The more things change ...

Theodore Roosevelt would not have been terribly surprised at how the "Arab Spring" is turning out, particularly in Egypt. (Tunisia is a bit more promising.) After a post-Presidential visit to Cairo and Khartoum, he wrote to longtime friend and correspondent Sir George Otto Trevelyan:

Perhaps what the French are now doing in Algiers, what the English are now doing in Egypt and the Sudan, will in the end result in failure, and the culture they have planted wither away, just as the Græco-Roman culture which flourished in the same lands-a couple of thousand years ago afterwards vanished.

And further:

The real strength of the Nationalist movement in Egypt, however, lay not with these Levantines of the café but with the mass of practically unchanged bigoted Moslems to whom the movement meant driving out the foreigner, plundering and slaying the local Christian, and a return to all the violence and corruption which festered under the old-style Moslem rule, whether Asiatic or African.

Between Nasser's destruction of the commercial middle class; the grinding, corrupt authoritarianism the continued under his successors Sadat and Mubarak and the Islamist surge, the burden of history is great in Egypt, and in the region generally.

Just how much the economic life of the region is distorted by its corrupt, authoritarian politics is nicely set out in this paper (pdf) by a couple of Arab economists. A weak and dependent commerce makes it even harder for the politics of the region to escape from the "mosque or military" as the only bases for organised political power.

Moral mascots and moral adults

Thomas Sowell uses the term ‘moral mascots’ to refer to groups that progressivist opinion focuses on at any particular time as especially worthy of moral concern. A feature of such status as moral mascots is that such moral mascots are often, particularly if they are not Westerners, not treated as moral adults. That is, they are not held up by progressivist opinion to the same moral standards as others (particularly Westerners) and bad behaviour is often regarded indulgently, sometimes astonishingly so. Such attenuation of moral responsibility typically extends to causality, to an attenuation of their status as moral agents. That is, they are typically seen as passive recipients of causal forces, or as reacting to causal processes initiated by others: they are much less likely to be seen as initiators of causal processes.

A bifurcated mindset
One sees this a lot in progressivist treatment of Muslims. One is, for example, permitted to criticise organised Christianity, Christian doctrines and beliefs and Christians as much as one wants. One can also do so without any reference to similar issues with any other religion. Christians are also expected to show forbearance when crosses or bibles are destroyed. In other words, Christians, particularly Western Christians, are treated as full moral agents; as moral adults to be held responsible for their actions.

The reverse does not apply. To criticise Islam is likely to be commit “Islamophobia” and to engage in “essentialism” and, if one does not acknowledge equivalent Christian sins, is a clear sign of prejudice and ignorance. In this mindset, Muslims are simply not treated a moral adults and full moral agents in the way Christians are.

In this mindset, when a solitary fanatic of dubious mental status murders lots of people and publishes a manifesto, the actions of that solitary individual are held to taint everyone who holds overlapping views. Yet no amount of mass murder by Muslims, for openly stated-to-be-Muslim reasons, taints any part of Islam. Westerners have moral agency (indeed, in this occasion, hugely inflated moral agency); Muslim moral agency, by contrast, is massively attenuated.

Similarly, the notion that Christians be held to follow Christian doctrine as a mark of cultural “authenticity”, that Christian sensibilities have to be carefully respected, is not a mark of progressivist behaviour. Christians are moral adults who can make their own choices and are expected to put up with criticism. By contrast, Muslim beliefs (no matter how misogynist) are treated as marks of cultural authenticity and are expected to be deferred to. Muslims are not moral adults; they are moral children to be cosseted.

If Qurans are accidently burned by US forces, that is patently offensive. If Muslims riot in response, it is an understandable rage. An “understandable” rage no Christian would be excused for indulging in. Again, the mindset treats Christians as moral adults and Muslims as moral infants.

If things are too embarrassing, they are either passed over in silence or moved on from as soon as possible. The deliberate destruction of Benghazi war graves was clearly unprovoked, bigoted vandalism that, alas, has canonical support in the life of Muhammad. But anyone who raises this latter history as problematic is engaged in very “poor form”. The status of Muslims as moral mascots needs to be protected.

There are few areas where this denial of moral adulthood and agency to Muslims is more rife than in commentary on the Arab-Israel dispute. Arab states trapping Palestinians in eternal (as long as Israel exists) status as refugees by denying them citizenship or residency is simply ignored. They are not moral adults, they are not held responsible. Only Westerners (specifically Israelis) can provide solutions, because they are the only moral adults and so accrue all responsibility and blame.

Palestinian politics driving Palestinian Christians away, thereby making it absolutely explicit that nothing beyond oppression and exile is being offered to Israeli Jews and Christians if they are no longer defended by the IDF, is also passed over in silence. The Palestinians are not moral adults, they are not responsible for contributing to any solution; that is the business of the moral adults, the Israelis.

And so it goes on.

Destructive thinking
This is, of course, a highly destructive mindset. Not only is it destructive to elementary understanding by systematically closing one’s eyes to inconvenient parts of reality, thereby fulfilling Matt Ridley’s definition of political correctness (that ‘ought’ implies ‘is’). It also undermines things getting better by implicitly or explicitly excusing destructive behaviour and attitudes. Why move on from the politics of narcissistic adolescent rage if such politics is pandered to? If such politics “works”, at least in the sense of overt attention and sympathy?

One insidious result of this sort of outlook is the way antipathy gets transferred onto any group whose experience undermines moral mascot status. This obviously happens with Israelis, but can also happen to Jews generally: former and aspiring Lord Mayor of London Ken Livingstone might well be a manifestation of this: what might be called anti-anti-semitism. Just as, in a former age, many folk on the left were anti-anti-communist because being reminded of the record of revolutionary socialism was so annoyingly awkward. And got in the way of the only truly "serious" moral business: critiquing Western capitalism.

If one stops seeing the world as divided into moral adults and infantilised moral mascots but instead sees it as divided into patterns which work and those which do not, then one can focus on spreading what works. But if the moral mascots are forever held to be dependent on the moral agency of others, then their chances of achieving patterns-that-work are greatly reduced.

Making victims
So, the moral mascots themselves can end up being victims of this mindset. Sometimes in a quite direct fashion. Failing to see Muslims are moral adults leads one to overlook (or, worse, excuse) the vicious and murderous campaign by radical Islamists to narrow what is allowed to be publicly expressed. A campaign that is killing, or otherwise blighting the lives, of precisely the most liberal and open-minded Muslims. A campaign that, completely un-coincidentally, marches along with the campaign to bring back the burqa and the niqab; those public manifestations and statements of female subordination.

This latter campaign of restriction of women's public presentation extends to violence against women, to murder and assault, to force them to accept such subordinating control: even to the extent of Jewish children becoming terrorist murder victims.

How much it is about controlling women was displayed when the Saudi religious police literally beat back girls trying to escape unveiled from a burning school, fifteen girls burnt to death: the sheer controlling misogyny involved is stunning. For the reality is, permitting the burqa and the niqab ends up exposing Muslim women who do not wish to accept such to greater pressure, to making them targets to whatever level of violence, abuse or other pressure can be got away with. And because the burqa and the niqab are viewed as indicating subordination to the will of Allah, and the sovereignty of Allah is unlimited, it also makes non-Muslim women targets.

The burqa and the niqab are not simply clothing choices, they are not even merely religious statements. They come with a cruel, vicious, brutal and controlling context.

Infantilizing of Muslims, refusal to accept moral adulthood, also occurs in some Muslim commentary, as in arguments that women have to be restricted in order to not inflame men. Tariq Ramadan can be relied upon to infantilise in a more subtle way, ripping the Toulouse terrorist from any Islamic context and putting the blame on the failure of France to integrate its migrants. There are many ways alienation can be manifested (and there are serious integration problems, France being a typical EU country in the policy weapons it wields against its own young folk, a policy repression that falls particularly strongly on migrant youth). But the Toulouse terrorist chose the jihadi route; as so many young Muslims do in so many countries. There was nothing specifically French in what he did, there was much that was specifically Islamist.

