Quotulatiousness

January 23, 2015

“We are all [Milton] Friedman’s children and grandchildren”

Filed under: Economics — Tags: , , , , — Nicholas @ 04:00

At Worthwhile Canadian Initiative, Nick Rowe explains just how important Milton Friedman still is in economics today:

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.

If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?

We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled “Quantitative Easing” is just a silly new name for Friedmanite base-control.

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

January 22, 2015

China (barely) misses growth target … as if we can trust their numbers anyway

Filed under: China, Economics, Government — Tags: , , , — Nicholas @ 04:00

Ah, well, I haven’t ridden this old hobby horse for a while, so let’s just let Tim Worstall explain why this time, we might be able to get a bit of perspective from the otherwise unreliable official Chinese government economic figures:

Many observers have been slightly sceptical of Chinese GDP numbers for some years now. Regional GDP numbers don’t seem to quite match with other regional numbers (say, oil consumption, other proxies for economic activity) and national numbers don’t necessarily reflect the sum of all of those regional numbers either. There’s absolutely no doubt at all that the place has been getting richer but whether quite so much or quite in the manner being reported is another matter. And then there’s another group of observers (this one including myself) who have some experience of how communists report economic numbers. There’s a plan, the Communist Party is in charge of executing that plan and, amazingly, the plan is always reported to have either worked or been exceeded. Anything less would reflected badly on said Communist Party. As I’ve also been exposed to the old Soviet accounting systems I’m more sceptical than most on this point.

So, there’s that slight worry that a slowing China (or one not growing at the former breakneck pace perhaps) will also lower growth in other countries. We’re pretty sure that’s going to happen. But we’ve also got this other thing to ponder. If the Communist Party is allowing the reporting of numbers that don’t meet the plan then what’s going on with that?

Is this some sea change in the management of the numbers? They’re actually reporting the correct numbers? Or are those suspected massages of the numbers still going on but they underlying reality is so bad that they just couldn’t get up to the planned target? This is, I agree, all wild surmise. But it is a surprise that the numbers came in below target because that’s just not what we’ve come to expect in such a political system. And that could be very bad news indeed.

January 16, 2015

It’s always a good time to cut taxes

Filed under: Economics, Government, Humour, USA — Tags: , , — Nicholas @ 02:00

In a column explaining why he’s terrified that the “Modern Monetary Theory” folks might get anywhere near the levers of power, Tim Worstall fits in the best reason to cut taxes:

Given that we are discussing monetary policy it seems appropriate to bring Milton Friedman in here. And he pointed out that if you ever have a chance to cut taxes just do so. On the basis that politicians, any group of politicians, will spend the bottom out of the Treasury and more however much there is. So, the only way to stop ever increasing amounts of the the entire economy flowing through government is simply to constrain the resources they can get their sticky little mits on. We could, for example, possibly imagine a Republican from the Neanderthal wing of the party arguing that what the US really needs is another 7 carrier battle groups. And one from the even more confused than usual Progressive end of the Democratic Party arguing that each college student needs her own personal carrier battle group to protect her from the microaggressions of being asked out for a coffee. You know. Sometime. Maybe. If you want to?

QotD: The impact of lower oil prices

Filed under: Business, Economics, Government, Quotations — Tags: , , , — Nicholas @ 01:00

When oil prices are high there is a rush of investment into oil based enterprises from multi-nationals to frackers. No bad thing but there is always a real danger of over investment leading to the exploitation of very marginal resources. A lower oil price will strand some of that investment and, just as importantly, postpone a great deal of it. Which frees up investment for other, potentially more useful, purposes.

The second thing which happens is that governments become addicted to the joys of relatively painless oil royalties. This looks like revenue but, because it is drawn from a diminishing resource, is actually a rather dangerous drawing down of capital. A lot of oil “revenue” is seen as general revenue and is spent on non-capital expenditures. With a booming oil sector governments are tempted to think the exaggerated revenues are available for general expenses and will continue to be. Which means that government budgets are set based on a purely extractive draw down of a province’s or nation’s capital. This is a poor idea.

