Trees good, parking bad

I live within the boundaries of Maribyrnong Council in an area that fulfils my definition of "inner city" (it has back alleys and many houses don't have driveways). So, parking is a bit of an issue, while a certain queueing politeness is needed while driving--quite a lot of the streets only allow one car to pass at a time.

The Council has clearly decided we need more trees, less parking and more traffic hazards, installing concreted squares with planted saplings on lots of the local back streets.

Traffic hazards with helpful light reflectors added (picture taken on a weekday).

So, things will be greener, but more frustrating.

Goals, rules and time-horizons

A perennial discussion in monetary policy is rules versus discretion. Should the central bank be constrained to follow a policy rule or should it have policy discretion?

I find this debate generally muddled both in the means-versus-ends question and what is the proper underlying concern. Is the concern bad policy or unclear policy? With constraining the central bank from acting badly or with effective management of expectations? To bind the central bank to a rule, such as the Taylor Rule, is also to put great confidence that you have the correct rule. I prefer to think of the proper concern for central bank policy as a matter of having an appropriate goal and having a clear goal rather than having policy uncertainty.

As for means versus ends, take expectations seriously and clarity of purpose dominates constraining of action (provided actions are credibly connected to said purpose, the purpose is credible given available actions and the central bank is credibly committed to the purpose). After all, if actions are too constrained then that can generate very unfortunate expectations, particularly in crisis or abnormal conditions. Clear expectations also allow the central bank to achieve its goals much more expeditiously through the Chuck Norris Effect or central banking as Jedi Mind Trick.


If we go for a clear goal (understood as a policy target), then the time-horizon of the goal matters. The narrower the time-horizon, the greater the inflexibility and the more likely perverse outcomes are (such as following economic activity downwards, intensifying the spending crash). The time-horizon has to be constraining enough to give content to the goal but not so constraining as to lead to perverse rigidity. If macro-economic stability is the goal, then the time horizon should be the business cycle so as to minimise the danger that the central bank will intensify, rather than smooth, the business cycle.

We can thus expect that an inflation-targeting regime which has the business cycle as its time-horizon would function better than one with a narrower time-horizon. This is certainly the Australian experience, with the Reserve Bank of Australia's over-the-business-cycle inflation targeting goal. Australia is now 21 years without a recession, which may well be a world record. (This is in dramatic contrast to certain other inflation-targeting central banks one might mention.)

If clarity of central bank goal is the best way to manage expectations, and if the business cycle is the appropriate time-horizon of said goal, then what should be the goal? A straightforward way to look at that is whether the goal encompasses the key functions of money. Money exists to facilitate transactions. It does this more efficiently if its value is sufficiently stable over time. So, the goal of price stability is appropriate, but not at the cost of serious and sustained impeding of its use in transactions; the basic purpose that price stability is desirable for.

Giving the central bank a goal with a time-horizon across the business cycle naturally ties together price stability and use in transactions, since the level of transactions on output will affect price stability. So would a stable spending-on-output-goal, or NGDP targeting.

Thus, central banks should have a clear goal; either price stability over the business cycle or a clear spending-on-output path. (I.e, if the economy wanders off the path, extra steps are taken to get it back on.)

What central banks shouldn't have is an unclear policy goal that makes mismanaging of expectations easy or a policy goal whose time-horizon is so narrow it can make the business cycle more intense or a policy goal which seriously subordinates the facilitation of transactions-on-output to price stability. Rather, the goal should incorporate acceptance that some trade-offs will be required from time to time; though much less if expectations are properly managed, if the policy target has an appropriate time-horizon, if the goal targets spending-on-output directly.

The right goal, the correct time-horizon and effective management of expectations can be a beautiful thing. Screw those things up, and it can get very ugly and stay that way for a remarkably long time.


ADDENDA This paper (pdf), by a former member of the Bank of England's Monetary Policy Committee, refers to a two-year time frame for monetary policy. Why two years?  Why not 23 months or 21 months or 57 weeks or whatever? This is a numerological constraint with no inherent connection to economic conditions, unlike the over-the-business-cycle time frame that the Reserve Bank of Australia operates on.



[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]

What can the price of beer tell us?

What can the price of beer tell us? Quite a lot according to this amusing piece (via).

Here is a chart of beer prices in various Eurozone countries since 1996.

Greece (blue), Italy (orange), Spain (red), Ireland (green), Germany (black)

Prices in Germany have remained pretty steady, with the price of beer rising about 1% a year. The price of beer in Greece has surged upwards (lots of inflation). Italy and Spain have also had a fair bit of inflation.  Beer prices surged in Ireland until 2003, flattened off, boomed in 2008 and are now dropping to the point where their beer prices have the same total growth over the period as Germany. In the words of the piece:

So really the beer chart says it all: Greece: a wreck. Germany: calm. Spain and Italy: in trouble, and Ireland making a comeback.