Conspicuous compassion
Infantilising one’s moral mascots may provide a convenient framing for playing the game of conspicuous compassion, for moral-concern-as-status-display, but it is a world away from actually improving the situation of the people one has framed as lacking full moral agency and responsibility. Adolescence is a way-station in life, not a worthy destination. Adolescents whine, adults achieve. Without a grounded-in-reality sense of what achievement is, and how it happens, nothing gets better. But trapping people in a bad situation, sabotaging the mindset that makes escape possible, leaves them as moral mascots indefinitely—and maybe that is the point.


[Cross-posted at Critical Thinking Applied.]

Defined out

Theologian John Millibank has published on the ABC website an essay against normalising homosexuality. It does so by defining homosexual people out of the properly human and the properly social.

Airbrushing history
He starts with the arguments that define homosexual couples out of marriage; that marriage is ‘by definition’ heterosexual. As Millibank puts it:

For centuries - indeed, for millennia - they argue, marriage has been understood as a conjugal relation between men and women linked to the natural bearing of children. Thus there is something monstrous about the state even claiming to have the power by law to change the definition of a natural and cultural reality which has historically preceded the existence of the state itself.

This a very common claim—one made, for example, by Catholic advocate Austen Ivereigh in his recent piece against permitting same-sex marriage:

marriage is a conjugal relationship of a man and a woman apt for the begetting of children who are raised by their natural parents; that this arrangement is both unique and uniquely beneficial to society and to children; and that there is something inappropriate about the state even claiming to have the power by law to redefine it.

But the state redefining marriage is precisely what the Christians did when they captured state power. Marriage is only ‘by definition’ heterosexual because the power of various states have been wielded to make it so. Millibank’s claim that:

But [homosexuality] has never previously been linked to marriage - apart from parodic instances (as in ancient Rome) or marginal situations where for various reasons (including those of transgender) a male or female marital role is "performed" by someone not of that gender

is flatly wrong. Both Roman law and Amerindian social practice, for example, recognised same-sex marriages. The Sifra, one of the oldest rabbinical texts, complained that pagans let men marry men and women marry women. Even the Kama Sutra mentions same-sex marriage.

When anthropologists tried to find some defining element of marriage, the only thing they could find was that it created in-laws. The “by definition” argument merely celebrates the success of past brutalities and restrictions; it is historical and anthropological ignorance passing itself off as metaphysical understanding.

As Skepticlawyer has noted, much of conservative Christian frustration comes from finding arguments they thought settled in the C4th, C5th or whatever century being re-opened, and them losing. Pretending the original argument never occurred is a air-brushing of history worthy of Stalinism, if it did not speak to the sheer ignorance of many such advocates: their metaphysical confidence blinds them to the complexities of reality and the truth of the historical and anthropological record.

One of which complexities is that the Latin Church was pushed into taking over marriage law (basically, to provide the landowning and inheriting elite with a common and clear set of rules for which children counted as legitimate). Marriage did not become a sacrament until the C11th, one that did not even need a priest to be present until the Council of Trent. (Somewhat earlier in English law: the provision was a product of the Reformation and concern to ensure the right priest was involved.)

Marriage has always been an evolving institution, even in Christian theology (there was considerable debate, for example, on whether consummation was necessary for marriage). The way the metaphysical certainty that Millibank invokes contradicts the complexities of biology, society and history is deeply revealing of its profound inadequacy as any path to truth or moral understanding.

Millibank writes of the antiquity of religion, ritual and kinship connections. But, when he does, Millibank implies that it was all enduringly heterosexual. This is more nonsense airbrushing of history. One of the deep divisions between monotheist and polytheist-animist visions is precisely that monotheism typically takes a narrowly procreative view of sex and polytheist-animist traditions typically do not—the latter being much more accurately based on the complexity of sexual expression in the natural world. Philo of Alexandria was, for example, outraged at pagan celebration of gender diversity.

This monotheist procreative obsession (one that does not express biological reality but, on the contrary, ignores or dismisses vast swathes of it) shows up in Millibank’s rejection of artificial insemination and surrogate motherhood. As if the miracle of birth is somehow lessened if we do not get the mechanics correct. There are genuine complexities involved in sperm donation and artificial insemination, but they are hardly insoluble and are certainly much less important than expanding the number of people able to choose to be parents and the number of loved and wanted children.

Those threatening queers
Defining the prior existence of same-sex marriage (and religious expression) out of the historical and anthropological record is merely the start, however. The next layer is to turn granting equal rights to homosexuals as an attack on heterosexuals. Millibank claims:

a supposed "extension" of marriage to gay people in fact removes the right to marry from heterosexual people.
This can seem like a perversely contorted claim, but its logic is quite straightforward: the intended change in the definition of marriage would mean that marriage as traditionally defined no longer exists. Thus heterosexual people would no longer have the right to enter into an institution understood to be only possible for heterosexuals, as doubly recognising both the unique social significance of male/female relationship and the importance of the conjugal act which leads naturally to the procreation of children who are then reared by their biological parents.
In effect, if marriage is now understood as a lifelong sexual contract between any two adult human persons with no specification of gender, then the allowance of gay marriage renders all marriages "gay marriages."

How does one, in a civilization based on a presumption of universal morality, justify denying rights to a minority? Claim that to do so is somehow profoundly threatening to the majority (or, at least, the traditionally dominant group). This is precisely the claim made by bigots down the ages—against giving equal rights to Jews, to women, to blacks …

Here we see an enduring and key element in bigotry: the insult of equality. Since being a heterosexual person in a heterosexual marriage is so much better than anything any homosexual or homosexual couple can be, to treat them as equals is an insult that strips heterosexuals of their rightful status. Again, a standard claim of bigotry down the ages—that it is outrageous to treat Jews as if they are the equal of Christians, women as if they are the equal of men, blacks as if they are the equal of whites, and so on. The targets and justifications shift (though the latter more superficially than substantively). The underlying patterns endure.

And decent people are, of course, entitled to be defended from such an insult. From the precious whatevers such outrageous equating strips from them.

Equal protection of the law does mean that heterosexuals will have to share the institution of marriage with homosexuals-as-homosexuals (rather than as folk desperately trying to hide from their sexuality): how appalling for them. Just as whites had to use the same facilities as blacks, men had to cope with women getting the vote and running for office, Christians had to deal with Jews have the same standing in law as them.

Status anxiety
Yes, an utterly unearned status of claim of superiority is taken away when equal protection of the law is applied. That does, indeed, follow: it is a consequence of equal protection of the law. Indeed, that is one of its major virtues, the stripping away of social subordinations and exclusions; the spreading of respect by the law, of dignity under the law.

[Read the rest at Skepticlawyer]

American political labels

This was based on a comment I made here.


American political labels are so amusing. 'Liberal' means politically cross-dressing social democrat. 'Conservative' usually incorporates large slabs of classical liberalism. 'Libertarian' means classical liberal with the complexity button turned off. While being Republican or Democrat means you get to accuse your opponents of "not getting" the American Revolution, and both be correct.

Meanwhile, 'right wing' and 'left wing' mean less and less the further we get away from the cycle of politics originating in the French Revolution (which was always problematic in transferring to the Anglosphere anyway). After all, Edmund Burke was a liberal (a very prudential liberal, but a liberal nonetheless; he was a Whig, not a Tory, and he and Adam Smith basically agreed on matters economic: so if Smith was a liberal, so was Burke).

The uses of grievance

The creation of Israel created two sets of refugees, one folk constantly talk about and one folk almost never talk about.

The one folk constantly talk about are the Palestinians. The one folk people almost never talk about are Jewish refugees from Arab lands. Both refugee flows were of similar size, but have had very different outcomes.

The Jewish refugees from Arab lands fled to Israel and the West, where they were accepted as citizens and have become part of the fabric of their new societies. Their acceptance and integration has been so successful, that they have effectively vanished from historical consciousness. Which has the effect of absolving Arab countries from any blame and Israel (and the West) from any credit.

Conversely, with the limited exception of Jordan, no Arab country has been willing to accept Palestinians as residents or citizens (via). They have no identity except as refugees; as people with a traumatic past but no future and so an endlessly empty present. They remain sticks to beat Israel with, the only sense in which their Arab “brothers” value them at all. The only future they are permitted to conceive is one where Israel is destroyed; that is the only way they are permitted to stop being refugees.

