Great Crises of Capitalism (2)

This continues my review of P. D. Jonson (aka Henry Thornton) has written Great Crises of Capitalism. The first part is in my previous post.


History matters
After the first three chapters (on the GFC, role of crises in capitalism, plus war, peace and capitalism) set the stage, the fourth chapter is engagingly, and provocatively, titled The Dutch Tulip Boom of 1636; with Brief Comments on the Modern Market for Art. Taking us through the Dutch Republic’s success, particularly its role in financial innovation, Jonson summarises the Tulipmania as described in Charles McKay’s cultural classic Memoirs of Extraordinary Popular Delusions and the Madness of Crowds and then a more recent examination of the episode by Peter Garber, examining the difficulty of defining a ‘bubble’ in a way that is genuinely informative at the time, rather than only in retrospect (Pp79ff).

This is a genuine difficulty, since the point of asset price bubbles is that their turning points are not systematically predictable: if they were no one would get caught in them. It is the lack of predictability which makes bubbles possible in the first place.

Jonson makes the point that the prices of assets of different classes tend to rise and fall together, particularly in general crashes (p.94). The more fundamental lesson this suggests is to limit one’s debt exposure. Jonson’s point that likely the worst effect of Tulipmania was its undermining of ‘trust and honour’ is surely a powerful one.

His discussion of the booms in art prices associated with wider booms is rather whimsical in tone. As an activity of the extraordinarily rich, he does not think it a public policy problem – particularly as the pieces often end up on public display in museums (Pp91ff).

Then it is on to the South Sea and Mississippi bubbles of the early C18th. This is an amazing pair of stories. In both England and France the state was burdened with massive public debts it could barely manage to service. An able economist, gambler and scallywag, John Law, proposed to the French Regent a system of note issue to improve liquidity and thus economic activity: in effect, creating a central bank. This worked so well that the Regent decided more was clearly better. One thing led to another, and there was an enormous bubble followed by a dramatic crash.

England already had a central bank, the Bank of England: indeed, the original [second] central bank. That the English central bank, far from being a participant in the English bubble, was engaged in a struggle against those at the centre of the South Sea bubble, limited the damage; though there was great rage against those felt to be culpable when the bubble burst.

In England, there was to be improved management of a consolidated national debt that was to permit the United Kingdom to fight major wars, successful (War of the Austrian Succession, Seven Years War), unsuccessful (War of American Independence) and long and eventually successful (French Revolutionary and Napoleonic Wars) while maintaining sound finances. Improvement in public finances in France from John Law’s innovations was temporary, and accompanied by much economic and social damage. As Jonson observes:

a leading edge in innovation can so easily become a bleeding edge (p.81).

The failure to deal with the underlying fiscal problems was to result in the Bourbon monarchy eventually being effectively bankrupted by a successful war (War of American Independence) and collapsing in revolution (Pp97ff).

A pop culture aside: Terry Pratchett’s Making Money is a splendid fictional take on some of these issues, with protagonist Moist von Lipwig likely being partly based on John Law, but one working for a competent autocrat, not a silly and greedy one.

The grand century
We then move onto the nineteenth century, concentrating on the UK and the US and a potted history of economic cycles in the US and UK, with supporting graphs and table focusing on the interaction between the gold standard, credit and railway speculation in particular. There seems to be a quasi-Austrian malinvestment theory behind Jonson’s analysis, except he points out that the railway investments turned out to be economic boons. I find the Austrian concept of malinvestment unpersuasive. There does not seem to be any useful general concept of ‘malinvestment’ that is independent of the level of economic activity. Sure, businesses fail but they do so all the time, even in the height of booms, and this discovery process is surely much more about exploring boundaries of what is or is not profitable (boundaries which shift as the level of economic activity shifts) than displaying some inherent characteristic. Yes, one can get inappropriate construction (e.g. empty housing estates in post-bust Ireland or various US cities) but they were the result of very specific forms of perverse incentives, not indicative of some general phenomenon, even in housing construction (even if you add in various complications).

Our author does fall into a common flaw of works of economic history, in failing to explain important features to readers. Specifically, a paragraph, or even a sentence or two, explaining why the Bank of England raised the Bank Rate (merely defined in the text as ‘a key contributor to economic stability under the gold standard’ [p.123]) in crises would have been very useful. There is a useful glossary of terms, which tells us what the bank rate is, but does not explain this crucial dynamic (Pp121ff).

Jonson has a nice eye for a good quote:

’A currency system which in difficult times,’ says Clapham, ‘depends on the chance occurrence of nuggets in gulches and gold dust in river sands lack stability (p.134)’.

Gold standard enthusiasts point to the stability of (goods and services) prices under the gold standard, but it is a stability which can lead to considerable instability in employment and economic activity, a factor that gains increased force given there is reason to believe that the degree of “stickiness” in prices and (particularly) wages has increased over time. The gold standard has also been compatible with wild swings in asset prices.

Leaving the nineteenth century in US and UK with praise of innovation and the warning that:

Prosperity often leads to over-exuberance and is often accompanied by fraud and incompetence, which helps to explain why prosperity often turns out to recession or depression (p.142).

Jonson moves on the “Marvellous Melbourne” and the extraordinary story of the Victorian land boom.

Antipodean occurrences
We start with a refreshingly (generally) positive portrayal of the energy, innovation and progress of the period, including Australia’s role as a pioneer of representative democracy, interspersed with references to Jonson family history (Pp143ff). In the midst of this (mostly) positive economic history, there was a land boom-and-bust in the late 1830s and early 1840s as wool prices surged then collapsed.

What Jonson labels – with an explicit invocation of recent American experience – as the ‘sub-prime land boom of the 1880s’ was built on two pillars: a plethora of building societies and a belief that it was impossible to lose money by investing in land. (This should sound very familiar.) What made things worse was that Victorian building societies were permitted to invest in real estate themselves. Prices surged: land prices in the CBD could double in price in a matter of months. When the boom busted, the crash was spectacular. Suburbs were built that remained untenanted for years; 20 major financial institutions closed, 120 public companies failed, high levels of fraudulent behaviour were revealed, there was massive unemployment accompanied by deprivation, misery and death (Pp151ff). It is hardly surprising that Melbourne became a bastion of labour and protectionist politics.

This is followed by a short economic history of Australia, where the period from 1900 to 1972 is covered rather more briefly than the period from the Whitlam Government on, interspersed with references to the author’s family and personal history. But the public policy history from 1972 onwards is very usefully covered, by someone who was a senior ‘econocrat’ for much of that time, concluding with a survey of current issues. That housing seems both clearly overvalued but has potential for future housing shortages just reminds us of the unknowability of the future (Pp161ff).

Income and expectation
My take on that is that rental prices tell the supply-and-demand story and value above a reasonable capitalisation of current rental (i.e. income) value tells the “bubble” story. (If a good return on an asset is 6%, take the annual rental value, divided by 6, multiply by a 100: that is the reasonable capitalisation of current rental value.) Except, of course, some of the excess price over said capitalisation may be (reasonable) expectation of future rental rises: that little difficulty of the unknowability of the future again. Still, one can do the check in reverse: take the current price, divide by 100, multiply by 6 – is that a reasonable expectation of future rents? If not, then there is in the price of the asset an expectation of capital gain beyond reasonable expectations of its future income value and we are in bubble territory.

That part of the price which is based on expectations of pure capital gain beyond income value can vanish astonishingly quickly if those expectations go away: which they do as soon as prices start falling sufficiently. Hence the sudden asset price “busts”. Which is unfortunate: it only becomes a disaster if it was the basis for debts, for one is then left with the debt without the asset value that was backing it. It becomes a catastrophe if lots of folk are in that position and suddenly financial institutions have a massive surge in “bad debts” – loans people cannot pay back and which are not covered by realisable assets. The loss of income and assets can destroy financial institutions and devastate capital markets leading to a dramatic drop in economic activity as people lack the funds to engage in transactions, or take their money out of the financial system, or simply stop transacting for prudential or anticipated rising-value-of-money reasons (since money in circulation is becoming more scarce).

A proposal
So, the truly risky form of debt is debt beyond the income value of an asset. Hence my suggestion that people simply be banned from borrowing against an asset beyond its capitalised income value. If people want to bet on capital gains beyond that, fine: but they can do it (only) with their own money, not on credit.

This is not some puritanical dislike of “speculation”, just a prudential concern to minimise systemic risk in the financial system. It would also take a lot of the “heat” out of asset price booms, as it would effectively eliminate the use of credit to generate expectations of capital gain beyond income value. It is not a proposal for perfection, merely of prudence. There would be some cost at the margin (that problem of reasonable expectations of future income gain) but the benefits would surely greatly outweigh that: the most one can hope for in any regulation. Moreover, it would actually increase information in the market, by forcing attention to how much of a price is current income value and how much expectations of capital gain (the problem with much regulation is that it either destroys or distorts information).

Roaring boom, savage bust
Jonson then moves back to wider economic history with his next chapter The Roaring Twenties and the Great Depression. The chapter has many quotes from Galbraith’s (highly quotable) The Great Crash, an account Jonson labels “sardonic and authoritative”, while Milton Friedman and Anna Schwartz’s magisterial A Monetary History of the United States only gets a role in the commentary towards the end.