The Eurozone crisis in one graph.*


*Actually no, since it completely ignores monetary policy and the ECB. But it makes a good story and graph.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]

Power and purity

Taboos are a major part of religious practice, across a very wide range of religious traditions. Taboos about what people can eat, wear, act, associate with, believe; the entire range of human behaviour.  Religious taboos are nicely defined as:

a vehement prohibition of an action based on the belief that such behavior is either too sacred or too accursed for ordinary individuals to undertake, under threat of supernatural punishment.

Such taboos both signal one's membership of a particular religious community and one's acceptance of the authority at the centre of that religious community.

Monotheism tends to have very strong taboos--about belief, food, clothing, gender roles and sexuality. Kosher and halal are a series of food taboos, for example.

The Old Testament is full of taboos. Such as Deuteronomy 13's taboo about worshipping other gods. Or Deuteronomy 22:5's taboo against cross-dressing. Leviticus is a book of taboos mixed in with more common legal prohibitions (critical scholarship identifies a subset of Leviticus as the Holiness Code); and if folk pick and choose among the provisions in Leviticus, then their authority is not Leviticus but whatever they are using to pick and choose. The punishment for breaking these taboos is, at the minimum, shunning and, at the worst, death. Indeed, Deuteronomy 13 requires siblings to kill their brother or sister if they become apostates.

Taboos work on what social psychologist Jonathan Haidt labels the sanctity/degradation moral foundation, which he describes as being:

shaped by the psychology of disgust and contamination. It underlies religious notions of striving to live in an elevated, less carnal, more noble way. It underlies the widespread idea that the body is a temple which can be desecrated by immoral activities and contaminants (an idea not unique to religious traditions).

Haidt has a useful website on research on disgust. But taboos also manifest, in their social operation, what Haidt calls the authority/subversion foundation;

shaped by our long primate history of hierarchical social interactions. It underlies virtues of leadership and followership, including deference to legitimate authority and respect for traditions.

Taboos extend the alleged ambit of morality from constraining our behaviour towards each other (both in the sense of not trespassing and in the sense of actively helping or cooperating) to much wider realms of behaviour and identity. One of the reasons squick is such a useful word is it breaks that connection between disgust and moral claims.

Signaling authorityThere is a long tradition of social scientists attempting to rationalise taboos. But taboos are so many and varied, that rationalising their content is likely to be often a pointless exercise. Their social role, however, is probably highly rational. Both in the aforementioned signaling role--yes, I am a member of our community; yes I accept the authority that binds us together; yes, you can have certain expectations about me--and in their role as an exercise of authority.

The easiest path to power and authority for priests and clerics is as gatekeepers of righteousness. In monotheism, that means offering and withholding God. Offering God as the loving universal Parent and path to salvation and withholding Him from those who do not walk the designated "path of righteousness".

Taboos are enormously useful for setting out the requirements of righteousness. Their very contingency, their very arbitrariness, makes them that much more distinctive and distinguishing, and so effective as social signals. But their contingency, their arbitrariness also makes them more effective as vehicles of priestly and clerical power; the people who can tell you what is righteous, and what is not.

If God just wants us to be nice to each other, that is something any of us can work out, either singly or together. But if God has a whole list of very specific injunctions, those a priest or cleric has to tell you about. Moral simplicity is empowering to people in general, moral complexity to those with specialised knowledge and "understanding". (A point that applies more generally: unions and employer organisations loved the rule-complexity of Australia's arbitration systems as the more complex the rules, the more workers and employers needed agents--unions and employer organisations--to manage the complexity of the system for them.)

Morality v taboosThis tension between morality and taboos runs through the Bible. In the Old Testament, it is the tension between the very Priestly Leviticus and Deuteronomy--with their prohibitions and concern for ritual and priestly authority--and the charismatic prophets with their overriding moral concerns and direction connection to God. The Jeremiah who denounces the "lying pens of scribes" expresses this prophetic and charismatic anticlericalism with particular intensity.

The Christ who spends so much time denouncing misuse of religious authority, advocating concern for the spirit not the letter of the law, and defines His teaching as love God and love thy neighbour as thyself is very much on the Jeremiah end of the spectrum. The conjunction of Christ's two principles can be reasonably summarised as you are not allowed to use God against your fellow children of God (epitomised in "let he who is without sin cast the first stone"). Even the Temple riot which precipitated Jesus's trial and execution was a revolt against profiteering from the priestly monopoly of ritual access to God.

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

Networked zealotry

A feature of the internet has been the growth of networked zealotry; where intensely held attitudes are expressed in overheated rhetoric and ad hominem abuse, not as solitary aberrations (though that also happens), but in self-reinforcing internet coteries.

This has fed off, and possibly intensified, the bitter "culture wars" of the US; the intensification of political rhetoric and a more intense partisanship in politics. The last, particularly in Federal politics, has likely been fed by a change in living arrangements among Senators and Congresspersons whereby they spend much less time socialising with people of the other political Party.