Indeed, their status as refugees is hereditary. Provided you have an ancestor who was resident within the 1948 boundaries of Israel for two or more years and then fled, you are a Palestinian refugee (according to the UN definition). Apparently, this status as a refugee is eternal, existing as long as Israel does.

So, this is next thing the vanishing of Jewish refugees from historical consciousness does: it absolves Arabs of any responsibility. Only Israel has responsibility.

The boxing of Palestinians into the status of permanent refugees is a wonderfully effective use of—indeed, insistence upon—grievance. One the international community is prepared (at least formally) to endlessly pander to.

There is a third thing the vanishing of Jewish refugees from historical consciousness does: it strips the context away from the plight of Christians in the Middle East. For, just as Arab nationalism drove the Jews away, defining them as “not Arabs”, so the rise of Islamic radicalism is driving the Christians away (via), defining them as drastically inferior to Muslims, as alien to Muslim society. Christians have dropped from 20% of the population of Muslims lands a century ago to 5% now. This process of driving the Christians away is occurring with particular intensity within Palestinian lands. In the West Bank and Gaza, they have dropped from 15% of the population to 2% in much shorter period.

The only Middle Eastern country in which Christians are flourishing is, of course, Israel where their proportion of the population has increased dramatically.

The Arab and Muslim Middle East has shown itself, over decades, to be hostile to minorities. As soon as they gained a measure of power, the Palestinians have shown themselves particularly so. Their sense of grievance is profoundly narcissistic. It is all about them; any sense of empathy for others (even for fellow Palestinians who fail to be Muslim) is patently impotent.

This is yet another reason why the One State “solution” to Israel-Palestine is such an obvious nonsense. What makes the situation of the Jews and Christians of Israel different from the (mostly absent) Jews and (increasingly vanishing) Christians of the rest of the Middle East is the Israeli Defence Force (IDF). The Jews and Christians of Israel can defend themselves in a way that Jews and Christians in the rest of the Middle East could or cannot. Take the IDF away, and they immediately become as vulnerable as the Jews and Christians have proved to be in the rest of the Middle East.

What the treatment of Jews and Christians in the Middle East—particularly in the Palestinian lands—shows is that the powerholders and their supporters in these countries have absolutely no interest in conciliating the Jews and Christians of Israel. They literally have nothing to offer them except oppression and exile. They make the case for preserving Israel and the IDF absolutely clear.

To truly understand the contemporary Middle East, you have to understand the story of the Jewish refugees from Arab lands. Once you do, the argument for preserving Israel and the IDF becomes overwhelming.

ADDENDA: Just to make my point, the Grand Mufti of Saudi Arabia has called for all churches in the Middle East Arabian peninsula to be destroyed.

Money is a transaction good, so expectations rule

(This is an attempt to talk about money somewhat philosophically and avoiding economic jargon while grappling with what monetary policy should be. It is the product of much reading of Scott Sumner, Nick Rowe, Lars Christensen, Marcus Nunes, David Beckworth and other market monetarist bloggers as well as David Glasner.)


Money is a transaction good; the only point in holding pure money is to engage in transactions: i.e. its expected swap value(s) in exchange is its only value.* (By ‘pure money’ I mean money that has no significant value except as a transaction good: paper fiat money for example.) So, use of money is driven by expectations. People take your money because they expect to use it in future transactions. You offer money in transactions because of that expectation. (And, if one money is refused, folk shift, if they can, to another that is accepted.)

There is a range of transactions over which money works as a transaction good. A particular money will only work within a subset of such transactions. For example, local taxes are usually only payable in local money. Indeed, by accepting payment of taxes in its money, a rulership can set a guaranteed range of transactions for its money. In effect, an anchor for its money: but an anchor that determines neither the range of transactions that money is used for nor its value in transactions—i.e. its (other) swap values. The ability to create such a guaranteed range of transactions for its money no doubt explains the origins of coins-as-money, but it determines neither a money’s (other) swap value(s) nor the extent of the range of transactions a particular money was or is used for. (As anyone who has had experiences such as of paying for goods in US$ in Red Square can attest.)

Anything that is used in a transaction purely for its swap value is being used as a medium of exchange. That does not, however, make it money. It is only money if it is also embodies the unit of account. Something that is used as a medium of exchange and embodies the unit of account is a medium of account and so money: something used to both quantify and pay exchange obligations.

(Money is also a store of value, but that is the least distinctive thing about it; many things are stores of value. Its role as a store of value comes from its swap value, which takes us back to it being a medium of account. Yes, we use it because of expectations about its future ability to operate as a medium of account, but that is what is distinctive about it, not being a store of value.)

The subset of transactions for which a particular money can be used will overlap with that for other moneys. The wider the expected range of transactions for which a particular money can be used, the more preferred it is likely to be: preferences which will affect the swap values of that money (either for other moneys or for goods and services).

Shifts in the quantity of money in use, and of the range of transactions over which it is used, will determine its swap values. Note that both of these are driven by expectations. Expectations will affect the gap between what quantity of a money exists and what quantity of that money is in use for transactions: that gap being the demand to hold money (what economists call ‘money demand’). Expectations will also affect the range of transactions over which a money is used: whether by affecting the level of transactions or shifting transactions to another money or to non-use of money. (A commodity money will also have the possibility of shifts to or from non-monetary uses of the commodity.)

Since (pure) money is a transaction good whose (only significant) value is its swap values, expectations about its future swap values affect whether people use it in current transactions or keep it for future use. Ironically, if the demand to hold money increases more than its supply, so it is used less for transactions, then its swap value(s) is likely to rise, increasing the incentive to hold money (particularly if its swap value[s] are expected to continue to rise). If that increases the demand to hold money without a matching increase in its supply, that will further reduce its current transaction use, creating a downward spiral in transactions (to the extent that other moneys do not make up the gap) and so in income (since, in an exchange economy, income is someone else’s spending).**

The less downwardly flexible (“sticky”) prices are, the more the drop in spending (and so income) will lead to drop in output. (Since the less prices adjust to the fall in spending, the more output will.) Conversely, if spending increases, the less upwardly flexible (i.e. constrained) output is, the more any increased spending will register in higher prices.

About credit
Given its swap value(s), money can be used for credit, for loans. In order to make offering money for credit worthwhile, lenders need to be covered for risk: the risk of downward change in swap value(s); the risk of debtor default; and the base risks in not having use of the money for the time of the loan (the time-cost of credit or what is called ‘the risk-free cost of capital’).

If institutions that receive deposits operate on less than a 100% reserve, and so make loans using deposits received, they can then apparently expand the quantity of money (since money which is credited on deposit is also being loaned out). More precisely, it is expanding the use of money (since some of the money credited on deposit is not remaining idle but its being loaned out and used in transactions[: in other words, they are acting as financial intemediaries {pdf}]). This expanded use will affect the range of transactions and how much money is being used in such. It also creates a potential instability, because of the possibility of runs on deposit institutions as people seek to withdraw deposits, some of which has been loaned out, and so is not available for withdrawal.

Clearly, interest rates are not the price of money, they are the price of credit—which includes expectations about the future swap value(s) of money. The nominal price of money is one, it being the medium of account. The price of money in terms of goods and services or other moneys is its swap value(s): the latter being its exchange rates. (Various indices, such as the CPI, aggregate and average movements in swap values for goods and services.) So, interest rates incorporate expectations about the future price(s) of money.

As interest rates are not the price of money, but incorporate expectations about the future price(s) of money, they tend to be inverse indicators of the tightness of money. (‘Tightness’ meaning the extent to which the money supply is sufficient to cover money demand without restricting its use in transactions). If the money supply is not sufficient to cover money demand without leading to its withdrawal from transactions, that will tend put upward pressure on the swap value(s) of money, so creating lower expected risk of loss of swap value(s) and so lower interest rates.

Conversely, if the money supply is more than adequate to cover money demand (and its current level of use in transactions), leading to its expanded use in transactions, that will tend to put downward pressure on the swap value(s) of money, so creating greater expected risk of loss of swap value(s) and so higher interest rates. To put it another way, tight money tends to lead to lower prices and so lower interest rates; loose money tends to lead to higher prices and so higher interest rates.