The public policy question Jonson concentrates on is the proper role of a central bank in the face of a boom in asset prices. One of the major speculators, Charles E. Mitchell, became a director of the New York Reserve of New York, a blatant conflict of interest (p.172). Raising the rediscount rate was proposed to cool speculation (since it would have reduced the profit on broker’s loans) while controlling margins (what proportion of cash had to be put up to buy stocks) could also be used to discourage speculative borrowing. The Reserve merely issuing a statement in February 1929 caused the share market to drop and then stall, particularly as the attitude of the new President (Hoover) was unclear.

Then Mitchell stepped in and made it clear his bank would support what the Reserve had warned against. The market rallied, the Reserve was silent: as Galbraith wrote, it had decided not to be responsible for a market crash and the share price boom restarted (Pp173-5). This is a basic problem: what central bankers wish to be responsible for a crash? The post-Depression joke – the role of a central banker is to take the punch away just as the party is getting started – is not a counsel of popularity. And the further away the memory of the last big boom-and-bust is, the less credence there is likely to be that the alternative is worse. Particularly as technological and financial innovation can so easily feed the delusion that “this time is different”.

The market surged on the belief that there was a “shortage of securities”, which much human ingenuity went into addressing, the use of credit to buy stocks surged (such loans being safe – as long as the market continued to rise) and various commentators supported the siren song “this time is different”. Prof. Irving Fisher, who Milton Friedman regarded as the US’s greatest economist, made his infamous statement that ‘stock prices have reached what seems like a permanently high plateau’, while doomsayers were sharply criticised (Pp176ff). The discrediting of free commerce advocates by their spruiking of the boom and the severity of the subsequent bust was to have major political, public policy and intellectual consequences.

Fisher himself was to develop his debt-deflation analysis (pdf) of the subsequent Depression, which was largely ignored at the time but, decades later, was to become more influential.

Then the stock market crashed, with expectations of gain being replaced by fears of loss and lack of information (such as the ticker falling behind, or Sunday market closure) becoming an increaser of fear:

After the Great Crash came the Great Depression which lasted, with varying severity, for ten years. In 1933, America’s Gross National Product was nearly a third less than in 1929. Not until 1937 did the physical volume of production recover to the levels of 1929, and then promptly slipped back again. In 1933, nearly thirteen millions were out of work, or about one in four of the labour force. In 1938 one person in five was still out of work (Pp180-1).

In Australia, whose governments had run up massive public debts, the surge in unemployment was likely even worse than in the US and the struggle to service the debt as incomes crashed dominated politics (Pp178ff).

Jonson wrestles with the question of what caused the Great Depression without coming up with a clear answer: as there is no scholarly consensus on this subject, this hardly surprising. He notes that Friedman and Schwartz’s analysis of severe contraction in money supply is the generally accepted explanation for the severity of the Depression. Ben Bernanke, the current Chair of the Fed, provided evidence for a severe contraction in credit whose effect was even greater than the money supply contraction. The Smoot-Hawley tariff increases and increases in taxes did not help (Pp182ff). As well:

There was an irrational fear of inflation while the country was experiencing the most violent deflation in the nation’s history (p.186).

A pattern we have seen replicated in recent times.

Meanwhile, in Australia, tariffs were raised, quotas and foreign exchange restrictions were imposed, limiting trade. But there was also a massive currency depreciation and a 10% nominal wage cut while the options of default, deficit spending or balancing the budget dominated politics. Jonson feels it is likely that the currency depreciation and wage cut, plus business unhappiness with FDR’s Administration, were the prime reasons why Australia recovered from the Depression quicker than the US (Pp186ff). As for lessons learnt since, the Greenspan view that it is not the job of central bankers to act against asset bubbles (as distinct from cleaning up afterwards) became widely accepted. When the GFC and Great Recession crisis hit, the response – cutting interest rates, swapping private assets for cash (‘quantitative easing’), bailouts and fiscal stimulus – were all adopted “with almost religious fervour”, a dramatic contrast to the policies of the early 1930s (Pp188-9).

Stagflation
Then we are on to “the Age of Aquarius” and the rise of stagflation – inflation with unemployment – and a period where the author can rely more on personal experience. Inflation is denounced:

Misery is inevitable in any economy as inflation erodes the value of people’s investments, raises their cost of living and makes contracts difficult to adjust and in some cases impossible to enforce (p.191).

Made worse if people also lose their jobs and others fear doing so. Since this was the time when the Phillips Curve had appeared to provide a clear trade-off between (goods and services) inflation and unemployment, the conjunction of inflation with unemployment – which reigning theory said was impossible – caused confusion and conflict in policy circles (Pp191-3).

The analytical breakthrough was to add expectations about inflation into the analysis. As inflation rose without effective counter action, so did inflationary expectations:

both rose largely independent of the state of the economy as measured by unemployment (p.194).

The link between unemployment and inflation was broken, with rising costs of inflation driving up unemployment. (More precisely, the ‘equilibrium point’ of unemployment.) There was an extra complication:

It is a basic theorem of economics that small open economies with a fixed exchange rate will import the global rate of inflation (Pp195-5).

The last effectively meant the US rate of inflation. On August 15, 1971 President Nixon broke the last link between gold and the US dollar, so there was no ‘anchor’ for inflationary expectations beyond people’s expectations about the actions of the US Federal Reserve (and their effects).

This point was not as widely understood at the time as it might have been. The battle between “cost push” and monetary explanations was fought out, being (mostly) won by the monetarists. The new Chair of the Fed, Paul Volcker, changed the Fed’s operating procedures. This led to the Federal Funds rate rising to 20% in June 1981: unemployment surged, but the recession was short and (goods and services) inflation collapsed to 3% p.a. Appointed by President Carter, re-appointed by Reagan, Jonson labels Volcker:

history’s greatest central banker, its most effective inflation fighter (p.197).

It took other countries rather longer to catch up, requiring as it did flexible exchange rates and abandonment of the hope of painless solutions. Jonson covers the arguments over floating the Australian dollar, which the author supported against the objections of then Treasury Secretary John Stone, who was opposed on the grounds that loss of financial reserves was a stronger constraint on fleckless government (Pp197-8).

The rest of the chapter is devoted to a lengthy discussion of the costs of inflation, the costs of stopping inflation and judging the balance thereof. Jonson is firmly of the inflation-as-scourge view, which policy needs to be constantly alert against: one of the costs of persistent inflation being the drop in household saving (Pp198ff). Expectations of capital gain in house prices become an alternative “saving” strategy: one using credit and dependant on what goes up not coming down.

[This review will be concluded in my next post.]

Great Crises of Capitalism (1)

P. D. Jonson (aka Henry Thornton) has written Great Crises of Capitalism, a history of economic crises in capitalism since the C17th and a jeremiad against inflation. It is clearly provoked by the Global Financial Crisis (GFC) of 2007-08, which the book begins with a survey of, and the subsequent Great Recession whose consequences Australia largely avoided but the US and other major Western economies are still suffering the effects of.

Jonson notes that financial booms and busts have recently been getting generally greater in amplitude (as measured by change in asset prices from height of boom to depth of bust). He also argues that, with the rising economic significance of China and India, goods and services inflation has been restrained, so easy money has spilled over into asset booms. (That is, global supply has continually responded to increases in money offers so as to keep inflation low: the weakness in this argument is many goods and services are not globally traded, though the range of these is diminishing – and non-traded goods and services are considered later [Pp235ff].) Jonson faults Alan Greenspan in particular for encouraging the notion that Central Banks should ignore asset price booms (p.18).

Follow the money
Another way of looking at this is that Jonson is, in effect, taking the classic Fisher equation of MV = PT (money x velocity [average number of transactions money goes through in a given time period] = price x transactions [in that time period]) and saying the restriction of T to current transactions (thereby leaving out asset transactions), so using CPI or some derivative thereof as the measure of P, and thereby ignoring asset prices, is a fundamental error. (Jonson points out that Milton Friedman’s model implicitly assumed a single good and a single asset, money, leading to inflation being defined in terms of goods and services [Pp17-8].)

A recent review of Earl J. Hamilton’s classic American Treasure and the Price Revolution in Spain, 1501-1650 nicely sets out the basic economics of the Fisher equation:

Most economics students are familiar with Fisher's Equation of Exchange, to explain the Quantity Theory of Money in a much better fashion than nineteenth-century Classical Economists had done: namely, MV = PT. If many continue to debate the definition of M, as high-powered money, and of P — i.e., on how to construct a valid weighted CPI — the most troublesome aspect is the completely amorphous and unmeasurable "T" — as the aggregate volume of total transactions in the economy in a given year. Many have replaced T with Q: the total volume of goods and services produced each year. But the best substitute for T is "y" (lower case Y: a version attributed to Milton Friedman) — i.e., a deflated measure of Keynesian Y, as the Net National Product = Net National Income (by definition).[note 55: For various reasons, too complex to discuss here, I prefer to use the Gross National Product - as many economic historians, in fact do, in the absence of reliable figures for Net National Product.]