Not to take anything away from the bright guys who are fracking and mining their way to oil fortunes, the reality is that extracting oil does not leave much in the way of useful, secondary industry, much less innovation. Which, in turn, means that when the oil is no longer profitable to extract there is no residual, non-oil, economy left behind. If a government spends the oil revenue as it comes in, or worse uses it to secure loans, when the oil revenue dries up there is nothing to cover the spending or the debt.

[…]

The golden lining of additional pressures on nasty states like Russia, Iran and Venezuela is likely not as significant as the prevention of malinvestment and governmental squander. In time, as various emerging economies continue to grow, demand will drive the price of oil upwards again. With luck investors and governments will not make the same mistakes twice.

(One unalloyed good arising from the collapse of the price of oil is that so called clean energy renewables like wind and solar look even sillier with their present technology. I suspect wind will always make zero economic sense; I have more hope for photo voltaic solar as new materials promise significantly higher efficiency. And those same materials in a different configuration promise radical gains in battery efficiency for that daily occurrence known as darkness. Again, a low oil price will dampen the insane over investment in these marginal technologies.)

Jay Currie, “Oil Wars”, Jay Currie, 2014-01-03

January 14, 2015

“This is what happens when you let the half-wits take charge of economic policy”

Filed under: Americas, Economics — Tags: , , , — Nicholas @ 02:00

Tim Worstall on the very sad economic plight of Venezuela:

As times go on the stories about how far and how fast the economy of Venezuela has fallen apart become ever more dramatic. They now actually have the Army, seriously, the armed forces, guarding food supplies. And the police are handing out toilet paper. We can just about imagine such things happening in the wake of some massive natural disaster, the levee breaks, the hurricane comes ashore, but not as day after day activity as something normal for the nation. But there has been no natural disaster in Venezuela, this is just the result of some years of idiot socialism. What makes it all so tragic is that there was and is another way to achieve the stated aim: making the poor better off. And when we consider what we might want to do to make the poor better off we’d better pay attention to this, admittedly extreme, example.

[…]

Sure, Venezuela’s an oil exporter, sure the price of oil has fallen. But this isn’t what happens in a commodity producer when the exports fall in price. This is what happens when you let the half-wits take charge of economic policy for a nation. Actually, in Venezuela, calling them half-wits is probably a mite too polite.

There’s absolutely nothing wrong at all with the intention of making the poor better off. Indeed, I share that aim: that’s why I’m this capitalist free marketeer type, as it’s the only socio-economic system we’ve ever had that has made the poor substantially better off for any period of time. However, there are good ways and bad ways of going about doing this and if we want to succeed in our aim, in the US, of making the poor better off then we’d do well to pay attention.

The short answer is don’t screw with the market.

January 10, 2015

The four kinds of healthcare spending

Filed under: Bureaucracy, Business, Economics, Government, Health, USA — Tags: , , , — Nicholas @ 03:00

Megan McArdle explains why healthcare costs more than you think it should:

Milton Friedman famously divided spending into four kinds, which P.J. O’Rourke once summarized as follows:

  1. You spend your money on yourself. You’re motivated to get the thing you want most at the best price. This is the way middle-aged men haggle with Porsche dealers.
  2. You spend your money on other people. You still want a bargain, but you’re less interested in pleasing the recipient of your largesse. This is why children get underwear at Christmas.
  3. You spend other people’s money on yourself. You get what you want but price no longer matters. The second wives who ride around with the middle-aged men in the Porsches do this kind of spending at Neiman Marcus.
  4. You spend other people’s money on other people. And in this case, who gives a [damn]?

Most health-care spending in the U.S. falls into category three. In theory, the people who are funding our expenses — the proverbial middle-aged men in Porsches, except that they’re actually insurance executives and government bureaucrats — have every incentive to step in, cut up the charge cards, and substitute a gift-wrapped box of Hanes briefs with the comfort-soft waistband. In practice, legislators frequently intervene to stop them from exercising much cost-control. The managed care revolution of the 1990s died when patients complained to their representatives, and the representatives ran down to their offices to pass laws making it very hard to deny coverage for anything anyone wanted. Medicare cost-controls, such as the famed Sustainable Growth Rate, fell prey to similar maneuvers. The only system that exhibits sustained cost control is Medicaid, because poor people don’t vote, or exit the system for better insurance.