Since expectations about the future swap value(s) of money are not the only element in interest rates, interest rates are not, however, pure indicators of the tightness or otherwise of money. Which also creates problems in seeing interest rates as “the” indicator of monetary policy.

About capital and assets
Since capital is the produced means of production, it represents resources withheld from present consumption for future (productive) use. The cost of deferring resource use incorporates the risk of failure (such as misallocation or accident), the risk of adverse shifts in the value of the resources used and the base risk in not having immediate access to the resources. Which replicates the elements in interest rates. Capital is often bought via credit, but opportunity cost is enough to make interest rates the cost of capital, given these are all alternate uses of money not used for consumption. Asset prices are inter-connected, because the same deferral considerations operate across all of them, creating a continuum of opportunity costs according to level of expected risk.

This again points to the limitations of interest rates as the central transmission mechanism in monetary policy. If there was no credit, there would still be money and questions for monetary policy. Even with the existence of credit, interest rates are not magically different and separate from other asset prices.

So, the trick with monetary policy is to ensure money supply covers money demand without significantly affecting the transaction use of money. If money supply is insufficient to do so, it will generate downward pressure on spending, and so income, as money is withdrawn from use in transactions. The stickier prices and wages are, the more such fall in spending will lead to a fall in output. If money is in significant excess of money demand (and current use in transactions), it will generate upward pressure on spending which, if output cannot respond sufficiently, will generate upward pressure on prices.

Monopoly provider
Which generates two basic questions: first, should there be a monopoly provider of money? If yes, what should its policy be?

The argument against a monopoly provider is the claim that an open market in money supply will ensure balancing of money supply and demand, as competing suppliers of money will respond to shifts in money demand. This a straightforward competitive-market-is-preferable-to-monopoly argument: though that non-commodity money is a good not constrained by the cost of production provides some interesting complexities in considering an open market in money.

The argument that central banks provide greater stability as monopoly providers than would an open market in money is not a strong one, given that central banks caused the Great Depression, the inflation of the 1970s, the Japanese stagnation, the Great Recession and the Eurozone crisis.

The most obvious appeal of a monopoly provider is the power it provides the ruler; though this is somewhat ameliorated in a world of floating exchange rates. For many, this power is precisely why they are against a monopoly provider of money.

An argument for a monopoly provider is simplicity: it means there is only one (local) money to recognise and assess. This is a weak argument; people cope with assessing different brands in markets all the time. Indeed, in countries where the local currency is weak, people often show great ability to distinguish between moneys in trade.

Another argument for a monopoly provider is externalities. Money is a form of network good, in that the more people who are willing to use a money, the greater its utility. Since the state is both the dominant transactor and gains (via taxes) benefits from transactions, it has the greatest interest and capacity to manage the local money supply. In particular, its taxing power allows it to recover benefits in use of money by third parties that a private issuer of money would not. Indeed, since the state is the dominant user of local money—due to its ability to insist that its taxes and expenditure be paid in a particular money or moneys—it might be better for the state to cover the risks involved in its ability to set a dominant local money.

The preceding is a derivation of arguments for government provision of infrastructure: hardly surprising as infrastructure is typically a network good with significant externalities

Of course, whether the state should be both regulator and provider (given the inherent conflict of interest in being both regulator and regulated) is a question in itself, but the insignificance of the cost of production of non-commodity money removes one of the basic arguments against public provision. Also, the evidence on the outcomes of public provision versus strongly regulated private provision is highly equivocal.

I am agnostic on the question of whether or not there should be a monopoly provider of local money. It is not, however, presently within the realm of practical policy to abolish the various state monopolies over local money.

What policy?
Assuming we have a monopoly provider of local money (aka a central bank), what should be its monetary policy? Presumably we wish neither to strangle transactions for want of money nor flood them with an excess of it. Either way, we don’t want to “surprise” people. Forward-looking agents can manage better if expectations about swap values have some explicit anchor so that they can contract with greater confidence. Sudden shifts in swap values will lead to mismatches between contracts and prices, with potentially unfortunate effects on the level of transactions. Such massive information failure is to be avoided.

An explicit target also allows expectations to do much of the work of monetary policy through the Chuck Norris effect. An explicit target further makes a central bank more accountable (not an attractive quality to central bankers but very much so for the rest of us), and more likely to maintain consistency of policy under stress (which is good or bad depending on the range of circumstances in which the specific policy target is appropriate).

So, an explicit target is (generally) good. But do we target swap value(s) or transactions? If we target transactions, then we are targeting the function of money (to facilitate transactions). We are explicitly aiming to balance money demand and supply to facilitate transactions, accepting whatever shifts in the swap value(s) of money are necessary to do that.

If we are targeting swap value(s), then we are targeting the price(s) of money, operating as if either it is more important than balancing money supply and demand or if stabilising price(s) is the same as balancing money supply and demand. The price/swap value being either for local goods and services or its exchange rate for other moneys: for you have to pick one, you cannot do both. If you target the exchange rate, you import your average change in local swap values (aka inflation) via the set exchange rate; if you target the average change in swap value of your money for local goods and services (aka inflation), then your exchange rate(s) reflects differences between local and trading partner inflation rates.

Either way, you run the risk of sacrificing transactions in order to achieve your target: for you are targeting the average swap value of money, not the level of transactions (or income, remembering that spending=income in an exchange economy). For the policy is not directly matching money supply and demand, it is targeting price. If we target the swap value(s) of money (i.e. inflation), changes in money supply will tend to mirror changes in output, running the risk of exacerbating negative shocks rather than ameliorating them. A danger likely to be worse the more prices are “sticky” and the more people have pre-existing obligations (notably debt). (The current woes of the Eurozone are playing out this scenario; with the most inflexible and debt-ridden economies suffering worst.)

It is possible to target swap value(s) in a way that effectively means targeting income: set an inflation target that is an average over the business cycle. This means that, if output falls, money supply expands to compensate and, if output surges, money supply tightens to compensate. The effect is to stabilise aggregate income. It is clearly superior to just targeting swap values, as it compensates for economic shocks rather than (at least sometimes) exacerbating them.

Concluding
In summary, money is a medium of account whose function is to facilitate transactions. Its use is dominated by expectations, so managing expectations is central to monetary policy—hence the virtue of an explicit target. It not only minimises the risk of serious information failure but allows expectations to do much of the work (the Chuck Norris effect).

Targeting swap values treat money’s role as a unit of account as dominant: as a means of calculating and quantifying obligations rather than the ability to meet them. Policy that stabilises aggregate income, by contrast, focuses on the full role of money as a medium of account used in obligations across time. Whether it is targeting an average inflation rate over the business cycle or targeting aggregate income (aka Nominal GDP or NGDP), it is the superior policy to having a fixed inflation target.

*A way to put this in economic terms is that money does not appear in any production or utility function. (From here [pdf] [via].)

** A nice expression of this in price terms is in this post.

Cruelty then brutality

By deeming sex is only legitimate if it is procreative, natural law theory imprisons sexuality and erotic love within procreation-as-conception. It does so, however, selectively; the aged and the infertile are let in, even though they cannot be procreative. So, sex is only legitimate if it is procreative in form, even if it is not at all in substance.

But why? Because to not to do so would be too big an ask. Telling sterile or post-menopausal married couples they could not have sex is a prohibition that is never likely to be accepted, even though it is a perfectly logical inference from defining sex by its procreative function (understood purely in terms of conception). Indeed, if conception-as-procreation defines sex, the only truly logical position is that of Clement of Alexandria—the only permitted sexual acts are those specifically intended to conceive.

But, of course, sex has many functions beyond procreation: such as catharsis, expressing intimacy, pleasure. Biologists identify a range of functions sex has in nature: functions that can, and are, fulfilled by sex acts that are not procreative in form. (As famously displayed by our closest animal relatives.) So, the natural law position becomes: it is fine for sex to perform those functions provided it remains imprisoned within the procreative form. The far more complex reality of sex in nature does not count.

But that gives the game away. That sex has other functions than procreation-as-conception is admitted by letting in the aged and infertile (not to mention permitting sex when the woman is not fertile); that sex is not purely procreative is accepted. The point of the procreative form is to conceive. So, whatever form can fulfil those other functions of sex—which have been accepted to be legitimate—must be fine too.