The variable "V" thus becomes the income velocity of money (rather than Fisher's Transactions Velocity) — of the unit of money in the creation of the net national income in the course of a year. It is obviously derived mathematically by this equation: V = Py/M (and Py of course equals the current nominal value of NNI). Almost entirely eschewed by students (my students, at least), but much preferred by most economists, is the Cambridge Cash Balances equation: whose modernized form would similarly be M = kPy, in which Cambridge "k" represents that share of the value of Net National Income that the public chooses to hold in real cash balances, i.e., in high-powered money (a straight tautology, as is the Fisher Equation). We should be reminded that both V and k are mathematically linked reciprocals in that: V = 1/k and thus k = 1/V

Thus kPy equals the demand for money and changes in k for a given level of M will lead to changes in Py. So, for example, if people expect deflation (and so wish to delay purchases and increase their k since they expect money to increase in value) then the withdrawal of money means either prices must fall or national product must fall, or both (with the balance depending on how downwardly responsive prices are). Conversely, if people expect inflation (and so wish to bring forward their purchases, and decrease their k, since they expect money to decrease in value) then either prices must rise or national product must rise, or both (with the balance depending on how upwardly responsive supply is – hence Jonson’s point about rising Indian and Chinese production reducing global inflationary pressures).

Clearly, expectations matter: for example, the belief that one has to get into the housing market as soon as you can because prices will keep rising faster than income is classic inflation-expectations behaviour.

As an historical aside, one can see how the flow of silver from the Americas in the C16th and C17th would have had price effects on its own, since the silver did not appear everywhere instantaneously, but passed through a series of hands; so there would be a lag in k responses, leading to an increase in P given that the silver kept flowing in and did so in patent excess of the ability of supply (y) to respond to the increased money offers (M/k=Py) within the European economy. Conversely, since only about a third of the silver went to purchase goods and services from the (much larger) Asian economy, and transport costs and official monopolies blocked convergence in prices (pdf), any price effect in Asia would have been much smaller, leading to European goods being priced out of Asian markets (except where they had no competitors) and Asian goods being priced into European markets.

About assets
Even in the explanation quoted above, we can see that there has been a move from considering all transactions and all prices to considering consumer prices only (and thus ignoring asset prices: even that part of National Product spent as investment). But money can be used to purchase consumer goods or assets. So our author has a plausible point.

Not that these macro considerations means that the characteristics of different specific markets do not matter. On the contrary, they matter a great deal. For example, money will clearly be attracted to assets where people have high expectation of income or capital gains (that is, downside risks are discounted). Such as housing markets with constricted supply; financial instruments where there has not (yet) been experience of problems or weaknesses or financial markets where explicit or implicit government guarantees have undermined prudence. The US brought all these things together in a “perfect storm” of (land) supply-restricted housing bubbles, sub-prime mortgages and Fannie Mae and Freddie Mac (as usefully discussed in this review of and also this review of a recent book on the matter).

Jonson notes that, in Australia:

By March 2007, compared to June 1986, consumer prices had slightly more than doubled, implying annual goods and services inflation of 3.8%. Over the same 21 years, average house prices had risen by 450%, the share price index had risen by a similar 480% while shares in BHP Billiton haqd soared by a massive 1150%. While the out-performance of BHP Billiton shares were in part, perhaps in large part, due to the ‘China boom’, other asset prices had risen by an order of magnitude faster than prices of goods and services (p.17).

Jonson’s argument about asset prices does point to a lacunae in mainstream economic thinking. But I disagree with some of his economic history, particularly his dismissal of the medieval economy. Jonson writes:

The strong inflows of Spanish gold and silver gave a pronounced stimulus to economies that had stagnated for centuries (p.40).

First, the dramatic increase in silver production from central Europe (based on technological advances) began well before the arrival of Spanish and Portugese gold and silver. Second, the medieval economy was far from stagnant: on the contrary, it was a highly adaptive economic system which created the first mass machine economy. The cathedrals were not signs of a stagnant economy. The Serene Republic of Venice in 1330 had more sophisticated capital markets than Qing China in 1830 (bonds were invented by the Serene Republic in 1171): indeed, financial innovation was likely at least as important in explaining the Great Inflation of the C16th and C17th as Central European and American silver.

Historical infelicities
There are also some simple historical errors in the book, such as that East Germany was not the People’s Republic of Germany (p.47), it was the German Democratic Republic. The Spanish influenza killed about the same number as killed in the fighting in the First World War, not half (p.48). I think one can reasonably claim that Japan joined the modern world before the A-bombing of Nagasaki and Hiroshima (p.209). There is also the odd failure of editing, such as:

When President Nixon devalued the US dollar against gold in 1971, the Japanese yen was set at ¥308 per $1, which compares to around 50 cents per US dollar at the start of the twentieth century (p.211).

This makes no sense, presumably ‘cents’ should have been ‘yen’. While in a sense the US won the Cold War due to much greater wealth than its Soviet rival (p.61), that was a result of a superior economic system, not some freestanding fact.

Jonson’s story about Sir Francis Drake’s looted Spanish treasure setting off a series of investments culminating in the East India Company being the source of England’s foreign investment (p.58) is a “lucky happenstance” analysis that is a completely inadequate explanation of why England (and the Dutch Republic) proved so much more successful than Spain and Portugal at taking long term advantage of the commercial opportunities of the European global commercial expansion. Massive flows of silver were not an asset, they were a long-term disaster. But if you have a dismissive attitude to medieval Europe, such a “they were lucky” analysis gains spurious plausibility. Jonson also keeps referring to Spanish gold (e.g. ‘vast gold fleets’, p.62) when silver was much more important.

Jonson is not adverse to some rather un-pc observations – such as ethnic Chinese integrate into democratic capitalist countries rather better than Muslims typically do (p.61): one of those embarrassing truths folk are not supposed to mention.

Jonson provides a brief potted history of great power struggles from the C16th to C20th, relying on Kennedy’s Rise and Decline of Great Powers (a study which sadly concluded by claiming that late 1980s America was suffering worse “imperial overstretch” than the Soviet Union) and Blainey’s The Causes of War (a much better book which Jonson relies rather more on) (Pp60ff).

Sometimes, one could wish for more economic history. Jonson’s:

There is clearly something deep in human character that is driven towards expansionism (p.68)

is not a helpful analysis. That people like wealth and rulers-cum-states like revenues are pretty straightforward reasons for both the expansion of farming (which has been going on for 10,000 years, since farming first began) and for imperialism (which has been going on since rulership first established itself, so at least 5,500 years).

Jonson raises the hardy perennial of how much ideological conflicts reflect underlying economic interests or tensions (Pp71ff). His suggestion that the American South could have won independence in the American Civil War by using insurgency tactics (p.74) seems to be based on the common Vietnam War-era misconception that insurgencies are naturally successful (most insurgencies fail) and is deeply implausible given an occupying North would have had the black population in support. But Jonson’s wider discussion of the connection between war and economies is nicely nuanced and thought-provoking (Pp74ff).

[This review continues in my next post.]

Narcissism: ego defence as self-delusion

A friend who practises Chinese medicine put me on to this Webinar by Lonny Jarrett, a Chinese medicine practitioner who runs the Nourishing Destiny website. In it Jarrett differentiates between the authentic self − which he identifies with the life force, the urge to create what was not there before − and the ego, which insists on separation and control. He explicitly evokes Taoist and Buddhist notions in this.

Jarrett argues that the ego is a great barrier to healing because it blocks seeing what is (a point that applies to both patient and practitioner) and, in particular, wants healing without taking responsibility for change, wants to delay doing what is required until it “feels like it”. The ego demands attention to its hurts, traumas and concerns in a way that can block actually fixing the problems.

That is surely true. Jarrett is arguing that the ego is where family and social conditioning resides (or, at least, operates through) and the authentic self is what one can use to break through that conditioning. Which is hard: particularly if one has been, in effect, conditioned to feel bound by one’s conditioning. To not believe that there is something that you have access to by your actions or thoughts which can be relied upon.

If one looks at the ego as insisting on separation and control then narcissism becomes – in its pure form – the complete insistence on separation and control. Including the insistence that reality serve that separation and control or, at least, that how reality is construed does so. The ego reaches out and blocks one’s apprehension of reality from contradicting the needs of the ego. In other words, the narcissist’s convenience becomes their reality principle, the determiner of how they see reality.

Which makes narcissism very hard to heal, since apprehension of reality is, in effect, policed before it can provide a contradicting perspective. There is neither the motive to change (since the harm is generally inflicted on others) nor an avenue for seriously assessing one’s own perspectives. No wonder counselling and psychotherapy can often make narcissists worse. The last thing they need is their emotions validated and it would take a very alert therapist to begin to pick holes in presentation of events that they have no independent verification of. Even if they do so, the narcissist is likely to conveniently reconstrue, or otherwise block, any responses by the therapist that contradict the convenience of the ego.