The result is a system where everyone complains that we spend much too much on health care — and the very same people get indignant if anyone suggests that they, personally, should maybe spend a little bit less. Everyone wants to go to heaven — but nobody wants to die.

Unfortunately, this is what cost-control actually looks like, which is to say, like people not being able to spend as much on health care. Oh, to be sure, we could achieve this end differently — instead of asking patients to pay a modest share of their own costs (the article suggests that this amount is less than 10 percent, in the case of Harvard professors) — we could simply set a schedule of covered treatment, and deny patients access to off-schedule treatments, or even better, not even tell them that those treatments exist. But people don’t like that solution either, which is why medical dramas are filled with rants about insurers who won’t cover procedures, and the law books are filled with regulations that sharply curtail the ability of insurers to ration care. And the third option, refusing to pay top-dollar for care, would be a bit tricky for Harvard to implement, given that they run exactly the sort of high-cost research facilities that help drive health-care costs skyward. Nor do I really think that the angry professors would be mollified by being given a cheap insurance package that wouldn’t let them go see the top-flight specialists their elite status now entitles them to access.

Instead, they persist in our mass delusion: that there is some magic pot of money in the health-care system, which can be painlessly tapped to provide universal coverage without dislocating any of the generous arrangements that insured people currently enjoy. Just as there are no leprechauns, there is no free money at the end of the rainbow; there are patients demanding services, and health-care workers making comfortable livings, who have built their financial lives around the expectation that those incomes will continue. Until we shed this delusion, you can expect a lot of ranting and raving about the hard truths of the real world.

Sub-orbital airliners? Not if you know much about economics and physics

Filed under: Economics, Technology — Tags: , , , , , — Nicholas @ 02:00

Charles Stross in full “beat up the optimists” mode over a common SF notion about sub-orbital travel for the masses:

Let’s start with a simple normative assumption; that sub-orbital spaceplanes are going to obey the laws of physics. One consequence of this is that the amount of energy it takes to get from A to B via hypersonic airliner is going to exceed the energy input it takes to cover the same distance using a subsonic jet, by quite a margin. Yes, we can save some fuel by travelling above the atmosphere and cutting air resistance, but it’s not a free lunch: you expend energy getting up to altitude and speed, and the fuel burn for going faster rises nonlinearly with speed. Concorde, flying trans-Atlantic at Mach 2.0, burned about the same amount of fuel as a Boeing 747 of similar vintage flying trans-Atlantic at Mach 0.85 … while carrying less than a quarter as many passengers.

Rockets aren’t a magic technology. Neither are hybrid hypersonic air-breathing gadgets like Reaction Engines‘ Sabre engine. It’s going to be a wee bit expensive. But let’s suppose we can get the price down far enough that a seat in a Mach 5 to Mach 10 hypersonic or sub-orbital passenger aircraft is cost-competitive with a high-end first class seat on a subsonic jet. Surely the super-rich will all switch to hypersonic services in a shot, just as they used Concorde to commute between New York and London back before Airbus killed it off by cancelling support after the 30-year operational milestone?

Well, no.

Firstly, this is the post-9/11 age. Obviously security is a consideration for all civil aviation, right? Well, no: business jets are largely exempt, thanks to lobbying by their operators, backed up by their billionaire owners. But those of us who travel by civil airliners open to the general ticket-buying public are all suspects. If something goes wrong with a scheduled service, fighters are scrambled to intercept it, lest some fruitcake tries to fly it into a skyscraper.

So not only are we not going to get our promised flying cars, we’re not going to get fast, cheap, intercontinental travel options. But what about those hyper-rich folks who spend money like water?