There is some penchant--depending on political preferences--for blaming one side of politics or the culture wars more than the other. Since the phenomena in question occur across the political spectrum, this is not likely to be an analytical fruitful exercise, as distinct from another manifestation of the same patterns.

Drowning not waving
Looking at deeper structural changes, we are living in information-saturated societies. A natural response to such an assault of information is to retreat into simplifying and emotionally satisfying narratives. And what is more simplifying and emotionally satisfying than a Manichean story of good and evil, where you and those who think like you are the "good guys" and them over there are there are the bad guys, who clearly only believe what they do because they are evil, wicked, malicious and stupid (while you and yours believe as you do because you are moral, clever, smart and informed).

The dramatic drop in communication costs, and explosion in ability to connect, that the information technology revolution represents means that the like-minded can associate together far more easily. This can be liberating and reassuring. It can also lead to intensification of beliefs as people reinforce each other and divergent information is excluded or discredited. An ironic effect of massively increased access to information is to make the crippled epistemology (pdf) which is so much a part of zealotry and fanaticism easier to maintain.

Established groupthink
The established information institutions have (more than) done their bit to create the basis for these patterns. While critical thinking is allegedly an ideal of post-Enlightenment education (particularly universities), what educations systems have generally actually been teaching and practising (particularly universities) has been groupthink. (Scott Sumner, for example, regularly bewails the current groupthink among macroeconomists--all the more remarkable since it fails to conform to previous accepted analysis.)


Moreover, teacher and academics may have been better at teaching the habits of groupthink than their specific groupthinking. Particularly if alienation from the offered groupthink leads, not to open-mindedness, but the search for more congenial groupthink. A sense of status, worthiness and morally-charged meaning are powerful passions; and if the real "lessons" have been that that is what information and analysis is "for", then people will go off and search for it. And, thanks to the information technology revolution, very easily find it.


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

Unintended consequences

Over the years, various reforms have been introduced in attempts to make American politics be more democratic. For example, primary voting was introduced during the Progressive Era as a way of broadening popular participation in the election process by registered voters selecting their Party's candidate. The unintended effect was to increase the expense of running for office, increasing the demand for political donations.

There have been a series of reforms and attempted reforms to regulate political donations. One mechanism has been to limit the size of donations; lots of small donations being held to be less susceptible to undue influence than fewer, larger donations.

This has also had unintended consequences (via).

Putting Presidents on the rubber chicken treadmill

The time spent by Presidents raking in all those small donations is escalating. 

Which fundraiser is this again?

Turning the US President into an ever greater prisoner of the fundraising circuit is perhaps not clever.

None so blind

In the course of exploring the history and dynamics of bigotry, of moral exclusion, and the history of money (particularly the similarities between the goldzone Great Depression and the Eurozone Great Recesssion), it has become clear to me how very poor conservatives tend to be at learning from history. Which is not, of course, how conservatives typically see themselves. On the contrary, they usually regard themselves as respecting the lessons of history.

Alas, this is not often not true. What one sees instead is a repeat of past mistakes.  So, just as during the Great Depression, we now get "hard money" conservatives worrying about the prospect of inflation even as inflation expectations are low and falling. The same people economist R. G. Hawtrey characterised in the 1930s as shouting "fire!, fire!" in Noah's flood. They cling to what gives them a sense of order, what dangers resonate for them, rather than seeing clearly what is before them.

Been here, done that
Similarly, the current debates over queer* emancipation are literally a re-run of past debates over Jewish emancipation--right down to exactly the same accusations being made against queers as were previously made against Jews (being an offence against God, being against the Christian basis of Western civilisation, that they corrupt everything they touch, that they prey on children, that they spread disease, etc etc). Ever since the Enlightenment, and particularly the Industrial Revolution, the opponents of equal protection of the law have always, in the end, lost. Yet here conservatives are, mounting the same barricades all over again in a cause it is clear they will and are losing.

Upon examining these recurring patterns, you build up a checklist of the standard evasions. For example, Rafe Champion's recent comment that:

That is why I have so much contempt for the Same Sex Marriage brigade. Nobody is suffering for want of same sex marriage. Get  your freaking priorities in order and do something to help people in genuine need.

Anyone familiar with the history of unequal legal standing recognises this one: it is the "wait your turn" response. And, strangely, it turns out never to be "your turn", there are always more urgent matters.  It is, of course, a nonsense view of social action, as if there is a single set of priorities that everyone must follow and things can only be changed or approved in a single sequential order. It is a way of dismissing the group seeking equal treatment as "clearly" morally deficient because they do not have "proper" moral priorities.

It also shows a deep failure to engage in that act of moral imagination that Adam Smith called sympathy and put at the heart of his moral analysis in The Theory of the Moral Sentiments. Of being apparently unable to project from the importance marriage has in one's own life, and the life of those around one, to others.