It can also make dealing with a narcissist profoundly disorienting, since the meaning of all their actions is subordinated to their ego needs. So there is no independent meaning, or even factual basis, to rely on: no consistency beyond their needs and conveniences (which can, of course, change – even from moment to moment). Words and actions do not have the meaning that would be commonly ascribed to them.

Once, however, you work out what is going on, then things suddenly make much more sense. (Though a sense which can be infuriating, in a different way.) One lives in a world where they feel free to contradict themselves and events whenever convenient. As Joanna Ashmum says in her very useful discussion of narcissistic traits:

The most telling thing that narcissists do is contradict themselves. They will do this virtually in the same sentence, without even stopping to take a breath. It can be trivial (e.g., about what they want for lunch) or it can be serious (e.g., about whether or not they love you). When you ask them which one they mean, they'll deny ever saying the first one, though it may literally have been only seconds since they said it – really, how could you think they'd ever have said that? You need to have your head examined! They will contradict FACTS. They will lie to you about things that you did together. They will misquote you to yourself. If you disagree with them, they'll say you're lying, making stuff up, or are crazy.

They are the classic emotional vampires who cannot see themselves in the mirror while being profoundly disorienting, or infuriating, or both to deal with.

Their deepest problem is fear: narcissists are profoundly fearful people. They are so terrified of having to bear responsibility for their actions that reflect badly on themselves that they make their (defensive ego) convenience their reality principle. Their psyche is profoundly out of balance: to be cured of their personality disorder, they need to be punctured from their protective ego-inflation and yet be led to the inner confidence to deal with their own bad behaviour. (Which, of course, mounts over time: so becoming ever more frightening.) This is a difficult double act to say the least: particularly given how thoroughly their sense of reality is policed.

The extent of the self-delusion involved can be staggering. (Do they really think that you do not remember what happened? Apparently not.) But that is the point, really. First there is no you-as-actual-person in all this, there is merely whatever picture of you is convenient for the narcissist at any given moment.

Second, there is no what-actually-happened either, there is merely what it is convenient for the narcissist to “remember” as having happened. Which means there is no conversation to be had, no meaningful interaction. There is nothing beyond the narcissist’s convenience that can be appealed to, that sets some common standard, or even common reality. The narcissist’s armour of self-delusion means that nothing will get through, not in the ordinary course of events. So nothing useful will come out, either.

Which makes interacting with a narcissist more like an unfortunate happening, a sort of personal natural disaster, than a personal interaction in any meaningful sense.

But, of course, they are a person: they speak, they act. It is very disorienting, to have to treat what they say and do as not having the ordinary meanings and consequences. This is why an acquaintance was so right to call narcissists “serial killers of the soul”, since such can so profoundly undermine one’s trust in others and, even worse, oneself.

It is very hard not, at some level, to accept their framing as mattering. They are a person, after all – particularly if they were a person who was emotionally important to you.

But they are not really a personality in quite the way other folk are. That is the first, last and hardest lesson of dealing with people personality disorders – they really do not think as you do.

It is, sadly, a lesson one often has to keep re-learning.

Why is the Middle East so rife with conspiracy theories?

This dispatch provides examples of what observer after observer remarks about the Middle East: it is rife with conspiracy theories. Conspiracy theories seem to pervade people's cognitive maps to an extent which is truly astonishing.

Two fairly obvious features of Middle Eastern societies are highly controlled media and domination by authoritarian regimes, many of which came to power via conspiracies. If one has no trust in public media, and constant experience of deliberate control of the same, then conspiracy theories obviously have an appeal greater than they otherwise might, particularly due to the lack of respected public fora for their debunking. That various regimes came to power through conspiracies just reinforces the notion of hidden, or not so hidden, controllers behind the scenes.

Of course, the far more open societies of the West are not exactly immune to conspiracy theories either. The extreme right and the not-so-extreme left are both rather prone to conspiracy-mongering. 9/11 "truthers" are just propounding the latest in a long line of conspiracy theories. Both groups experience significant levels of alienation from their surrounding society and operate through activist networks. Conspiracy theories provide an "explanation" for why things do not happen as they want/expect as well as reflecting aspects of their own political existence.

While the far more open Western societies also provide plenty of avenues to debunk such conspiracy-mongering, conspiracy mongering still appeals to the cognitive bias to (over) ascribe intention to actions and particularly consequences. Still, the level of conspiracy-mongering in the West is clearly much lower than it is in the Middle East.

Nor does the greater level of alienation by ordinary folk from their public institutions, and the lack of respected public fora to debunk conspiracy theories, seem to be quite enough to explain the extent of the conspiracy-mongering in the Middle East.

The alternative to conspiracy mongering is greater confidence in more impersonal processes of causality. The epitome of which is science. It is another feature of the Middle East (and the Muslim world in general), that the level of scientific activity and understanding is much lower than in the West. Muslim scientists, or scientists with a Middle Eastern background, write long, thoughtful essays about, or otherwise discuss, the problems of science in the Middle East and the Islamic world. So, the lack of confidence in, or awareness of, other, far more impersonal, causal explanations may also be part of the problem.

It is, after all, notable that the extreme right in the West tends to put much emphasis on the heroic will -- which encourages conspiracy mongering -- while much leftwing thought in the West is still beholden in one form or the other to Marxism which -- with its notions of hidden forces, differential consciousness and individuals as manifestations of classes -- also encourages a personalised conception of causality that leads easily to conspiracy mongering.

The cognitive map which most pervades the Middle East, and the Islamic world in general, is, of course, a religious one. Moreover, a religious one which, since al-Ghazali, has emphasized a conception of causality as just the manifestation of God's will with no inherent ordering beyond that which God happens to follow. All of Creation is taken to be a manifestation of the intentional will of God in a specific, day-to-day, every-moment sense. Such a profoundly personalised conception of all of causality undermines more impersonal notions of causality and so encourages other personalised conceptions of causality -- such as conspiracy theories. Hence, a whole series of factors encourages conspiracy theories, leading to the intense level of conspiracy-mongering that is such a feature of the Middle East.

Which is not a good thing for the prospects of more formal systems of social action, such as the rule of law and democracy. The penchant for conspiracy mongering is not only a penchant for illusion and delusion, it is also a barrier to other ways of thinking about, and so acting in, the world.

[Cross-posted at Critical Thinking Applied]

Islam's recurring patterns

Like many people, I have been doing a lot of reading on Islam and Islamic history since September 11 2001. But my interests in history – particularly military and medieval history – meant I have been building on previous knowledge. Indeed, in the early 1990s, I gave a paper to a private discussion group when, in the course of the discussion, I was asked where the next challenge to the West would come from, I said ‘Islam’ simply on the basis that it is the other universalist civilisation.

In the end, what most strikes me is how much Islamic history seems to be stuck in recurring patterns. Islam comes basically in four varieties – modernising, reformist, traditional and splinter. The modernisers wish to open Islam up to achievements in other civilisations, particularly science and critical reason. The reformers wish to return to the purity of original Islam – that is, they hold C7th Arabia as the pinnacle of human social order. The traditionalists are based on lineages of teaching, notably via Sufi orders, which often incorporate local traditions on the way. The splinter groups are small, permanent minorities who may not be accepted as Muslim by many mainstream Muslims: classic splinter groups are the Alawi, the Ismailis and Ahmadis. Some splinter groups, notably the Druze, have left Islam.

Generally speaking, the splinter groups are the easiest for non-Muslims to deal with. As permanent minorities, they eschew the idea that their religious rules are to be imposed on others, turning religious law into community law following a path originally pioneered by rabbinical Judaism. Even the ruling Alawite regime in Syria, no matter how vile it is, parades its ‘secular’ nature in ruling over a Sunni majority.

Traditional Islam often incorporates various techniques to soften aspects of Shar’ia, something also pioneered by rabbinical Judaism in dealing with the homicidal severity of Torah rules. Since, however, traditional Islam retained full judicial power, the softening never went as far as with the rabbis.

While there has been some tendency for Westerners, particularly in the Anglosphere, to romanticise the Sufis – there have been strains of Sufism which were enthusiastically jihadist – nevertheless, due to its mysticism, Sufism has also included rather more humanitarian strains of Islam, open to non-Muslim influences. The notion of a direct connection to the divine provides grounds on which to restrain or reinterpret some of the harsher elements of the teachings of the Prophet.

Non-Muslims have often managed to reach accommodations with traditional Islam. A revealing study of anti-Americanism in the Islamic world (pdf) points out that one of the most overtly pious of Muslim countries (Senegal) is also the one of the most pro-American. There, religion is controlled by various Sufi orders who have reached a working accommodation with the secular political elite. Senegal (and Muslim West Africa generally), Javanese Islam, Bangladesh, Morocco are examples of such “accommodationist’’ or “traditionalist” Islam being dominant.

Islam has also had various modernising movements, at least as far back as the Mu’tazilites of the C8th to C10th. Kossovo, Bosnia, Tunisia and Azerbaijan are examples of countries where modernising Islam is currently dominant. (Though post-revolutionary Tunis is showing some tensions over that.)

[Read the rest at Critical Thinking Applied.]