Unless, that is, procreation-as-conception somehow defines the proper form of sex in a way that no other function of sex does. The natural law answer is to claim that sex is essentially procreative, because it would not exist without procreation, so the procreative form does define sex in a way no other function does.

Well yes, the original function of sex was to conceive new life. That is why sex evolved. But that does not, in itself, preclude sentient beings finding other, perfectly legitimate, functions to sex. Evolution works by finding new ways of doing things and new things to do. We would not, for example, have hands if that was not so. Form and function are interactive; there is not some static once-only creation that irrevocably ties form and function together.

Fearful imprisonment
Moreover, non-procreative acts can serve procreation, for procreation extends well beyond the act of conception. A subordinate male providing sexual pleasure to a dominant male can re-direct the latter’s aggression, increasing the former’s chance of procreating. Male masturbation can clear out old sperm, making fertilisation more likely. Female masturbation can encourage ovulation. Male-bonding swans can steal eggs and raise the cygnets, prompting the female swan from which the egg(s) were stolen to lay more. The intimacy of sex can bind a couple together.

So, even just in terms of procreation, sex can serve way beyond conception; indeed, quite indirectly. Consider the ways procreative possibilities can be increased through expanding the capacity to support children. The existence of a minority erotically directed towards their own sex can provide people directed to passing on an enriching the binding knowledge and culture of a group, thereby strengthening it. An intensely pleasurable activity can provoke development of communications, even tool use; expanding procreative possibilities. Sex can build coalitions, it can reward efforts: both of which are part of its functions in nature. The structure and patterns of reality are far more complex than simple equating of penile-vaginal sex as the only way sex can support procreation presumes.

Hence, given these complex possibilities, nature is so prolix in its sexual expressions, constantly exploring possibilities. There is far more to procreation than merely getting someone pregnant, or even giving birth: and the more complex an organism, the more that is so. Hence a same-sex couple can serve procreation, by investing time, effort and love in raising children.

The notion that the procreative origins of sex require it to remain imprisoned in a single form is not an expression of reality, it is a profound denial of it. It is using the conclusion (sex must be procreative in form) to set the ambit of its premises (only aspects of sex in nature that allows, or mimics, the possibility of conception counts as evidence: anything else is perversity). A conclusion that itself has been shifted from sex-only-for-conception in order to deal (however inadequately) with the far more complex reality of sex. Imprisoning sex within this ludicrously narrow understanding of procreation is not a seeing into the heart of sex, of eros; it is fearfully hiding from its complexity, and its power.

If form does not even define procreative functions of sex, then there is no reason to think that forms of sex which perform its other functions are not also legitimate. Especially as human life exists well beyond procreating: as does the moral realm.

Irretrievably cruel
But much worse is involved than a denial of reality in so simplistically equating sexual form with sex-as-conception (albeit revealingly inconsistently). In so denying reality, profound cruelty, leading naturally to brutality, is engaged in. Imprisoning sex (however inconsistently) within conception (or, rather, the form-with-which-conception-would-be-possible-if-both-were-currently-fertile) does not protect, support or expand the moral realm; it deforms, restricts and subverts it.

For, let us be clear. Given the reality of human sexual diversity, given that people do not choose their sexuality, there is no form of preaching against homosexuality that does not involve profound and insidious cruelty. Cruelty in alienating people from their own nature; cruelty in alienating parents from their children; cruelty in isolating and denigrating vulnerable individuals. For few are more vulnerable than queer teenagers and young adults, growing up as solitary individuals in families and social milieus overwhelmingly straight.

We know that people do not choose their own sexuality; not merely from introspection (tell us all about the moment when you chose to be heterosexual?) but because, in all the vast array of human songs, poems, stories, narrative, films etc about love, lust and romance there is none about choosing to fancy men or women (or both), because no one has that moment. To say people should not be homosexual is exactly like saying people should not be black: it is to demand that they change a characteristic that is not subject to choice. (After all, being black in the US, for example, means lower life and income expectancy; so there are reasons to “choose” not to be black.) The theory that people “choose” to be homosexual is just a way of hiding one’s cruelty from oneself, of absolving God from cruelty, and making it easier to engage in denigration and hatred.

And to say, if they cannot be other than homosexual, people should not act upon it, is also profoundly cruel, for it requires them to be at war with their own sexual nature; to live lives either of profound constraint, crippling their possibilities, or of profound deceit. It is also to denigrate them, to dismiss their nature as deformed; to dismiss their hopes for love and intimate pleasure; to deny them standing about the most intimate aspects of their natures.

A writer whose juvenile novels include various queer characters has told of how, when she talks at schools, teenagers come up behind her and, talking quietly over her shoulder, speak of how grateful they are for being able to read of folk like them. It is so hard to convey the profound loneliness, even despair, that can come from being not as folk assume; particularly for someone who is struggling with the onrush of sexuality (let alone the “wrong” sexuality).

The proscription of homosexuality is such an insidious and vicious cruelty. There is no “morality” in it. Particularly as people who advocate its proscription so wilfully block any consideration of awkward contrary facts, any genuine empathy for others.

Indeed, the proscription is a form of moral psychopathy because of its denial of empathy. A denial that is patent in the more rabid rantings against human sexual diversity, against the “evil” of homosexuality, but also exists in the condescending “treat them with charity/hate the sin, love the sinner”. The latter is moral condescension of a particularly sickening kind—“you’re not a proper version of the human, so we are going to pity you: please be grateful for our magnanimous forbearance”. Denial of equal protection of the law is pretty much a give-away for the underlying contempt, the morally stunting denial of common humanity.

Precisely because proscription of homosexuality cannot do other than begin with cruelty and denigration, it is so easy for preaching against homosexuality to lead directly to hatred and intense brutality, as the historical record attests. The evil consequences of proscribing homosexuality are vastly greater than letting people be themselves.

But such massive imbalance is inherent in moral exclusion. By letting a ludicrously narrow focus on the mechanics of conception override the constrained respect for others that is at the heart of morality, people are stripped of moral standing and moral protections without them having transgressed in the slightest against the moral protections of others. If you place people outside the boundaries of the moral, and moral protections, of course hatred and brutality will follow. But that hatred and brutality is then rendered morally invisible; for the suffering of the morally excluded is itself excluded from moral consideration. Worse, such suffering becomes “their” fault for being the sort of person who is morally excluded.

The conservative burden
Because enforcement of this cruel and vicious religious taboo, this unilateral overriding of moral protections, is traditional, it provides a particular problem for conservatives. The conservative concern for order and stability has always been deeply intertwined with notions of hierarchy: hence conservatives are perennial opponents of attempts to escape social subordination and exclusion. Social subordination or exclusion often justified by some claims about the “natural” order: an order invariably imposed forcefully. As, for example, same-sex marriage rights (which existed under Roman law and Amerindian social practice) were stripped from people via the imposition of monotheist taboos about sex and gender.

In fact, there was never anything “natural” about such subordinations and exclusions (of women, of Jews, of slaves …). They were merely “accepted background constraints”. Not the same thing at all. But a mode of argument that, as natural law theory does, allows the conclusion to set the ambit of its premises—so permitting the dismissal of inconvenient facts as perversity—is as useful in service of social hierarchy as it is for supporting religious doctrine.

There is no form of prescription of homosexuality that is not grounded in cruelty and denigration. Hence hate and brutality come so easily to it. It does not represent the preservation of morality, but the stunting and subversion of it: and there is no fixing that, except by abandoning parading the exclusory religious taboo against homosexuality as morality. For moral is precisely what it is not, as the historical record so amply attests: by their fruits shall ye know them (and their ideas).

[Cross-posted at Critical Thinking Applied.]

Fiat moneys end, so what?

This is based on a comment I made here.


One of the alleged paradoxes of fiat money is that any given fiat money will, eventually, end. So how can it retain any value now, given there will come a time when it is no longer accepted in transactions? That is, the range of transactions for which it will be accepted will shrink to zero, eliminating its transaction value. (David Glasner explains the reasoning nicely.)

On this indeterminacy issue, I suggest that there is much less there than there seems. Think of it in terms of transaction horizons. If you buy a good you are going to use up, so there is no future transaction involved, then its transaction horizon finishes once you have bought it. You have no concern with its future price. If you buy a good that you are not going to use up--an asset, or something that you might possibly sell (albeit it at a depreciated value) to the second-hand market--then it has an open transaction horizon (for you). Until you sell it, when its transaction horizon closes.