SF writer John Scalzi has expressed how unequal standing in society works quite nicely with his recent post on different levels of social difficulty. (With follow-up posts here and here while fantasy author Jim Hines has one here.)


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

Shoggoth lives!

On Murano, the glass island, they have glass sculptures.

They tended to be rather starkly modern, but I was taken with this one (possibly for somewhat Lovecraftian reasons). OK, it does not actually look much like a Shoggoth but that is where my mind went. (I presume it is some sort of sea anemone.)

The insidious reach of error

I have become deeply interested in the origins of money, which means reading the work of various historical anthropologists. As is often the case when reading other social scientists on matters of economic significance, one comes across a fair bit of economist envy. Compared to other social science academics (and, for that matter, humanities academics), economists' skills are generally far more in demand outside academe; economists tend to get more, and more highly paid, consultancy work; they get to be talking heads commenting on events much more; and have more influence over public policy. What's not to envy?

Worse, economics keeps invading other disciplines. Run down the list of what people get Nobel memorial prizes in Economics for and there seems to be no part of the domain of social science that economics and economists are not willing to invade. Worse again, mainstream economics tends to be enamoured of markets and private property, they study wealth and tend to approve of use of market mechanisms in general. All realms most academics have little to do with, are not comfortable in and often resent.

All of which shows up in the politics and outlooks typical in much of academe--especially when (other) academics write about economics and economic issues. This is not helped by the fact that being self-consciously clever folk simply living in "capitalist" economies seems lead to the conclusion that academics understand "capitalism"; a conclusion which is regularly adhered to more strongly than is warranted.

I once asked an Israeli archaeologist why archaeologists (and historical anthropologists) seem to be so influenced by Karl Marx. He replied that it was because Marx talked about economic surplus and they study the products of economic surplus, which makes sense. Though the appeal of broadly Marxian ideas to humanities and social science academics generally is clearly strong; an understandable reaction to academics' circumstances and common resentments.

All of which has made it easier, alas, for one of Marx's more profound errors to become part of many people's common wisdom. An idea set out in the first chapter of Das Kapital:

…[commodities of equal value] must, as exchange values, be replaceable by each other, or equal to each other. Therefore, first: the valid exchange values of a given commodity express something equal; secondly, exchange value, generally, is only the mode of expression, the phenomenal form, of something contained in it, yet distinguishable from it.

The notion that exchange is a matter of matching equivalences keeps turning up in the writings of anthropologists on money. It is a deeply wrong-headed way to look at exchange. Trades, exchanges, happen at points of intersection, not points of equivalence. The supply-and-demand "scissors" economists are so fond of are a good way to express what is going on.

It also helps explain why trade-with-strangers is regarded in many cultures as a dubious process, one that merges into swindling.

Trade as swindle
Suppose we have two peoples who are in contact with each other, perhaps across a sea.  One, call them the Cols, have a river that runs with gold. You put a fleece in the river, leave it for a while, come back and lo!, it has flecks of gold all through it. You retrieve your now golden fleece, pick out the gold and repeat.  Gold is not such a big deal to the Cols, because it is so easy for them to get hold of it.

Then there is another people, call them the Crims, who have an easy salt mine in their territory. You take a pick, swing it a couple of times, and loosen as much salt as you can carry. Salt is not such a big deal to the Crims, because it is so easy for them to get hold of it.

Clearly, the Cols and the Crims will swap gold for salt. Clearly, the Cols value the salt they get more than the gold they trade away, while the Crims will value the gold they get more than the salt they trade away. Each will leave thinking they have got a really good deal. Indeed, it is likely they will think they have been clever in convincing the other mob to trade away something "clearly" worth less for something "clearly" much more valuable. Trade with strangers is obviously a matter of ripping off the strangers.

First, there is no "equivalence" here, merely a point of intersection.  Secondly, both groups will be quite correct in thinking they "ripped" off the other mob because, in terms of their own valuations, they did.  The trade occurred because they had different, but intersecting, valuations. Which allowed both sides to enjoy gains from trade; to be better off than they were before the trade.

If trade was a matter of swapping things of equivalent value to the participants, no one would bother. It is precisely the different valuations that makes trade worth doing. If you see exchange as swapping equivalences, you will miss its nature and point.

Finding what is not there
But it is worse than that. You will start looking for what intrinsic "thing" makes them equivalent--in the case of Marx, leading on to the labour theory of value. The statement from Marx quoted above is only one of three false claims he makes in his argument for the labour theory of value. It is the second such, the first being:

The utility of a thing makes it a use value. But this utility is not a thing of air. Being limited by the physical properties of the commodity, it has no existence apart from that commodity.

This is wrong, for utility is utility to someone. So, the utility of a thing does have existence apart from that commodity, it exists in the relation of the thing to the purposes of anyone who has a use for it. Having got utility and equivalence wrong, Marx then moves on to the third false claim:

… if then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour.