First class air travel by civil aviation is a dying niche today. If you are wealthy enough to afford the £15,000-30,000 ticket cost of a first-class-plus intercontinental seat (or, rather, bedroom with en-suite toilet and shower if we’re talking about the very top end), you can also afford to pay for a seat on a business jet instead. A number of companies operate profitably on the basis that they lease seats on bizjets by the hour: you may end up sharing a jet with someone else who’s paying to fly the same route, but the operating principle is that when you call for it a jet will turn up and take you where you want to go, whenever you want. There’s no security theatre, no fuss, and it takes off when you want it to, not when the daily schedule says it has to. It will probably have internet connectivity via satellite—by the time hypersonic competition turns up, this is not a losing bet—and for extra money, the sky is the limit on comfort.

I don’t get to fly first class, but I’ve watched this happen over the past two decades. Business class is holding its own, and premium economy is growing on intercontinental flights (a cut-down version of Business with more leg-room than regular economy), but the number of first class seats you’ll find on an Air France or British Airways 747 is dwindling. The VIPs are leaving the carriers, driven away by the security annoyances and drawn by the convenience of much smaller jets that come when they call.

For rich people, time is the only thing money can’t buy. A HST flying between fixed hubs along pre-timed flight paths under conditions of high security is not convenient. A bizjet that flies at their beck and call is actually speedier across most intercontinental routes, unless the hypersonic route is serviced by multiple daily flights—which isn’t going to happen unless the operating costs are comparable to a subsonic craft.

January 9, 2015

QotD: Britain in the “New Elizabethan Age” of the 1950s

Filed under: Britain, Economics, Food, History, Quotations — Tags: , — Nicholas @ 01:00

The euphoria of the New Elizabethan Age was all the more striking when set against the backdrop of the deprivation and austerity of the immediate post-war years. For many people, things had actually got worse after the war. The shortages — of food, of fuel, of housing — were such that on the first anniversary of VE Day, as Susan Cooper later recalled, “the mood of the British was one not of festivity but of bleak resignation, with a faint rebelliousness at the restrictions and looming crises that hung over them like a fog.” “We won the war,” one housewife was quoted as saying. “Why is it so much worse?” The winter of 1947 was the coldest of the century: there were shortages, and strikes, and everyone shivered; and in the spring the floods struck, closing down the London Underground, washing away the crops of thirty-one counties and pouring into thousands of homes. By the following year, rationing had fallen well below the wartime level. The average adult in 1948 was entitled to a weekly allowance of thirteen ounces of meat, one-and-a-half ounces of cheese, six ounces of butter, one ounce of cooking fat, eight ounces of sugar, two pints of milk and one egg. Even dried egg, which had been a staple of meals in wartime, had disappeared from the shops. Children at the beginning of the 1950s still wondered what their parents meant when the reminisced about eating oranges, pineapples, and chocolate; they bathed in a few inches of water, and wore cheap, threadbare clothes with “Utility” labels. It was just as well that the British prided themselves on their ability to form an orderly queue; they had plenty of opportunities to prove it. Not until July 1954 did food rationing finally come to an end.

Austerity left its mark, and many people who had scrimped and saved through the post-war years found it hard to accept the attitudes of their juniors during the long boom that followed. As one housewife later commented: “It makes you very careful and appreciate what you have got. You don’t take things for granted.” Caution, thrift, and the virtues of “making do” had become so ingrained during the long years of rationing that many people never forgot them and forever told each other, “Waste not, want not”, or reminded themselves to put things aside “for a rainy day”, or complained that their children and grandchildren did not “know the value of money.”

Dominic Sandbrook, Never Had It So Good: A history of Britain from Suez to the Beatles, 2005.

January 7, 2015

In praise of the bus, but not “the buses”

Filed under: Britain, Economics — Tags: , , , — Nicholas @ 04:00

Over at The Register, someone accidentally let Simon Rockman get up on his hobby horse and start yelling nasty things about buses:

A bus is a fantastically efficient way to move a large number of people. Buses however are not. They are a dreadful system for getting people to work.

The difference is not as subtle as that sentence may make it seem. What lies behind it is that when you want to move a large number of people from one place to another all at once, a works outing for instance, a Charabanc makes perfect sense.