Theology in speculative fiction

[An earlier version of the discussion of Carey and Chan as examples of Taoism in SF was previously posted elsewhere.]

I once asked a friendly wizard to summarise the difference between Buddhism and Taoism. He responded with this story:

The Tale of the Three Vinegar Tasters
Three sages (a Confucian, a Buddhist and a Daoist) walk into a bar. There in the middle of the floor is a big cauldron. Sage 1 steps forward, says I'll handle this and takes a sip. "Ewww! It's sour!" quoth he and recoils from it.

Sage No.2 steps forward, has a taste and says yes. "It's bitter. But then, life itself is bitter, so it all fits really."

Sage No.3 has a taste and says "Hmmmmm. Probably REALLY good with fish and chips."

Which made me laugh, but is also very Taoist, for it gave one much to ponder on very succinctly.

Taoism turns up in various speculative fictions: notably Barry Hughart’s delightful novels of Master Li (who has a slight flaw in his character) and Number Ten Ox. Two speculative fiction authors who incorporate Taoism in their stories in a rather more positive form than does Hughart (who presents the Buddhist-originated Taoist-as-self-seeking-alchemists view) are the urban fantasies of Kylie Chan and Naamah's Kiss by Jacqueline Carey.

Descendants of Angels
Jacqueline Carey is much the better, and more profound, writer. I know that some of my friends who tried the first book in her D'Angeline stories, Kushiel's Dart, were put off by the heroine of the first trilogy, Phedre's, concern for her own beauty and the dark eroticism but, if that does not bother you (or you can get past it), you are taken along in grand stories full of striking characters and a vividly imagined world.

One of the things that most struck me about Carey's D'Angeline stories was her theological insight: her ability to get into how different theological premises lead to very different consequences, including social consequences. The D'Angelines—descended from angels who came to Earth out of love of Elua, the earth-born child of the blood of the crucified Yeshua ben Yosef—are all about beauty and eroticism. To them, rape is heresy but willing eroticism is to be celebrated. They are polytheists for whom sex and gender are part of the divine: not monotheists for whom sex and gender are inherently deeply problematic because sex is not part of the divine and gender is tied up in the absolutely trumping authority of a God conceived as masculine (which thereby associates masculinity with authority and femininity with the lack of it).

Carey is true to her stories. So the heroine of the first trilogy, Phedre, is a courtesan (hence her attractiveness matters deeply to how she makes a living) and an anguissette, someone who can take pleasure from pain. In a sense, she is formed to be a courtesan, and of a very specific sort. Phedre is as she is, in a very particular culture. Just as the hero of the second trilogy, her adopted son of royal and traitorous blood, Imriel, starts off as whiny adolescent because that is what he is, where he is coming from. But he ends up somewhere well beyond that. (And, to be fair, he had some fairly horrible boyhood experiences.)

Phedre’s trilogy does not only explore the implications for human actions of our cosmological assumptions, to use the language Deepak Lal invokes to analyse culture, but also a world where theology really is history, really is grappling with part of how things are. In the last book of Phedre’s trilogy, Kushiel’s Avatar, what had seemed an interesting backdrop for the stories becomes a fundamental driver of the narrative as the aspirations of even the most cunning mortal characters become the flotsam of the plans of gods. Carey explores what serving a divinity that genuinely hungered for destruction would be like. Yet, even here, Carey gift for making even her villains understandable – which makes them all the more memorable and effective as characters – can make a monster a person yet still be a monster: they are made comprehensible, they are not thereby justified or vindicated.

Showing that the theological insight about monotheism and polytheism is not a one-off, Carey explains the difference between Taoism and Buddhism rather well in Naamah's Kiss, the first book of her third D’Angline trilogy. Our heroine, Moirin—part D'Angeline, part Old Folk of Alba (Britain)—becomes the student of Master Lo Feng, a Daoist sage from far Ch'in. In the course of their travels, the men of the party she is in, including Master Lo Feng, disguise themselves as Buddhist monks. So he introduces them to the teachings of the Enlightened One. There and elsewhere in the story, Carey shows she gets the difference rather well.

[Read the rest at Skepticlawyer.]

Nobel Peace Prize winner announces that mass murderer has been assassinated

Here.

Two of everything?

This is based on a comment I made here.


A recent piece suggests choice of topic or issue is a major mechanism of media bias. A classic example is how homelessness was a major media topic in the Reagan-Bush years, and then dropped out of the mainstream media when Clinton became President. If one judged by media coverage, all one had to do to “deal with” homelessness was elect a Democratic President! There is a reason FoxNews has found such a (large) niche.

There seems to be a principle that any organisation in the policy/advocacy/education etc realm not of the right gets taken over by the left, as the left simply cannot be trusted to share. (Since dissent is evil, don’t you know?) The constant attack on the moral character, intelligence and motives of dissenters from Club Virtue’s orthodoxies -- such as Club Virtue’s habit of labeling anyone who disagrees with them on indigenous or migration policy as ‘racist’ -- and the tendency to recruit in their own image and likeness has a tendency to discourage, or even drive out, dissent. Social psychologist Jonathan Haidt raising of the issue of political outlook imbalance within academic social psychology is just an example of a wider pattern. (It is also amusing to see people who would take evidence of a lack of women, non-whites, etc in other fields as evidence of bias trotting out the old-faithful 'lack of people of sufficient talent' justificatory responses.)

One solution to this problem of imbalance is simply to set up two of everything. (Though that leads to the obvious issue about the ‘none of the aboves’.) Still, to take a specific example, given the fairly dreadful state academic Oz history has fallen into, setting up ‘Centres of Archival Research’ to reconnect history to actual evidence and away from the Manning Clark ‘myths that make me feel superior’ approach probably is a good idea.

Humpty Dumpty analysis

In Alice’s Adventures in Wonderland, Humpty Dumpty famously holds that a word means what he wants it to mean:

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean — neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master— that's all."

Since 'Lewis Carroll' was the nom de plume of Charles Dodgson, a serious mathematician, we can be confident that the every bit of satirical irony that can be reasonably ascribed to the joke was intended.

The great virtue of Humpty Dumpty’s approach is that one cannot be wrong: one just adjusts the meaning of the terms involved so that no criticism “takes”. It is also an utterly pointless exercise in analytical terms, as one is not holding any specific position; for one is merely using words as placeholders, filling them with whatever content allows one to “win” the argument.

When I learnt that Terry Eagleton had published a book with the title Marx was Right, it seemed – this side of the tyrannical and murderous failures of Leninism and its derivatives – at best a profoundly quixotic exercise. Having now read his recent essay summarising his arguments, it turns out to be a much less interesting exercise than that.

The first principle he wishes to establish is that none of the experience of actually trying to introduce Marxism counts:

Marx was no more responsible for the monstrous oppression of the communist world than Jesus was responsible for the Inquisition. For one thing, Marx would have scorned the idea that socialism could take root in desperately impoverished, chronically backward societies like Russia and China. If it did, then the result would simply be what he called "generalized scarcity," by which he means that everyone would now be deprived, not just the poor. It would mean a recycling of "the old filthy business"—or, in less tasteful translation, "the same old crap." Marxism is a theory of how well-heeled capitalist nations might use their immense resources to achieve justice and prosperity for their people. It is not a program by which nations bereft of material resources, a flourishing civic culture, a democratic heritage, a well-evolved technology, enlightened liberal traditions, and a skilled, educated work force might catapult themselves into the modern age.

One might think that this is glibly dismissive of immense human suffering. One would be right.

But let us turn this around: what about Marxism in the Western world? Have Marxists in the West typically displayed respect and admiration for the:

flourishing civic culture, a democratic heritage, a well-evolved technology, enlightened liberal traditions

of Western societies? Or have they typically, sneered and denigrated such things? Typically, that is precisely what they have done. (Consider any Western Communist Party of your choice, for example.)

So, by ‘Marxism’, Eagleton neither means Marxism as practised outside the West, nor Marxism as typically practised inside the West. ‘Marxism’ apparently means ‘the thought of Marx, but not where it motivates bad things’. We are truly in the realm of Humpty Dumpty analysis. One is reminded of G. K. Chesterton’s comment on Christianity:

The Christian ideal has not been tried and found wanting. It has been found difficult; and left untried.

So, defending Marxism becomes “easy”, because no facts about the history of actual Marxism count – not if they are bad facts. Good facts get to count, however. Eagleton reminds of, to Marx’s credit:

the political movement which his work set in motion has done more to help small nations throw off their imperialist masters than any other political current. …
In the 1920s and 30s, practically the only men and women to be found preaching racial equality were communists. Most anticolonial movements were inspired by Marxism.

Capitalism does not, however, get the same treatment. On the contrary, everything that might be adduced against capitalism counts – even if it is something as ubiquitous in human history as imperialism. So, you are allowed to exclude any inconvenient fact about the history of Marxism, but no inconvenient fact about, or even vaguely tied to, the history of capitalism.

Terry Eagleton is the Humpty Dumpty of historical analysis – the facts only count when he says they do.