Which is also not true. Commodities also have the qualities of being made of materials (what economists call ‘land’) and by tools (what economists call ‘capital’); labour on its own produces little or nothing.

Even more basically, to be exchanged, such things have to be controlled by someone. Locke’s metaphor that a person in the state of nature acquires something by “mixing his labour” with it is misleading: what they do is take control of it (and, more importantly, that control is acknowledged by others). Any contribution of labour to exchange—whether in production or the realisation of value in exchange—is framed by such control: as is also true of land and capital. Moreover, the control has to matter: the thing has to have sufficient scarcity and be sufficiently wanted by someone for such control to matter. We can control a twig, but who cares? (Acknowledged) control, scarcity and wanting are the bases of exchange.

The search for a "common property" in things exchanged is completely wrong-headed, because exchange is a matter of intersecting differences, not matching equivalences.  One can, of course, compare the currently operating intersections of supply and demand and decide that at $50 for a pair of shoes then "equals" 10 cups of coffee at $5 each. But that is still not matching equivalences, it is matching points of intersection. Which will change as supply and demand for shoes and coffee change.

Pointing out that, for example, allocation of labour tends to shift with price merely tells us that we allocate labour towards things we value. We do the same with land and capital, it is just that we can usually do so with labour quicker and easier.

All of which hardly exhausts how thinking of trade as matching equivalences will lead one astray. It will, for example, encourage a quite mechanistic approach to economic activity, as if economies can be planned so as to just turn out the right mix of equivalences. Ironically, the search for some underlying extrinsic value (even in labour) that explains said "equivalences" does not humanise economic activity, it dehumanises it because it completely abstracts away from the diversity of human valuations, the human purposes, that drive economic activity.

It will also devalue private transactions--capitalist acts between consenting adults--since that is just "swapping equivalences", not expressing preferences and improving utility. Which then undermines restraining state action, since "managing" swapping equivalences is rather a different thing than blocking mutually beneficial transactions. As the discovery role of private transactions is thereby also devalued ("equivalences" are "easily" knowable), the knowledge of officials is exaggerated, their ignorance minimised. It becomes that much easier to be dreadfully complacent about the problems in Seeing Like A State.

So, whenever you come across someone writing about exchange as "matching equivalences" you will be observing some who, in Keynes's words, is the slave of a defunct economist and who understands economic activity and commerce (and, for that matter "capitalism") a great deal less than they think they do.

[Cross-posted at Skepticlawyer and at Critical Thinking Applied.]

Friedman centenary

Today (Tuesday 31st) is Milton Friedman's centenary.  It seems appropriate to link to some Milton Friedman quotes here and here.  Various bloggers have offered their comments, including Bryan Caplan's ode, Tyler Cowen notes how much he is still needed, Lars Christensen writes him a letter, and David Glasner continues his campaign against the Wall St Journal editorial pages. [UPDATE A black Marxist student remembers being impressed that, in 1960, Friedman had a black secretary.]

David Glasner's tribute is an excellent summary:

Milton Friedman, by almost anyone’s reckoning, was one of the great figures of twentieth century economics. And I say this as someone who is very far from being an uncritical admirer of Friedman. But he was brilliant, industrious, had a superb understanding of microeconomic theory, and could apply microeconomic theory very creatively to derive interesting and testable implications of the theory to inform his historical and empirical studies in a broad range of topics. He put his exceptional skills as an economist, polemicist, and debater to effective use as an advocate for his conception of the classical liberal ideals of limited government, free trade, and personal liberty, achieving astonishing success as a popularizer of libertarian doctrines, becoming a familiar and sought-after television figure, a best-selling author, and an adviser first to Barry Goldwater, then to Richard Nixon (until Nixon treacherously imposed wage-and-price controls in 1971), and, most famously, to Ronald Reagan. The arc of his influence was closely correlated with the success of those three politicians.

Milton Friedman would cheerfully advise anyone about how to improve the economic condition of their people including (infamously) Gen. Pinochet and (often ignored) Communist China. (Pinochet, of course, relinquished power after losing a referendum; don't see the Beijing regime doing that any time soon.)

Milton Friedman was an opponent of conscription [the highlight of his famous exchange with Gen. Westmoreland is here], in favour of drug legalisation, an innovative thinker on welfare (proposing the negative income tax and education vouchers) and a critic of the IMF and the World Bank. (In particular, he did not approve of the way the IMF protected banks and other institutions who lent to developing countries at the expense of their taxpayers.) As this paper (pdf) points out, Milton Friedman's comments on Japanese monetary policy make it pretty clear he would not have been impressed by our current "hard money" monetary-contraction inflation hawks.

There is also a "fantasy Friedman" on whom various falsities are projected--such as that he supported IMF policy, that the Euro followed his proscriptions (he was deeply sceptical about its prospects) or that he only worried about inflation. The last is hilariously untrue, since he co-wrote the classic analysis of the dire effects of monetary contraction deflation, A Monetary History of the United States.