The transaction horizon of the person you sell it to matters for the expected price but, once you have sold it, they take on the risks (positive or negative). Your concern is merely their expectations at the time of sale. Future information after that point no longer matters to you. Any such information is on the other side of the (now closed) transaction horizon.

Such transaction horizons are how assets can surge in price even though we may have reason to believe a turning point will occur (sometime). A theoretical turning point does not matter for the price until it becomes part of the information within current transaction horizons.

The utility of fiat money as a transaction good is similarly a matter of transaction horizons. Any putative loss of utility by some fiat money as a transaction good does not matter until it becomes part of the information within current transaction horizons. Even then, there is the possibility of unloading before the game of "musical transaction chairs" stops. So, for example, as the prospect of the collapse of the Confederacy loomed, the value of the C$ dropped dramatically, but people kept transacting with it up until the bitter end.

So, the theoretical end of a fiat money does not matter if no specific information (beyond its theoretical possibility) has entered folk's transaction horizons. Arguing backwards from "it will end" does not work because it imports information into the sequence of transactions that does not yet exist.

ADDENDA: A very similar, but much more mathematically literate, argument is made by Josh Hendrickson here.

The divine law disadvantage

Of the various centres where urban civilisation developed—the Andean mountains and coasts, Mesoamerica, North-East Asia, South-East Asia, the Indian Subcontinent, the Middle East, Europe—why was it the cultures of the Atlantic littoral of Europe who first created global history (by connecting all parts of the globe so that, for the first time, human civilisations and cultures were directly aware of the entire rest of the globe) and then transformed human societies by that explosion in the creation and use of capital we call ‘the Industrial Revolution’? Why was Japan the first culture not of the Atlantic littoral (or descendant societies) to achieve industrialisation?

Why not … ?
Why not the Middle East—where the original production revolution, the agricultural revolution, first began and which dominated human invention until about 500BC? Why not China—the continental civilisation with the strongest history of political unity and which dominated human invention for about two millennia (from 500BC to about 1500AD)? Why not India, long a world-leader in metallurgy and mathematics? For, in history, why x? questions come with linked why not y? questions.

We can dismiss the urban civilisations of the Americas as contenders, for they were too isolated. At the time the conquistadors arrived, their civilisations were at about the level of early Pharonic Egypt. The wheel was in very limited use, they had little metal technology while the Andean cultures had not yet developed writing. They had generated states capable of generating considerable economic surpluses beyond subsistence and applying them to vast building projects; projects which both expressed elite power and ensured the surplus was directed to the purposes of the elite. In protein-starved Mesoamerica, this included a ready supply of protein to the elite. (You didn’t think they wasted all those human sacrifices, did you? Religion, like other human ideologies, has a way of selecting for elite convenience.) But the urban civilisations of the Americas were not contenders for anything but being laggard civilisations; witness their devastation by disease and massive disruption by small but much better equipped (both technologically and in range of experience) European forces.

Which leaves the Eurasian contenders. The question is: how did the selection processes of history act in a way that selected for the relevant characteristics? We know the who; the question is how and why?

Selection in history
For the selection processes of history to work, there had to be social possibilities to work upon and pressure to select for the relevant characteristics. Viewed in this way, clearly the post-Roman Atlantic littoral cultures had major long-term advantages. They were on the edge of Eurasia, protected by geography from regular conquest by outsiders; this gave time for long-term institutional learning to take place rather than suffering regular institutional “flattening”. Geography worked against political unity, setting up strong, sustained competition between polities, creating competitive pressures. They represented a range of cultures that developed a variety of institutional forms, which gave a wider range of possibilities for the selection processes of history to work from. They had enough commonality (such as a shared scholarly language—Latin—and a shared religion—Latin Christianity) for movement of people, ideas and capital between polities to be comparatively easy. This intensified the selection processes. Being on the Atlantic littoral—given, prior to railroads, transport by water was enormously cheaper than transport by land (probably by a factor of about 15: i.e. it cost the same to go 100km by land as it did 1500km by sea)—was an enormous exploration, trade and conquest possibility advantage. (One might argue that this water advantage persists.)

Other centres of urban civilisations had some of these features, but none had the full package. The Middle East and China had too much political unity, which greatly lessened competitive pressure and selection possibilities. Northern India suffered too many invasions: also something of an issue for the Middle East and Northern China. South-East Asia had a long period of a dominant polity (the Khmer Empire: see also) and, ironically, both too much institutional similarity (so less for selection processes to work upon) and insufficiently permeable cultural links (so less intensity in competitive processes).

The area of urban civilisation that had the next highest combination of these factors to Atlantic littoral Latin Christendom was—surprise, surprise—Japan. While notionally a unitary state, in practice local provincial lords had sufficient power for Japan to experience a form of “competitive federalism” while the split between Mikado and Shogun, between tenno and bakufu, added to the legal pluralism. It had less cultural and institutional diversity to work from than Europe. But once it was able to “piggy-back” on the results of historical selection processes on the Atlantic littoral and descendant polities, it was away.

Why not India?
A region that might have been something of a contender was southern India, which was largely shielded from the regular invasions that northern India suffered. India certainly developed a technologically, intellectually and religiously vibrant set of polities and cultures—India had a richer tradition of mathematics and philosophy than China, while its metallurgy was as good as or better than anywhere else’s. It was never, however, a serious contender for the “break out” that Atlantic littoral Europe achieved.

[Read the rest at Skepticlawyer or at Critical Thinking Applied.]

It's transactions, stupid

If you had to do everything yourself (feed yourself, clothe yourself, shelter yourself), you would be very much poorer than you are now. The ability to specialise and the ability to access resources beyond your immediate vicinity enormously increases your resource use possibilities.

(This, btw, is why "food miles" is such utter crap. It is just a revamping of the late C19th/early C20th "local food" movement. As it was back then, it is richer folk sneering at the only way lower income folk can get cheap food.)

The ability to specialise and to access resources beyond your immediate vicinity relies on transactions. The easier it is to transact, the greater the resource use possibilities. Which is why reduction in transaction costs has been such a key feature in the evolution of mass prosperity. Institutional structures which generate lower transaction costs have tended to be advantaged over those that generate higher transaction costs. More transactions, more resource use possibilities, mean greater social capacity and higher levels of general prosperity.

The trouble is, blocking certain sorts of transactions can be a great way to create or defend privilege. Various forms of social mercantilism restrict the ability to transact, or the ease of transacting, to favoured groups: such as requiring (expensive or time-consuming) official permission. Latin America, for example, has long been bedevilled by that sort of social mercantilism. As has the Middle East (pdf). Such social mercantilism both generates jobs for officials (and possible bribe income) and allows some groups to be advantaged over others.

One sees the same privileging by restricting the ability to transact in many European labour markets: hence high unemployment rates, particularly among young workers. This is a particularly severe problem in Spain.

This is a game that generates problems, particularly for welfare states. Not only does restricting the ability to transact lower the level of economic activity, thereby decreasing the revenue for government; it also increases the reliance on welfare services, raising the expenses for government. Sure, public employment and welfare dependence can be a voter-and-activist base, but one runs into problems of sustainability.

The success of the Australian public policy model has been crucially based on making transacting easier and targeting welfare more precisely, creating a far more sustainable welfare state. A low tax, low debt, low unemployment, high income growth, high low-income growth, public policy model.

Central to this success has been macroeconomic stability founded in a clear monetary policy target. The target is an average of 2-3% inflation over the business cycle. That means that, if output surges, the Reserve Bank (RBA) tightens policy; if output falls away, the RBA loosens policy. In other words, using the MV = Py equation, if y [output] surges, the RBA puts downward pressure on P [prices]; if y falls away, the RBA eases so that growth in P increases.

In other words, the RBA acts to stabiliise growth in Py (or GDP in money terms: i.e. NGDP). Which means it stabilises growth in spending, hence income (since income is just someone else's spending). Stable income growth means a higher transaction path.

Money is a transaction good. In Australia, monetary policy encourages stable growth in transactions. Monetary policy thus allows money to perform its function of being used in transactions, based on stable expectations of income growth.