Eagleton’s point about the Gospels not being a natural support for the Inquisition is also rather less telling than he seems to think. For the Inquisition may have little to do with the preaching of the Gospels, but it has a much closer connection to the logic of monotheism: to the notion of a single, absolutely trumping authority which is a source of definitive understanding of the truth.

Similarly, the notion that one can have such a correct understanding of social dynamics that one knows where history is “properly” heading, an understanding which profoundly de-legitimises the very basis of current social arrangements, has a natural affinity with totalitarianism. It is much easier to go from Marx’s writings to the totalitarian impulse than from the Gospels to the Inquisition. And both historical journeys occurred: repeatedly. There is something to be explained here, and “they got it wrong” is not enough. Powerful patterns need explanation, not dismissive exculpation. Lezsek Kolakowski is, in every sense, much more serious on these points than Eagleton.

For how much of what Eagleton invokes, the:

flourishing civic culture, a democratic heritage, a well-evolved technology, enlightened liberal traditions

of Western societies rests on strong and vigorous private property rights? All of it, surely. Yet that is precisely what Marx profoundly and absolutely rejects and delegitimizes. The difficulty is not in arguing that undermining these things is a bad thing: the difficulty is in arguing that Marxism is compatible with any of it.

Though this is not a problem if one can engage in Humpty Dumpty analysis and say words mean – and the facts they refer to count – when convenient and not if inconvenient. Except, of course, that just takes the point out of the exercise. If Marxism means whatever it has to mean, or at least has whatever implications are required, in order to be benignly correct, then it does not mean anything in particular. It becomes a series of analytical placeholders, to be filled as convenient.

There is a way of preserving specific content but insulating doctrine from inconvenient facts. That is to declare such inconvenient facts as manifestations of perversion, of instances of corruption or deviance; not proper manifestations of the underlying doctrine or principle at all.

This is a favourite tactic of natural law theory, operating all the way back to Aristotle. Aristotle, for example, excludes random events from his causal analysis. So, his causal analysis works for all events, except random ones. What is any event it does not work for? A random event, clearly. Can you see the little problem?

This, the-conclusion-gets-to-exclude-inconvenient-instances principle, is classically applied by natural law theorists to sexual activity. So the purpose of sex is reproduction and any sexual act that is not reproductive in purposes is a perversion of sex. What if sex has many other functions in nature? None of them count, they are just perversions. The conclusion – the sole legitimate purpose of sex is reproduction – cannot be wrong, since any contradicting usage is a perversion and does not count.

The same with Terry Eagleton’s history: any use of Marxism that has bad consequences is a perversion and does not count. Only good uses of Marxism count.

But that an entire philosophical tradition is based on a technique does not make any more analytically or intellectual worthy. And it is still, at bottom, Humpty Dumpty analysis – except the word that gets to mean whatever the Humpty Dumpty theorist wants it to mean is ‘perversion’ or whatever is the equivalent excluder-from-counting.

Humpty Dumpty analysis does make for splendid polemics – as a polemical exercise, Eagleton’s piece is full of righteous energy. It just does not make for anything resembling serious analysis.

The problem remains that Marx was wrong: his theory of value is false, his theory of exploitation incoherent. He may indeed, as Eagleton notes, been tremendously impressed by the creative power of capitalism: but he did not actually understand it. Marx was wrong on things that matter to an analytically disabling extent, and no amount of Humpty Dumpty analysis changes that.

If we shout loudly enough, will you hear us?

Anti (Muslim) immigrant sentiment is proving increasingly an electoral winner in Europe. Adding anti-bailout sentiment seems to increase the appeal, as the True Finns have just discovered.

The “European project” has two levels to it. One is the European common market: creating a huge common commerce area. The aim was, by entangling European peoples so deeply with each other that another Great European War became outside the realm of emotional, and above all political, likelihood.

The other manifestation of the “European project” is to create a European superstate. To create a political identity and superstructure that sits above, and ultimately subsumes, the various European ethnic identities and associated states.

The first is a liberal project (in the classical liberal sense, not in the modern we-know-better conspicuous-virtue progressivist sense). It widens the range of interactions that people can choose to engage in. The second project is a deeply illiberal one.

Confederal democracy need not be an illiberal project, but the European superstate is not a confederal democracy. It is bureaucratic internationalism with an elected figleaf, given the European Parliament is little more than a talkshop.

The root of the problem is the underlying analysis, which holds that the great problem of European history is nationalism. This is nonsense. Europeans have found many reasons to slaughter each other over the centuries, even in the last century, nationalism is only one.

The power problem
The great problem of European history is unaccountable power. Nationalism was simply a sentiment that unaccountable power mobilised for its own purposes.
Read More...
The First World War occurred because dynastic authoritarians wished to stave off political changes that would undermine their power. Invoking their roles as war leaders was a way of attempting to bind their subjects to them against threatening notions of democracy and ethnic equality, a role their alliances were based on and which a series of events either trapped them into or motivated them to take “all the way”. The representative democracies of Serbia, France and the United Kingdom got drawn into the war, but it was Dynastic empires of Habsburg Austria-Hungary, Hohenzollern Germany and Romanov Russia that created the War between them. It was, at its heart, the Dynasts’ War.

The Second World War occurred because Hitler had created a system where he was accountable to nothing but his own Will, and his Will was to create the Empire of Lebensraum. Stalin, equally unaccountable, saw a way of expanding his own Empire and entangling the “Imperialist” Powers against each other and so they divided Eastern Europe between them. It was, at its heart, the Dictators’ War.

But if one diagnoses the problem of European history as unaccountable power, then that implies the answer is democracy, is giving power to the vulgar masses, and limited power, a system of strong checks and balances. If one diagnoses the problem of European history as nationalism, that is a popular sentiment, and then the answer is for a “wise and virtuous elite” to curtail the “dangers” of popular sentiment. In other words, create yet another manifestation of unaccountable power.

It also means that the people only “get it right” when they agree with said virtuous elite.

This is, of course, an exercise in hubris. And, in the words of Proverbs 16:18

Pride goes before destruction,
a haughty spirit before a fall.

Failed integration
What we are currently seeing is the intersection between two failures of the European elites. The first failure is managing successful integration of large migrant (specifically Muslim) populations. Not only are second generation male Muslims “de-assimilating”, but much of the European political left is using migrants as a new basis for support, to the extent of apparently deliberately manipulating migration policy to that effect.

Note, this is an active policy of preferring newcomers to the original residents. It fits in with the “anti-custodian” attitude of the Progressivist Ascendancy where critiquing what exists, what has been handed down from the past, in the name of a legitimating vision of virtue is an essential element in progressivist sense of status and identity. So, making any complaint about problems with newcomers because automatically “racism” and beyond the pale. But there are issues of integration and friction, and if they cannot be articulated within mainstream politics, then they will be taken up by whichever political entrepreneurs move into the available political territory first. (The point is not to claim that all complaints are legitimate: merely that issues that cannot be meaningfully discussed cannot be dealt with, so continue to fester.)

There are two problem with progressivists managing integration into the wider society. First, the point is not to have the newcomers behave (and so vote) like the existing residents. Differentiation is basic to the underlying political purpose.

Secondly, successful integration acts to legitimate the existing culture, society, institutions. If one’s status and sense of virtue is based on critiquing all that, then clearly having such “expand” their operation, to display their worth and effectiveness, gets in the way. The point is to use migrant difficulties as a critique of the existing culture, society and institutions, not as a means for such to display their power and worth.

To put it another way, given Western civilisation is, in so many ways, such a successful one, if one defines virtue against success, then one is going to produce a lot of failure. Particularly if failure is actually functional – that is, vindicates one’s sense of virtue and status and keeps the differentiated groups as moral and political mascots.

After all, if, for example, African-Americans became socially successful, they might start voting Republican, rather than being captive political dependents of the Democratic Party. (Having the Democratic Party as their monopoly political provider – how is that working for most African-Americans, exactly?) But if you want to see these processes operating in all its horrid logic, I direct your attention to the failure of indigenous policy in Australia, which displays these patterns in all their pathological glory.

Euro mess
The other great hubristic failure of the European elite is, of course, the euro itself, which has operated to make the looming demographic-fiscal crunch of European welfare states much worse. Economist Tyler Cowen has a particularly grim analysis of the current problems of the euro.

Paul Krugman summarises the underlying problem aptly:

But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

Alas, the “magical thinking” Krugman points to is not some euro-specific malady, it pervades progressivist outlooks and particularly those of the European elites. Their sense of status and virtue comes fundamentally from the nobility of their intentions, of their moral vision. Yet a sense of virtue not ameliorated with a strong sense of responsibility grounded in social reality is a dangerous, hubristic indulgence. Without truth, there can be no morality for there is nothing which resists mere convenience. (This, by the way, is why serious narcissists are not seriously bound by moral considerations: since their convenience is their reality principle, they just reconstrue matters to evade any inconvenient moral constraints or obligations.)

Hence good intentions being what the road to Hell is proverbially paved with. While such “magical thinking” is generally a matter of various levels of public policy failure, these can have vile consequences for the sufficiently vulnerable – many indigenous communities in outback Australia include women and children living in hellish conditions. The recent Mullighan report (pdf) gives a sense of the horror.