One of his great virtues was his ability to be clear, with a gift for vivid explanatory metaphors. An OpEd on "the Fed's thermostat" (pdf) is a good example.  He once proposed "the mother-in-law test". Any economic idea he could not explain to his mother-in-law over a cup of tea was probably wrong.  If you couldn't be clear to interested lay folk, what was the point?

He thought Keynes was a great economist and was a friend of Friederich Hayek (though apparently they ended up agreeing not to discuss matters monetary, as their disagreements were too strong).

His son is also very independent minded, which speaks well of his parenting skills. David Friedman (who has no degree in economics and is one of the prominent early figures in the SCA) wrote one of the first pieces I ever read which applied economic reasoning to a non-"economic" subject--why C18th armies had bright complicated uniforms. (To make it clear if a soldier broke ranks, since the inaccurate muskets of the period worked best if fired at once in clumped groups, which also made the soldiers better targets.)

Paul Krugman [who respects Friedman] once wrote of something Milton Friedman had written that it was "typical Milton; too simple but mostly correct".  To be "mostly correct" seemed to me then, and does now, as high praise.

Milton Friedman, July 31, 1912 – November 16, 2006. Requiescat in pace.

Broken by the fix

What do the goldzone Great Depression (1929-3?) and the Eurozone Great Recession (2008-?) have in common? They were both created by European central banks with the US Federal Reserve (the Fed) as accessory during and after the fact. (Yes, the monetary shock which set off the Great Recession started in Europe though the responsibility of the European Central Bank [ECB] in that initial shock was a bit more indirect than that of the Bank of France in the Depression; the ECB was much more directly culpable in the subsequent monetary contraction.)

When Nobel laureate Thomas Sargent described the euro as an artificial gold standard he was zeroing in on common features--the goldzone and the Eurozone both being fixed exchange rate systems operating over institutionally divergent countries with limited labour flows, no fiscal union (so no significant fiscal transfers) nor common risk pool otherwise (in the case of the eurozone, no lender of last resort). Having the Eurozone include Mediterranean economies was not (pdf) a monetary union that conventional Optimum Currency Area (OCA) theory supported. While economist Charles Goodhart is quite correct when he points out that OCA theory cannot explain the boundaries of existing currency realms--that being a result of the operation of state power--if OCA theory is seen as providing an analysis of whether currency realms should amalgamate, it turns out to be very powerful, as the travails of the Eurozone are proceeding to demonstrate.

This surprised-by-American-scepticism paper [pdf] by European economists--scepticism largely driven by OCA theory--reads rather differently now. Though labour mobility is supposed to be one of the key differences between the US and the Eurozone, yet land-rationing in the richer US cities is seriously reducing labour mobility, making the US more like the Eurozone and undermining its macroeconomic resilience.

Inflation phobia
Milton Friedman was famously an advocate of (pdf) floating exchange rates, Frederich Hayek an advocate of (pdf) fixed exchange rates. The latter seems an odd position for a free market thinker to take. Especially when Hayek was also an advocate for the gold standard, if one was going to keep the state money monopoly. A series of fixed prices (fixed exchange rates, fixed gold price) erected on monopoly provision seems a very odd position for a free market thinker to take.

The explanation is simple: fear of inflation. A fixed price of money in gold means--given gold's scarcity--that the possibilities of inflation are greatly reduced. A fixed exchange rate means giving up the ability to domestically inflate (as Greece, Italy, Portugal and Spain are currently discovering). A monetary authority can control price stability or it can control the exchange rate, it cannot do both. Being in the goldzone means inflation will only occur if the price of gold is falling, which it is unlikely to do by much, given that stocks greatly outweigh new production.[i]

The experience of inflation is another feature in common between the goldzone Great Depression and the eurozone Great Recession. Both the great deflation of the former and the disinflation of the latter occurred after dramatic periods of inflation. In the case of the interwar goldzone; the wartime inflations, the German and Austrian hyperinflations, the French early 1920s inflation. Fear of inflation dominated the thinking of monetary authorities--indeed, paralysed their thinking. To the extent that the Fed is paying people not to spend money.
In our own time, the Great Inflation from the late 1960s to the early 1980s has profoundly affected the thinking of monetary authorities; indeed, paralysed it. The success of inflation targeting in squeezing inflation out of Western economies has made it a policy fetish that central bankers cannot see beyond, just as the gold standard was a policy fetish monetary authorities in the early 1930s could not see beyond. Not even to make adjustments necessary to save it. It has been a continuing pattern for central bank policy to respond more to the traumas of the past than the dilemmas of the present.

Been there, done that
It is a sad reflection on the ability of policy makers to find new ways of making old mistakes that if one reads either version of the paper (pdf) by Barry Eichengreen and Peter Temin, The Gold Standard and the Great Depression, and replaces 'gold standard' with 'inflation targeting', one gets an almost perfect description of the current failures of central banks and the mentality behind such. Particularly when the Eichengreen and Temin say (p.19 of the NBER paper):

policies were perverse because they were designed to preserve the gold standard, not employment.