But it doesn’t scale. If you want to travel by bus there needs to be a regular service. That means lots of buses have to waft up and down a route in anticipation of there being someone who wants to get on. In a major city, and I live in London, that’s good for some of the time. So long as there is a steady supply of people there can be a good number on the bus. This of course doesn’t work very early in the morning or late at night when there are not enough people.

What’s worse is that buses don’t go from where people live to where they work. Unless you live by a bus stop, in which case you have the kinds of people who hang around bus stops hanging around your house, you’ll have to walk to it. The same is true at the other end. Then you have to wait for the bus. If I walk down to my nearest bus stop and a bus arrives as I get there I think it’s a fantastic, special happening. If I walk out of my house and my car is there I think “that’s normal”.

How to create an investment monoculture

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 03:00

At Coyote Blog, Warren Meyer explains how what must have seemed to be a simple, common-sense regulation change led almost inevitably to a housing market melt-down:

… a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency. I will oversimplify here, but basically it categorized some assets as “safe” and some as “risky”. Those that were risky had their value cut in half for purposes of capital calculations, while those that were “safe” had their value counted at 100%. So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets. As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.

Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as “safe”. Which of course was the whole point — if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks’ shorts about the risks they are taking with their investments. This is the attempted tightening of regulation to which Kling refers. Regulators were trying for tougher, not weaker standards.

[…]

Anyway, what assets did the regulators choose as “safe”? Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt). So you are a bank president in this new regime. You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in “safe” assets. What do you tell your investment staff? You tell them to go invest the money in the “safe” asset that has the highest return.

And for most banks, this was mortgage-backed securities. So, using the word Brad DeLong applied to deregulation, there was an “orgy” of buying of mortgage-backed securities. There was simply enormous demand. You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason — banks needed these things. For the average investor, most of us stayed out. In the 1980’s, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.

It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice). Grocery stores would instantly be out of oranges and orange juice. People around the world would be scrambling to find ways to get more oranges to market. Fortunes would be made by clever people who could find more oranges. Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang. Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so. Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.

Government regulation — completely well-intentioned — had created a mono-culture. The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets. And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages. When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset. The US banking industry was a mono-culture through which a new disease ravaged the population.

January 6, 2015

QotD: Home ownership as a form of forced savings

Filed under: Economics, Quotations — Tags: , , — Nicholas @ 00:01

Housing is pretty effective forced savings. We pay extra on our house each month, much to the dismay of many financial types of my acquaintance. Now, in theory, I could put that money right into mutual funds. In practice, I’m probably more likely to put it into a nice table for the backyard. As Dave Ramsey says all the time, the biggest mistake people make in talking about personal finance is treating it as a math issue. It’s not. The math behind personal finance is so risibly simple that journalists can do it. The discipline, however, is very hard. So the correct comparison for homeownership is not what the buyer could have achieved by putting all that extra money into a mutual fund; it’s what they would actually have done with the extra money if they hadn’t bought a house.

So while I’m not saying that you should definitely invest in a house, I won’t say you definitely shouldn’t, either; all I would say is that you shouldn’t count on your home value too much.

Megan McArdle, “Buying a Home Isn’t Bad for You”, Bloomberg View, 2014-04-07

January 5, 2015

The role of price controls in the decline of the Roman empire

Filed under: Economics, Europe, Food, History — Tags: , , , , , — Nicholas @ 06:58

The latest issue of Libertarian Enterprise included this selection from Ludwig von Mises’ Human Action on how government restrictions on prices and trade contributed to the downfall of the western empire:

Knowledge of the effects of government interference with market prices makes us comprehend the economic causes of a momentous historical event, the decline of ancient civilization.