So, if you are a European voter, confronting a EU system that gives you no direct levers of power beyond national politics and yet the EU structures are used increasingly to override national (and thus democratically accountable) decisions, what do you do? You see if people will hear you if you shout loud enough.

And voting for “right wing populism” is certainly a way to shout loudly.

Elite hubris
The problem is that this is as likely just to confirm the Euro-elite in its own hubristic belief that its virtue is “needed” to block “clearly pernicious” popular sentiments. If agreeing with the elite leads to being taken for granted and disagreeing with the elite leads to being contemptuously ignored, then a very nasty spiral can be set in train where increasingly intense mechanisms of complaint are resorted to in a vicious interaction between popular frustration and hubristic self-satisfaction.

The question becomes, a what point do people shout loudly enough that they will be heard? What is more important to the European elite, its sense of virtue and status or some dim sense of that the current political framings are not invulnerable? This is an open question: plenty of elites in history have ridden their sense of virtue and superiority to crashing collapse.

The fundamental problem of European history remains what it has always been: unaccountable power. The EU is not the solution, it is the latest manifestation of the problem. Unless it changes to become far more accountable, the pattern of spiraling disaster is only going to get worse.

ADDENDA I have amended this post to include the actual verse from Proverbs, rather than the common misquote.

Signaling support

This is based on a comment I made here.


Xavier Marquez has a great post on the role of cult of personalities in signaling support for a dictator. The basic idea is that adhering to the cult of personality is a way to signal support by engaging in costly activity (public endorsement and engagement of overblown praise).

This is a very plausible, indeed powerful, analysis. There may also be a further element, one general to propaganda in totalitarian societies in particular: crowding out. Part of the purpose is to literally leave no public space for critical views. So, not only are you signaling support by the rituals of the cult of personality, it excludes alternatives.



In the original post, commenter AC offered the following:

Thought experiment: suppose that instead of a single dictator, there is an elite class, which has general control over most cultural organs and elite institutions but whose political ascendancy is somewhat tenuous. Like the dictator, it will want signals of loyalty (both for determining loyalties and because of general ingroup/outgroup dynamics.) But because it’s not a single dictator, the signal can’t just be “the Generalissimo is awesome.” Instead, the shibboleth would be particular statements, or articles of faith, that are known to be supported by the ruling class.


Of course, making the shibboleth a mathematical axiom would be pointless; if nothing else, non-loyal mathematicians would be misperceived as loyal elites. The signal must be costly. So the articles of faith must be faintly ridiculous; easily challengeable on the facts, so that only people really devoted would at first make those claims. (Of course they can’t be obviously false either, else the integrity of the ruling class would also be called into question.)

Like cults of personality, there is a ratchet effect. As the elite becomes more entrenched, the shibboleths, while never changing in form (too costly to coordinate), will ever increase in intensity and audaciousness. And the enforcement of the party line will be strongest in educational institutions where the future members of the elite class are trained. It would be considered a matter of proper education – like the finishing schools of old – when “politically incorrect” thoughts in these institutions are mercilessly squelched.

Continuing AC's analysis of political correctness, one notes the rhetorical viciousness with which people who are critical of said markers of virtue are often treated. The point being to preserve said markers as signs of virtue (which clearly they are not if merely contestable opinion: so having "wrong" opinions clearly has to be a character defect) as well as punishing, and seek to crowd out, dissent.

Continuing the extension of Xavier Marquez's original analysis, political correctness often involves overblown, or even contradictory, positions. (e.g. being in favour of high migration while being against new dams, power stations or releasing land for housing). Such signaling virtue by adherence to one-sided, overblown or even contradictory positions works in a similar way to the way cults of personalities work in Xavier Marquez’s analysis: by taking on the implicit cost one signals one’s membership of “Club Virtue”. Taking on AC’s point, it is also why one gets particularly intense forms of political correctness in certain milieus (e.g. academic departments). Not only is more effort, more cost, have to be taken on to differentiate and so to signal one’s virtue, the lack of internal challenge allows various considerations to be ignored: hence the intensifying effect.

So, instead of status through conspicuous consumption, you get status through conspicuous compassion or other forms of conspicuous virtue. It is not what one spends in money which counts, but what one accepts and undertakes in cognitive intensity: including willingness to discount contrary evidence and disparage those who offer it or otherwise have contrary perspectives.

(Partly related, Arnold Kling offers a comparison of two status systems -- it is obvious which one would be more prone to the above pattern.)

Money inertia

This was originally provoked by a question and answer here.


The problem with the real price of money is that it is not real.

There is a view within economics – which was at one stage canonical – that money is an epiphenomenon; what matters is the “real price”, the price in terms of actual goods and services, and the “real economy”, the production, distribution, exchange and consumption of goods and services. (And assets, but we leave that aside.) To think that money mattered in its own right was to believe in the money illusion. As James Tobin wrote in 1972 (as quoted here [pdf]):

“An economic theorist can, of course, commit no greater crime than to assume money illusion”

Now it is obviously true that goods and services are what ultimately matters – we value money because we can buy goods and services with it and pay off obligations (to people who can then buy goods and services with it, and pay off obligations to people who can …: note that such obligations are typically implicit or explicit contracts – i.e. transactions operating across time). But if what matters is the “real price”, so that money is an epiphenomenon, the question then arises, why have money in the first place? What role is it playing?

To which the answer is: providing a huge reduction in transaction costs. What money provides is a universal transaction item. The more it does so, the more it is prized. It becomes the means by which transaction offers are made and accepted. It frames transaction offers and acceptances. It also frames obligations to pay. That is to say, its crucial value is being the medium of account (i.e., in Scott Sumner’s words, “the object that embodies the unit of account”).

For the alternative is barter, which is a much clumsier alternative: so much clumsier that even times of ludicrous hyperinflation, people still use money. What economists call ‘the real price’ is the barter price – the price in terms of goods and services. (Expressing this as ‘relative prices’ is another way of making this point, but one that continues to assume the use of money.) What economists call the ‘real price of money’ is its average barter price across all goods and services.

So, when I refer to ‘barter price’ I mean what economists call ‘real price’ as a barter price is a price in terms of goods and services and the real price is barter price expressed in a unit of account (typically money for a particular year) – a usage which in itself expresses the utility of money.

The real price of money is unknowable at the time of any given transaction. It can be (retrospectively) estimated, but that is all. If all prices were static for a known time period, so that the barter price for all goods and services relative to each other was known at the time of any given transaction, then any transferrable good or promise of service would do as payment, since its exchange value would be determinant for all parties. But money would still be used because it so reduces transaction costs (such as ease of movement and storage, allowing immediate transfer, economising on information and calculation, etc).
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Barter thus makes sense only when money is not available, or there is some strong penalty involved in using money sufficient to outweigh search and other costs involved in some specific barter or barters.

But all prices are not static for known time periods, so the real price of money is not knowable at the time of any given transaction. This means that prices and contracts will be in nominal values, because nominal values are specific, numeric (so can be added, subtracted, divided, multiplied, etc), applicable across goods and services and knowable. In that sense, nominal prices are real (in the sense of being knowable), and the “real” price (in terms of aggregation across all goods and services, or even just across one’s own budget set) is not. (The real price is not even numeric in quite the same sense, since it can easily involve odd fractions.)

Which means money can have real effects, because of the information lag between shifts in (nominal) supply and demand for money and overall price effects (i.e. shifts in the overall barter price of money). People will act according to nominal shifts because that is what they have immediate information on and it is what their prices, wages, contracts and obligations are specified in (money being the medium of account.) As the universal transaction item with a clear nominal value but a not-immediately-knowable overall barter price, money is not an epiphenomenon.

Moreover, as people tend to be loss averse (since people build up expectations and obligations based on existing income and wealth), and part of what is unknowable is how quickly other people’s prices will adjust to shifts in the real price, deflationary shocks (falling nominal prices, so rising barter prices for money) will tend to have more nominal stickiness than inflationary ones (rising nominal prices, so falling barter prices for money). This asymmetry in responsiveness (noted in a series of experiment here) is because raising one’s nominal price(s) is clearly compatible with being able to cover existing nominal prices, contracts and obligations. Lowering one’s nominal price is rather less so. Indeed, if it is known that certain prices, contracts and obligations will be slow to adjust or have already been set in nominal terms (such as, for example, tax obligations), then that effect is reinforced.

Remembering that, with regard to money, we are also dealing with powerful cognitive habits: which themselves are rational responses to the time and effort engaged in cognition and gathering information. Moreover, revealed rationality (rationality in behaviour) can easily vary from expressed justification. You do things because they work: one will not necessarily recall later all the considerations which led you to undertake an action, develop a habit, etc.

In particular, the slower one’s general cognitive responses and the more limited the relevant information available, the more dependant on cognitive habits and routines one will be. What people call ‘stupidity’ is often simple tardiness in responding to changed circumstances combined with some pertinent level of ignorance: hence the expression “x is slow on the uptake” and the importance of training to speed up responses (i.e. increasing the range and immediate availability of cognitive resources) to particular circumstances. So the higher the premium on cognitive economy (either in calculation or information), the greater will be the tendency to rely on nominal values.