The RBA does not treat minimising growth in P as the only thing to worry about. In particular, it does not play games with expectations; it does not suddenly shift its intended growth rate in P without telling folk, as the US Federal Reserve [Fed] disastrously did. Nor does it regard driving down income growth to keep growth in P low good policy, as the European Central Bank did, creating the European income, and thus debt, crisis. In Australia, money supply reacts to changes in money demand so as to keep stable growth in income by providing a stable framework for expectations about future income.

Which makes it a lot easier to keep public debt down, since income growth is relatively stable.

What is undermining European welfare states, particularly in Mediterranean economies, is a double "whammy". First, structural failures which restrict the ability to transact (and so the number of transactions); putting downward pressure on government revenue and upward pressure on expenditure. Second, monetary policy failure; so that preserving the "value" of the Euro is regarded as much more important than the level of its actual use in transactions. The mindset which declares the value of money is more important than its level of use.

To summarise the failure of European policy (and the failures of the Fed): it's transactions, stupid. And to summarise the success of Australian policy: it's transactions, of course.

Indeed, the greatest failures of Australian policy are in indigenous policy (with massive social failure in indigenous communities) and land use policy (creating way over-priced [pdf] housing). In both cases, restrictions on transacting are at the heart of the failure. Really, it's transactions, stupid.

Australian exceptionalism

The Governor of the Bank of Canada recently gave a speech on inflation targeting (via). It was a sensible enough speech except for one thing. (Well, perhaps more than one, but I will let Scott Sumner deal with that.)

What I am going to harp on is: no mention of Australia.

If you are going to discuss sensible monetary policy, it is past time when careful meditation on the Australian experience should be required. No recession since 1991 is a performance to ponder. But the point is much broader than that. Australia is an extremely successful public policy example. What we do works, and was working very well before the recent commodity price surges.

It is just that the success is particularly stark in monetary policy. The Reserve Bank of Australia's monetary policy target of an 2-3% average level of inflation over the business cycle has been extremely successful. So successful that for the Governor of the Bank of Canada to make no mention of it at all in a speech on inflation targeting is risible.

Not merely a Greek disaster

This report on Greece from the Daily Mail describes a country spiralling down into social collapse; one where a book of recipes from wartime Greece can be a hit. A society under deep stress through economic problems:

What is so shockingly evident as you walk around Athens are the awful parallels between that war-time era and today. The soup kitchens, the beggars, the pensioners picking up discarded vegetables after street markets close, the homeless scavenging for food in bins. These are the signs that can be seen.
Less noticeable is the quiet desperation of dignified people who turn off heating despite the cold and share dwindling savings with jobless relatives. Or the workers unable to afford fares home and the children fainting in school from hunger.

The scale of the economic problems is remarkable:

Greece’s economic freefall is calamitous. Gross domestic product is already down 13 per cent since 2008, and is likely to fall a further seven per cent this year.
By contrast, the fall in national output in Britain during the Great Depression was never more than 10 per cent. Such is the speed of collapse that a quarter of Greek businesses have gone bust since 2009.
One in five people live below the poverty line. Rates of crime, disease, homelessness and suicide are shooting up, while capital spending and property prices plummet.

Jobs are scarce:

The official unemployment rate has hit 20 per cent — though, as one journalist warned me bitterly, never trust an official statistic in Greece.
Nearly half those under 25 are jobless.

A similar report from the Melbourne Weekly indicates the depths of the problem:

University of Athens economist Panagiotis Petrakis ticks off the indicators: standard of living down, by as much as 30 per cent; bank deposits that have not been spirited out of the country are dwindling; almost 70,000 businesses folded in 2010 and bankruptcy is stalking more than 53,000 of the remaining 300,000; unemployment, 25 per cent - but youth joblessness is 47 per cent and rising; a quarter of the population living in poverty; homelessness, up 25 per cent, with well-educated youngsters accounting for much of the rise. Petty crime, doubled.
On top of all that Petrakis detects a slow run on the Greek banks. "It means a slow death for the economy," he forecasts.

As the Daily Mail reports, the economic crisis is becoming a health crisis:

It is worried by the growing numbers unable to access healthcare, and watching with alarm the rise in infectious diseases, the increase in mental health problems and the return of malaria after an absence of nearly 40 years.

The Melbourne Weekly reports a strong sign of supply-side problems:

"Despite all the economic loss to middle and lower class families, no prices have gone down - not for food, not for medicine," Charakidas says. "The theory is that you have an internal devaluation by lowering wages and pensions and prices will fall - they haven't."

The World Bank ranks Greece at 100 out of 183 countries ranked in ease of doing business but 135 out of 183 in ease of starting business, 150 out of 183 in ease of registering property and 155 out of 183 in protecting investors. Attempting to open an online store in Greece is a nightmare:

It took 10 months, a fat bundle of paperwork, countless certificates, long hours of haggling with bureaucrats and overcoming myriad other inconceivable obstacles for one group of young entrepreneurs to open an online store.

Economic activity is about having transactions. Greece pays a lot of bureaucrats with generous pension benefits to make it expensive and difficult to be in the business of engaging in transactions. As the Daily Mail reports:

The crisis has given Greeks an image of being feckless and workshy. But surveys have shown this to be wrong — there are more entrepreneurs per head of population than in any other European country, and they work longer hours, too.
In 2008, the year the financial storm broke, the average Greek worked 2,116 hours throughout the year, compared with the 1,426 hours put in by the average German.
Given the incompetence of the state, people are coming together to sort out their problems — another reminder of that war-time spirit under Nazi occupation.

The crisis comes from a deeply dysfunctional system:

There is no shortage of finger-pointing and name-calling. Greeks mostly blame their politicians for the mess they are in. Their politicians excoriate their European paymasters, especially the Germans, as much for fuelling the Greek addiction to debt as for the ruthless detox regime to rein it in.
The borrowing fed a pact with the devil. The politicians used the money to pay a bloated public sector - one in seven Greeks is on the government teat. The deal was that families and whole communities would support politicians as long as the cheques kept coming. Reporters testing oft-told stories of hospital janitors earning more than doctors because of this system of patronage, known as ''rousfeti'' in Greek, are assured they are not apocryphal.

Or, as the Daily Mail reports:

The crisis was partly caused by politicians hugely increasing the size of the public sector after the country joined the euro.
In 12 years, the wage bill of the Greek state sector doubled — and this excludes ‘fakelaki’, the notorious cash-filled envelopes needed when dealing with officials. It was decreed that those in ‘arduous’ jobs could start receiving pensions from the age of 50 — and hairdressers and waiters were among 600 jobs classified as arduous.
A poor state school system employed four times the number of teachers as Finland, the country with the best education system in Europe.
And, famously, a finance minister complained the railways were costing the country so much money, it would be cheaper to pay taxis to take the travelling public wherever they wanted to go.

As Melbourne Weekly tells us, made worse by a tax system which deeply unfair because it is riddled with evasion:

When privately employed Greeks are not complaining about politicians and the government, they vent about tax. "Taxes are so high because almost everybody else, businessmen, professionals and companies, can evade them - and the schemes introduced to reduce evasion don't work," Dimos Charakidas, a 34-year-old finance and investment consultant told the Herald. 'The injustice then is that the government increases the tax on those who do pay."

Part of a wider culture of evasion:

Despite anxiety about rising homelessness, most Greek families own their homes; the rental rate is one of the lowest in Europe.
The consultant Charakidas explains: "They have loans but they don't pay them and they get renewed protection from bank foreclosure every six months."

And the voters are not blameless:

The more popular, he explains, is for Greeks to curse their politicians for failing to tell them the consequences of their rampant borrowing. But this is something of a cop-out, he says: "The compromise was that these not-so-good politicians would be re-elected as long as they didn't impose the drastic measures needed to address the impact of the national borrowing."
He sits back, indicating that he is more inclined to a less popular, second argument: "I'm in the minority. I believe you get the government you deserve … and here that means this crisis will get much worse before it gets any better.

The stress the Greek political system is under is enormous. As conditions become more extreme, so do politics. As Nick Cohen points out:

Because they oppose the EU, cranks from the left and racists from the right now make more sense to Greeks than their mainstream politicians. The parallels with the 1930s are too obvious to labour.