It may be left undecided whether or not it is correct to call the economic organization of the Roman Empire capitalism. At any rate it is certain that the Roman Empire in the second century, the age of the Antonines, the “good” emperors, had reached a high stage of the social division of labor and of interregional commerce. Several metropolitan centers, a considerable number of middle-sized towns, and many small towns were the seats of a refined civilization. The inhabitants of these urban agglomerations were supplied with food and raw materials not only from the neighboring rural districts, but also from distant provinces. A part of these provisions flowed into the cities as revenue of their wealthy residents who owned landed property. But a considerable part was bought in exchange for the rural population’s purchases of the products of the city-dwellers’ processing activities. There was an extensive trade between the various regions of the vast empire. Not only in the processing industries, but also in agriculture there was a tendency toward further specialization. The various parts of the empire were no longer economically self-sufficient. They were interdependent.

What brought about the decline of the empire and the decay of its civilization was the disintegration of this economic interconnectedness, not the barbarian invasions. The alien aggressors merely took advantage of an opportunity which the internal weakness of the empire offered to them. From a military point of view the tribes which invaded the empire in the fourth and fifth centuries were not more formidable than the armies which the legions had easily defeated in earlier times. But the empire had changed. Its economic and social structure was already medieval.

The freedom that Rome granted to commerce and trade had always been restricted. With regard to the marketing of cereals and other vital necessities it was even more restricted than with regard to other commodities. It was deemed unfair and immoral to ask for grain, oil, and wine, the staples of these ages, more than the customary prices, and the municipal authorities were quick to check what they considered profiteering. Thus the evolution of an efficient wholesale trade in these commodities was prevented. The policy of the annona, which was tantamount to a nationalization or municipalization of the grain trade, aimed at filling the gaps. But its effects were rather unsatisfactory. Grain was scarce in the urban agglomerations, and the agriculturists complained about the unremunerativeness of grain growing. The interference of the authorities upset the adjustment of supply to the rising demand. The showdown came when in the political troubles of the third and fourth centuries the emperors resorted to currency debasement. With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society’s economic organization. The more eagerness the authorities displayed in enforcing the maximum prices, the more desperate became the conditions of the urban masses dependent on the purchase of food. Commerce in grain and other necessities vanished altogether. To avoid starving, people deserted the cities, settled on the countryside, and tried to grow grain, oil, wine, and other necessities for themselves. On the other hand, the owners of the big estates restricted their excess production of cereals and began to produce in their farmhouses — the villae — the products of handicraft which they needed. For their big-scale farming, which was already seriously jeopardized because of the inefficiency of slave labor, lost its rationality completely when the opportunity to sell at remunerative prices disappeared. As the owner of the estate could no longer sell in the cities, he could no longer patronize the urban artisans either. He was forced to look for a substitute to meet his needs by employing handicraftsmen on his own account in his villa. He discontinued big-scale farming and became a landlord receiving rents from tenants or sharecroppers. These coloni were either freed slaves or urban proletarians who settled in the villages and turned to tilling the soil. A tendency toward the establishment of autarky of each landlord’s estate emerged. The economic function of the cities, of commerce, trade, and urban handicrafts, shrank. Italy and the provinces of the empire returned to a less advanced state of the social division of labor. The highly developed economic structure of ancient civilization retrograded to what is now known as the manorial organization of the Middle Ages.

The emperors were alarmed with that outcome which undermined the financial and military power of their government. But their counteraction was futile as it did not affect the root of the evil. The compulsion and coercion to which they resorted could not reverse the trend toward social disintegration which, on the contrary, was caused precisely by too much compulsion and coercion. No Roman was aware of the fact that the process was induced by the government’s interference with prices and by currency debasement. It was vain for the emperors to promulgate laws against the city-dweller who relicta civitate rus habitare maluerit [deserted the cities, preferring to live in the country]. The system of the leiturgia, the public services to be rendered by the wealthy citizens, only accelerated the retrogression of the division of labor. The laws concerning the special obligations of the shipowners, the navicularii, were no more successful in checking the decline of navigation than the laws concerning grain dealing in checking the shrinkage in the cities’ supply of agricultural products.

The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy. A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police. The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Führer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.

From: Ludwig von Mises, Human Action: A Treatise on Economics, vol. 3 (LF ed.) [1996], Chapter 30. Online at http://oll.libertyfund.org/titles/1895#lf3843-03_head_036, the Online Library of Liberty, A collection of scholarly works about individual liberty and free markets.