Thus the term ‘money illusion’ is an illusion, because much of what is going on is not mere illusion, but (broadly) rational responses to information and other cognitive limitations as well as accrued obligations. It would be better to call it money inertia: the information lag to shifts in the overall barter price of money plus resistance to receiving less of the medium of account. Even when it is "pure" illusion, it is still a form of money inertia -- continuing to calculate in monetary terms rather than attempting to shift to (more complex) barter prices.

Why have contracts?

This was originally provoked by a question and answer here.


One of the most productive questions ever asked in economics is: “why do firms exist?” Why are not all economic agents sole traders? Alternatively, why is there not one big firm? Why, indeed, do firm structures vary so noticeably across industries?

The question was famously posed by Ronald Coase and he answered it with what became known as transaction costs. (A useful summary and appreciation of his work is here [pdf].) In effect, firms existed to minimise transaction costs: if it is cheaper to do a transaction in-house, then it is. If it is cheaper to do purchase a good or service externally, then it is. Firms are alternatives to coordination by the price mechanism. In a sense, they are areas of the suppression of the price mechanism. (Original article is here [pdf].) This was very productive question because it transformed organisational and institutional analysis -- many subsequent Nobel prices in economics were awarded for work based on use of transaction costs.

But is a firm defined by a transaction costs boundary? Or is it, as Yoram Barzel has argued, defined by the range of the guarantee of the equity capital? By the range across which expenditure to match obligations is guaranteed (and, if the guarantee fails, bankruptcy occurs). Firms then become mechanisms to deal with both risks and transaction costs. It is the intersection of comparative transactions costs and risk coverage that sets the boundary of the firm. Noting that it is existence of a realm where it is beneficial to replace the price mechanism (Coase’s point) that creates the range of expenditures needing the equity guarantee (as identified by Barzel) in the first place.

Coase’s analysis in itself does not explain why firm ownership is purchased and why the owner is the recipient of the residuum (the net income of the firm, whether positive or negative after all expenditures are paid for): adding Barzel’s analysis does. While Barzel's analysis does not identify why there is a range of transactions needing the equity guarantee in the first place (as Coase's analysis does.)

So, why do contracts exist? Why are not all transactions just on-the-spot swaps?

Lots of transactions are, after all. Not only are there spot markets, but retail markets are dominated by such on-the-spot swaps, where prices are free to move between transactions.
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Contracts exist for the same reasons firms exist, to lower transaction costs and manage risks. Contracts structure, and thereby permit, economic interactions that extend beyond a caveat emptor swap on the spot. A contract is any agreed transaction or series of transactions across time. So, any purchase which is not on a caveat emptor basis has some contractual element, as there is an obligation across time. (So even spot markets can have contractual elements.)

This is easiest to see with regard to labour markets. While spot markets for labour have existed, they tend to be relatively rare. Generally, people providing goods and services they do not make or provide themselves need to use labour with some regularity, and labour with specific skill sets and characteristics (such as reliability). A contract offers income to the provider of the labour on the basis of providing particular skill sets and personal characteristics. The promise of future income (to the labour provider) and future use (to the hirer of the labour) gives the hirer of the labour reason to engage in necessary training (even if only in the procedures of the firm) and a reasonable expectation of the labour being available. The hirer can then have a reasonable expectation of providing the goods or services he can then offer to customers.

The point can be extended to any good or service that is a regular part of the production process.

So, contracts exist to manage interactions across time. They are more than simply repeated games (such as one has with a regular customer/purveyor: though these can involve built-up expectations which can become implicit contracts). Contracts structure any interactions where there is a delay between provision and payment. So, ordering a meal in a restaurant is a contract, since you are promising to pay at the end of the meal. Even if payment for an on-the-spot swap is immediate, if a transaction is not caveat emptor there will be some continuing obligations about quality which make the transaction a contract.

In common law, a contract is a matter of offer and acceptance (i.e. mutual assent) and consideration. That is, a contract involves mutual agreement for some benefit (typically, an exchange of benefits). The mere matter of assent and benefit simply makes it a transaction: it is having explicit or implicit operation over time that makes it a contract.

Contracts reduce transaction costs – in particular, you do not have to keep searching for providers, negotiation costs are reduced (particularly if standard contracts, whether customary or statutory, are used) – and they reduce risks: you can act on the basis of reasonable expectations, with means of redress if there is a failure to provide as promised, making planning ahead easier. Since time-range transactions are so common, contracts are ubiquitous in human economies. So much so, that customary contracts evolve to an extent that people are not even conscious of being engaged in an (implicit) contract, as in purchasing a restaurant meal. By creating a structure one that allows transactions that operate across time (that is, loosen the time constraint) a contract also allows much more complex interactions than would otherwise be practical.

Having high levels of social trust and effective contract law enforcement greatly increases the range of transactions that it is reasonable to engage in. The biggest single economic advantage to high levels of social trust may well be the expanded ability to engage in contractual (i.e. time-range) transactions.

While there is some minimal trust element in on-the-spot swaps, there is so little that even black markets can engage in them easily. To engage in time-delay transactions generally requires an enforcement/recourse mechanism. This accounts for much of the overt menace in black markets, since such enforcement have to provided by the purveyor themself. (The rest of the menace and violence comes from the need to privately enforce property rights, making them much more “up for grabs”, and to deter assisting the state to enforce its ban of those transactions.)

So, a contract is a way of reducing transaction costs and managing risks thereby permitting transactions that have some element across time. Which leads rather naturally into the notion of a firm as a nexus of contracts.

Unlike firms, contracts are not generally suppressions of the price mechanism: typically, they are ways of extending its operation – that is, they bring a wider range of possible transactions into the market. What is distinctive about the contracts of a firm is that they provide the basis for alternatives to the price mechanism in coordination and their operation is within the guarantee of the equity capital. Noting that firms are a nexus of contracts does not, of itself, appear to add anything to the combined Coase-Barzel analysis of firms outlined above.

It is more that firms are a particular nexus of contracts. That is, firms and contracts are both ways of reducing transaction costs and managing risks: it is just that a firm uses contracts to create a specific realm of coordination and equity guarantee. Contracts are the mechanism, the firm is a particular conjunction of the use of contracts.

Natural money bunkum

I kept trying to read this natural money site but it is so ignorant of economic history it makes my head hurt. Interest on loans is (mostly) the level of risk that has to be covered for credit to be offered. One cannot abolish risk, one can merely degrade the ability to price it and so deal with it more effectively.

If I was to nominate a single reason why the Western economic take-off occurred, I would nominate capital markets. Capital markets meant ideas could be operationalised. To take one example that made so much of a difference (we live in the Renaissance that never ended because of it), the printing press operated very differently in Europe than it did in China because of capital markets.

To be sure, those capital markets were embedded in property rights and competitive jurisdictions that allowed them to operate, but their operation then had effects back on the operation of property rights and competitive jurisdictions. And yes, debt was misused. Sovereign monarchs could be even worse than the duly elected representatives of sovereign peoples at mishandling the taxpayer-guarantee – Philip II of Spain was paying amazingly high interest rates at one stage due to previous Habsburg bankruptcies. But, even given all that, the operation of capital markets was an incredible advantage to Europe and its offshoots. Some financial instability has been a small price to pay, just as the business cycle pales compared to the long run trend of higher incomes and higher life expectancies.

The Aristotelian argument, in all its offshoots, against interest rates is natural law bunkum. Risk is a real factor in economic affairs: a central factor, as assessment of risk is so central to economic actions in so many ways. Being able to price it properly, and in diverse ways, is an enormous advantage. The problem in recent times is not interest rates, it is action which badly distorts risk assessments and incentives. The economy will not work better if one closes down such a basic information channel: that is massively magnifying the problem, not creating any sort of solution.

Great art as transcending constraint

A friend has been painted for the Archibald Prize. The artist knows how modern critics want her to paint, but it is not how she likes to paint. As the portrait's subject’s partner said to me recently, art evaded the constraints of the Church and then produced what of value exactly? (Somewhat harsh, but one takes his point.) It is not the abolition of constraint, but its transcendence, that produces great art. If there are no constraints, there is nothing to transcend.

In Christopher Beckwith’s Empires of the Silk Road he mounts a heartfelt critique of modernism and post-modernism. He observes:

But before the twentieth century, although the greatest artists nearly all achieved their success by striving against tradition and sometimes breaking the rules, there was a balance between the two forces: the goal of the upward-aiming aristocratic system was to achieve success by creating artworks that were as near to perfection as possible within the traditional rules based on the natural order. The goal of the downward-aiming modern tendency was to achieve success by creating art works that effectively changed the traditional or previously followed rules. Because the two forces were in balance, the great artists of the past did not destroy existing rules, they stretched or otherwise modified them (p.292).

Part of that natural order being the continuity of human nature:

The consistency of human behaviour over such great expanses of space and time can clearly be due only to our common genetic heritage (p.xi).

Constraints gave art something to both strive against and be judged by. Without constraints, what is the point?