A crisis on this scale has political repercussions.

A euro crisis
This is a crisis all about the euro. There are many reasons why Greece is suffering worst from the euro-crisis, but Greece is not causing it. In Nick Cohen’s words:

But Greek corruption cannot explain why Portugal is in crisis, any more than Italian corruption can explain why Ireland and Spain are in crisis. All five countries are suffering – and France may soon be suffering – because the euro is a monumental mistake. Rather than rectify it, European leaders attack the welfare states, employment protections and public services that the best of the European centre-left fought for after 1945. In the name of saving the euro, everything must go.

As British Foreign Secretary William Hague has said, the euro is a burning building with no exits.

Poverty levels in Europe—or, at least, those at risk of social exclusion—are high and rising. There is much more at stake than the viability of the European financial system.

As Greece is suffering worst, it becomes the focal point of the crisis. But the Greek austerity measures are cutting so deep, some people may end up paying to have a job. As the Melbourne Weekly reports:

Amid deep humiliation and great uncertainty about what it means to be Greek and, more particularly, European, enraged Athenians are lashing out as the weight of five grinding years of recession and the promise of perhaps decades of crippling reform and restructuring crushes the living breath from them.

And the bailout terms are stark:

The conditions insisted upon by Europe and barely delivered on by Athens, include the axing of 150,000 jobs from an 800,000-strong public sector by 2016 and a 22 per cent slice off the minimum wage - in a country in which average wages have dropped 15 per cent since 2009. The retirement age is to be lifted from 58 to 65 and restrictive closed shops that control the professions and services are to be busted.

Distrust of the Greek political class is poisoning the process:

But such is the mutual distrust and a Greek suspicion, reasonably founded on blunt public comments by German, Dutch, Finish and Luxembourg officials, that the Europeans are manoeuvring to cut Greece adrift from the European monetary union, that there are doubts all the money will be forthcoming - without which Greece would default within weeks on bonds worth $17.8 billion.
European officials are furious that Greek political leaders continue to allude to a need to renegotiate some of the bailout conditions, despite signing undertakings, demanded by the troika, that there would be no walking backwards.
The depth of the naked suspicion was encapsulated in a comment on Wednesday by Wolfram Schrettl, professor of economics at Berlin's Free University, when he told reporters: "Statements and assurances from Greece [that it will abide by loan agreed conditions] are no longer taken at face value. There is a growing belief that Greece is looking for a sucker - and Germany is playing the sucker." …
Apart from anger at Greece's failure to implement earlier agreements there is growing confidence in Berlin and several other capitals that the markets recognise that Greece is beyond redemption and that it could be cast out without a contagion affect in other Euro basket cases - Portugal, Spain, Ireland and Italy.

Nick Cohen makes the striking comparison that the EU is treating Greece worse than the US treated a defeated and war-devastated Germany:

The EU's terms do not begin to match the altruism the United States showed to the defeated Germans after 1945. America did not pauperise West Germans as many in France and indeed Washington wanted. America guaranteed their security, then gave them loans from the Marshall Plan that allowed the West German economic miracle to begin. Greece has invaded no one and committed no crimes against humanity. Yet the EU, which boasts that solidarity is its founding principle, is forcing it into destitution and chaos.

Policy driven by decent, moderate people is driving Greece into disaster and collapse.

Europe does not seem pleasant, prosperous or peaceful today. When historians write about the end of its postmodern utopia, they will note that it was not destroyed by invading armies anxious to plunder Europe's wealth or totalitarian ideologues determined to install a dictatorship, but by politicians and bureaucrats, who appeared to be pillars of respectability, but turned out to be fanatics after all.

What we are seeing is the disastrous effects of closed minds, of massive, entrenched groupthink:

The EU cannot take responsibility for what it has done and be magnanimous for reasons British readers may not grasp. Raised in a Eurosceptic country, we do not understand how an absolute commitment to the European project was a mark of respectability on the continent. Like going to church and saying your prayers for previous generations, a public demonstration of commitment to the EU ensured that the world saw you as a worthy citizen. If you wanted to advance in Europe's governing parties, judiciaries, bureaucracies and culture industries, you had to subscribe to the belief that ever-greater union was self-evidently worthwhile.

What is most striking is that, in three lengthy reports on the spiraling crisis in Greece (all via), not one mentions the ultimate culprit—monetary policy; or, more precisely, the tight money policy of the European Central Bank (ECB).

The ECB did it
It is true that the euro was likely a disaster waiting to happen. As Milton Friedman pointed out (pdf), it imposed a single monetary policy on institutionally disparate countries. Mediterranean countries, whose political economy had been based on regular devaluations to maintain competitiveness, were yoked with Northern European countries, which used periodic institutional reform to maintain competitiveness. Early on, Germany was disadvantaged. It then engaged in major economic reform, and became advantaged by the euro. It was, however, always likely that countries whose political economy had relied on devaluation would, over the longer term, suffer more than countries which used institutional reform. Which is what has happened.

(A friend points out that Protestant countries are handling the euro better than Catholic/Orthodox ones. A similar pattern emerged during the deflationary period of the C19th gold standard [scroll down to English version]. Given the central role of public debt, this is not so surprising given that Protestant and Catholic cultures have different attitudes to time, as the work of psychologist Philip Zimbardo explicates. This likely leads into an ethic of personal responsibility and future-directedness that probably makes institutional reform easier. It turns out that the social consequence differences between being “naked before God” and a Church that takes responsibility for absolving the contrite of responsibility are not trivial.)

Even given all this, however, the question remains why did the crisis happen when it did and in the form it did?

To which the answer is: because of the ECB’s tight money policy. (We can even track it on Google Insights.)

‘Tight money’ being defined not by reference to some monetary aggregates (as the relationship between monetary aggregates and economic outcomes is not stable due to such things as institutional change and shifts in expectations), still less by interest rates (since interest rates are far from the only monetary transmission mechanism and interest rates are the price of credit, not money) but by the relationship between money supply and the demand to hold money.

Since the price of money is what you can buy with it, shifts in money demand are registered in prices and spending. The “stickier” prices are, the more any downward shift in spending will be registered in falls in output. Either way, income falls (since someone’s spending is another person’s income). So, if the demand to hold money shifts upward, but money supply is held steady, then spending, and thus income, falls. With the “stickier” prices are, the more such a fall in spending becomes a fall in output. (So yes, supply side reforms making your economy more flexible are a good thing.)

And if income falls, the ability to service debt worsens. If spending falls enough, one can get a severe debt crisis. So a central bank can create tight money simply by not changing what it has been doing, if demand to hold money rises.

And an asset price bust is a classic reason why people want to hold more money (to use less credit and pay back past debts). But it is not the asset price bust that creates the financial crisis; it is the failure of the central bank to respond to the increased demand for money. (Or, worse, reduces the supply of money, which is what the insane Bank of France and the US Fed did in 1929-32, creating the Great Depression [pdf].)

But to be held accountable for the change you fail to make, particularly when there is a highly visible asset price crash and financial shake-up going on, is hard. It takes some reasoning to see underlying causes, as well as mainstream commentators to notice. Alas, monetary policy is not something that is all well understood. Indeed, there are entire theories of macroeconomics that greatly downplay its importance.

The more invisible a responsible institution is to mainstream commentary, the more unaccountable they are. Nor are central bankers at all likely to publicly accept responsibility. People have an incentive to accept theories that reduce their accountability.

So people look at Greece’s dysfunctional political economy; they look at some countries having major debt problems and others not so much; they look at the difficulties inherent in the euro and they see explanations.

With far too many people not looking any further, so not seeing this is a crisis made by the ECB. Europe does not have a public debt crisis. Europe has an income crisis. An income crisis caused by a collapse in spending caused by the ECB’s tight money policy. Of course the crisis hit the most vulnerable and the most dysfunctional first: that is what crises do. But do not let Greek dysfunction distract you from the reality that the ECB caused Europe’s debt crisis.

Yes, the euro was a bad idea. But this crisis has a specific cause: and that cause is the tight money policies of the European Central Bank.

ADDENDA David Beckworth puts it pithily (with graph).

[Cross-posted at Critical Thinking Applied]