January 3, 2015

“Secular Stagnation and Cast-Iron Frying Pans”

Filed under: Books, Economics — Tags: , , — Nicholas @ 02:00

At the wonderfully named Worthwhile Canadian Initiative blog, Frances Woolley looks at some of the ordinary human cussedness that prevents wonderfully clear and understandable economic theories from working quite as efficiently as their formulators expect:

1. Economies grow when people buy stuff.

2. Over time, people accumulate more and more stuff.

3. People can only handle so much stuff. Sock drawers get full of socks. Cupboards get full of cups. Bookshelves get full of books.

4. It’s hard to get rid of stuff. Economic models typically assume disposing of unwanted things costs nothing. But life isn’t like that. Sorting out stuff that can be tossed from stuff that is worth keeping takes time and effort.

5. People are “loss averse”. Throwing things away — clothes that don’t fit, vinyl LPs — hurts psychologically.

6. There’s no need to replace perfectly good stuff. True some stuff, like mobile phones, only lasts a year or three. But other stuff, like cast-iron frying pans, lasts for decades.

Taken together, observations 2 through 6 imply that, as people get older, they buy less and less stuff. Combined with observation 1, these observations explain why countries with aging populations experience lower rates of economic growth.

My only quibble is with the final sentence of point 3: bookshelves don’t get full … you just run out of immediate book storage options. Bookshelves are never really full, they’re just temporarily over-booked.

January 2, 2015

Who needs a multi-billion dollar espionage agency, when so much intelligence data is on the web?

Filed under: Economics, Military — Tags: — Nicholas @ 04:00

By way of Think Defence, a great visual illustration of the highest risk points of transit in world shipping:

Click to see full-sized image at Think Defence

Click to see full-sized image at Think Defence

QotD: The co-ordination problem of pure Marxism

Filed under: Economics, History, Politics, Quotations — Tags: , , — Nicholas @ 01:00

… it is interesting to analyze Marx as groping toward something game theoretic. This comes across to me in some of his discussions of labor. Marx thinks all value is labor. Yes, capital is nice, but in a sense it is only “crystallized labor” – the fact that a capitalist owns a factory only means that at some other point he got laborers to build a factory for him. So labor does everything, but it gets only a tiny share of the gains produced. This is because capitalists are oppressing the laborers. Once laborers realize what’s up, they can choose to labor in such a way as to give themselves the full gains of their labor.

I think here that he is thinking of coordination as something that happens instantly in the absence of any obstacle to coordination, and the obstacle to coordination is the capitalists and the “false consciousness” they produce. Remove the capitalists, and the workers – who represent the full productive power of humanity – can direct that productive power to however it is most useful. In my language, Marx simply assumed the invisible nation, thought that the result of perfect negotiation by ideal game theoretic agents with 100% cooperation under a veil of ignorance – would also be the result of real negotiation in the real world, as long as there were no capitalists involved. Maybe this idea – of gradually approaching the invisible nation – is what stood in for the World-Spirit in his dialecticalism. Maybe in 1870, this sort of thinking was excusable.

If capitalists are to be thought of as anything other than parasites, part of the explanation of their contribution has to involve coordination. If Marx didn’t understand that coordination is just as hard to produce as linen or armaments or whatever, if he thought you could just assume it, then capitalists seem useless and getting rid of all previous forms of government so that insta-coordination can solve everything seems like a pretty swell idea.

If you admit that, capitalists having disappeared, there’s still going to be competition, positive and negative sum games, free rider problems, tragedies of the commons, and all the rest, then you’ve got to invent a system that solves all of those issues better than capitalism does. That seems to be the real challenge Marxist intellectuals should be setting themselves, and I hope to eventually discover some who have good answers to it. But at least from the little I learned from Singer, I see no reason to believe Marx had the clarity of thought to even understand the question.

Scott Alexander, “Book Review: Singer on Marx”, Slate Star Codex, 2014-09-13.

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