Replace 'gold standard' with 'inflation target' and that is exactly what has been happening in our own time.[ii] Indeed, it was worse than that, as the the Fed and the Bank of France were not even "doing" the gold standard properly (pdf). Just as the European Central Bank and the Fed are now not even doing inflation targeting properly. (To the extent that the IMF is now reporting a significant risk of deflation [pdf] in Mediterranean Eurozone countries.) Just to increase the similarities between the Great Depression and Great Recession, inflation targeting that implicitly or explicitly incorporates "headline" inflation which includes oil and commodity price shocks turns into a de facto commodity standard (since a rise in commodity prices leads to monetary tightening; so the value of money is tied to commodity prices).

As for the authors' comment:

Central bankers continued to kick the world economy while it was down until it lost consciousness (p.2)

that is a fair description of the role of the ECB in the Eurozone crisis. With the added proviso that many think some beating is warranted: alas for such righteous monetary Calvinists, the policy of the beatings continuing until performance improves has long since degenerated into pointless and destructive monetary sadism.

Which makes Greece an enormously useful scapegoat for the ECB.  While people are pointing at its obvious policy dysfunctions (a country rated by the World Bank as 100 out of 183 in difficulty of doing business has considerable capacity to improve its economic performance through its state simply stopping spending money and effort getting in the way of people transacting[iii]), and the undoubted economic rigidities in other Mediterranean Eurozone countries (Italy is rated 87, Spain 44 and Portugal 30 in difficulty of doing business compared to Germany at 19), the ECB is avoiding any accountability for its actions. (Which would make it the ultimate EU creation; the EU being a construction where power without accountability is not a bug, it's a feature.)

Conversely, the worst thing for the Eurozone would be for Greece, or any other country, to leave--and promptly start to do better. Moreover, economic rigidity hardly explains the level of economic pain in the Great Recession—the UK is ranked 7, Ireland 10, USA 4 in difficulty of doing business. Nor does public debt on its own--even within the Eurozone, Spain has a lower level of public debt than Germany (pdf).

Compared to the ECB's destructive monetary austerity, the Fed is more in the situation of having belted the US economy into a TKO,[iv] then helped it sit back up a bit, and offered some water, but resolutely refuses to help the punch-drunk economy stand, proclaiming that if it cannot stand up on its own, it is not fit to, while promising that it won't let it fall to the matt again. Monetary policy matters.

Contractionary blindness
The great blindness involved in this inflationphobia is to think that inflation is the only significant monetary danger. Firstly, serious monetary-contraction deflation is worse than monetary-expansion inflation, even hyperinflation. Both undermine economic calculation, but inflation tends to promote transactions (as people spend before their money loses value), deflation to restrict them (as people defer using money that will buy more later, leading to falling spending and thus falling income). Generally, falling transactions, falling economic activity, is worse than rising.

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

Chocolate!

Time for some more food p0rn.

Are your bites bloc-sized?

It's always time for chocolate.

Have caterpillar tracks, will climb

Venezia is not a wheelchair friendly city.  Almost all the bridges are stepped.

But we were taken with this solution to the problem of wheelchairs and stairs.

Dr Who fans will no doubt go to a famous joke about the Daleks.

Debt and Boom

The slogan for this post is: don't think debt, think safe assets.

(This post is partly provoked by this post by Paul Krugman responded to by Scott Sumner and by Marcus Nunes.)

In my Debt, Doom and Despair post I noted that a hugely debt-burdened post-Napoleonic Wars UK (where the national public debt was probably about 250% of GDP or about 25 times the revenue of the British government) went on to an amazing surge in population and mass prosperity.  (In fact, by far the most remarkable in all of human history up to that time.)

What if it was not a coincidence? What if the debt burden actually encouraged said surge?  After all, WWII left the British, Australian and US governments all highly indebted (at about 240%, 150% and 120% of GDP respectively) yet all experienced amazing postwar surges in population and prosperity. All surges marked by high rates of productivity increases from expanding technology and global trade.

One's persons debt is another person's asset.What were the British, US and Australian governments doing in running up such huge debts? They were creating a huge level of safe assets, given that none of these three governments have defaulted on their bonds, ever.  One reason why Britain went back on gold in 1925 at the pre-war (over-valued) parity was to "keep faith" with its bondholders.

So, those high levels of public debt were also creating high levels of income from safe assets. If you are, for example, 1815 Britain, and debt is 250% of GDP, then a significant amount of income, compared to total production, is flowing from said safe assets.

Expropriating risk managers
There are two basic things states do: they expropriate and they manage risk. The latter is necessary for the former and goes back to the origins of rulership--dead farmers cannot pay taxes.  In ibn Kaldun's definition, cited and admired by Ernest Gellner, government is:

an institution which prevents injustice other than such as it commits itself.

This the paradox of politics or the paradox of rulership--we need the state to protect us from social predators but the state itself is the most potentially dangerous of social predators. It is a paradox that can never be fixed, only managed more or less well.

One of the tricks of rulership, refined by medieval rulers such as Alfonso IX of Leon, and Edward I of England, is that, if you get consent for your taxation, you can do a higher level of taxation because it lowers the "resistance cost". Democratic welfare states have taken the consent-benefit trade-off up to record levels (for any non-patrimonial or totalitarian polities; i.e. for societies with any free element). Welfarism is the domestic aggrandisement of the expropriating state as imperialism is its external aggrandisement. (One of the ways we can tell that welfarism is, at least in part, an excuse for state aggrandisement is how weakly expenditure is tested against effectiveness in improving social outcomes; conversely if there is less inherent nobility in welfarism than appears, there were also positives in imperialism, albeit at wildly varying levels.)

But the public goods, and latterly welfare, provided by the state in return for implicit or explicit consent for its expropriations are overwhelmingly about risk-management. And risk management is a genuine service. Consider protection of life, person and property; or mitigating the risks of unemployment, sickness, disability, old age.

Balancing risks
For any given level of risk aversion by potential investors, creating a safe income stream raises the risk threshold for further investment. People will be more willing to tolerate higher levels of risk in their other investments.

Such as in highly uncertain investment in new technology. True, that leaves one open to asset booms and busts (pdf). Nevertheless, net economic outcome is likely to be a long term acceleration in productivity (pdf). And the surge in population and prosperity such involves.



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

The mystery of the human and the trade-offs of control

What is the biggest difference in decision-making between buying equipment and hiring a person?  The characteristics of the equipment are much easier to discern.

Sure, there can be hidden flaws in machinery and buildings. You may have to take the equipment for a test run, you may need some expert to have a look at it, but, in a very important sense, what you see is what you get. And, once you are used to one example of a piece of equipment, the next item of the same thing is likely to have the same characteristics. Indeed, the higher quality the provider, the more reliable this sameness is.

People are so not like that. They vary greatly in ways which matter to an employer (or, indeed, anyone else seeking to interact with them) but which are not easy to discern. The only reliable way to find out about a particular person is to interact with them. (Nobel Laureate James Heckman has co-written a study on how "soft skills" matter [pdf] [via], on how personality traits affect life outcomes yet can be hard to assess.)

Who is telling me
Much of how labour markets work is dominated by the opacity of relevant personal characteristics. For example, the biggest labour market intermediary (way people get jobs) is generally "friends, relatives, acquaintances, etc"--someone they know told them about the job and/or the employer about them.

You can spread information about a job much more easily by posting a job vacancy.  But that will tell you almost nothing about the applicants. Personal networks provide much richer information; even if it is just "I don't know Bob, but Kate recommended him and Kate wouldn't steer me wrong" and/or "I have a high regard for Kate's judgement". You can judge the recommendation on the reliability of the recommender and to what extent the recommender is, in effect, acting as a guarantor (so as to avoid harming your existing connection).

Recommendation through existing networks thus becomes a proxy for judging the personal characteristics you cannot directly discern.

It tells me what
Such proxies abound. Has someone else taken the risk of hiring you? If yes, have they persisted in that choice for any length of time?  Hence the best place from which to get a job is being already in one. Does your education suggest that you have application and persistence? Hence the value of education qualifications is surprisingly weakly connected to the alleged content of that education. And so forth.

This is where making it hard to sack someone (in Australia "unfair dismissals" legislation) tends to so retard the operation of labour markets, for it greatly increases the risk in hiring someone precisely because of the opacity of personal characteristics. If the minimum cost of getting rid of a complete dud is, say, $3,000 in legal fees, employer time and "go away" money, then that adds a $3,000 risk premium to every hire. This is then offset by not hiring if it pushes the risk too high for expected benefits or relying even more heavily on other filtering mechanisms. Both responses hit the most marginal would-be labour market entrants hardest. But, like much labour market regulation (indeed, much regulation generally), job-protection legislation is about protecting incumbents.

It also weakens the signal of simply being in a job, as the employer's persistence in keeping you becomes a weakened recommendation.

What can I tell?
Given the difficulty in discerning the relevant characteristics, the harder it seems to "read" someone, the less attractive they are as employees. Language and cultural differences--to the extent they seem to make it harder to discern characteristics, communicate information and predict behaviour--become an employment negative. Effects which can be hard to distinguish from actual ethnic antipathy.

So, if you are a young Muslim male in a Western European country with strong "job protection" legislation, your chances of employment are not good. Or even just being young; there are reasons why France exports young people to Britain (while Britain exports retirees to France), as these job emigres in London (helping to make London France's sixth biggest city) can attest:

[Read the rest at Skepticlawyer.]