Monthly Archives: January 2016

Deirdre McCloskey at the AEA

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She writes,

The second element, universal dignity—the social honoring of all people—was necessary in the long run, to encourage people to enter new trades and to protect their economic liberty to do so. The testing counter-case is European Jewry down to 1945, gradually liberated to have a go in Holland in the seventeenth century and Britain in the eighteenth century and Germany and the rest later. Legally speaking, from Ireland to the Austrian Empire by 1900 any Jew could enter any profession, take up any innovative idea. But in many parts of Europe he was never granted the other, sociological half of the encouragement to betterment, the dignity that protects the liberty.

Read the whole essay. Pointer from Don Boudreaux.

Another excerpt, from earlier in the piece:

North, Wallis, and Weingast treat only England, France, and the USA, which obscures the ubiquity of what they call “doorstep conditions”—the rule of law applied even to elites, perpetually lived institutions, and consolidation of the state’s monopoly of violence. Such conditions characterize scores of societies, from ancient Israel to the Roman Republic, Song China, and Tokugawa Japan, none of which experienced a Great Enrichment.

And much later in the piece:

The important “institutions” were ideas, words, rhetoric, ideology. And these did change on the eve of the Great Enrichment. What changed circa 1700 was a climate of persuasion, which led promptly to the amazing reflection, entrepreneurship, and pluralism called the modern world.

Justin Fox on Academic Journals

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He writes,

in economics almost every paper of significance is now available in some form free on the Internet before it is published in a journal. Yet economics journals that keep their articles behind paywalls and charge hundreds or thousands of dollars a year for library subscriptions continue to thrive.

This is apparently because the journal editors and referees are still needed to certify the quality of research, certification that informs hiring and tenure decisions and provides information on the relative quality of university academic departments. Also, scholars who want to cite others’ work in their own academic papers need access to the published versions to make sure they get the wording and the page numbers right.

Pointer from Mark Thoma.
These days, I am seeing the world through Martin Gurri’s lenses, as a conflict between the uncredentialed public and the credentialed elites. Thanks to the Internet, the uncredentialed public now has as much access to information as the credentialed elites. One consequence of this is that institutions like accreditation, selective college admission, faculty tenure, and publication come to be seen less and less as essential tools to promote scholarly quality and more and more as artificial gate-keeping.

Steven Pinker on Utopian Ideologies

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Quoted at Fee.org

There are ideologies, such as those of militant religions, nationalism, Nazism, and Communism, that justify vast outlays of violence by a Utopian cost-benefit analysis: If your belief system holds out the hope of a world that will be infinitely good forever, how much violence are you entitled to perpetrate in pursuit of this infinitely perfect world?

…Moreover, imagine that there are people who hear about your scheme for a perfect world and just don’t get with the program. They might oppose you in bringing heaven to Earth. How evil are they? They’re the only thing standing in the way of an infinitely good world. Well, you do the math.

I think that it is the conservatives who are most willing to see extreme, utopian ideology as a threat can only be stopped by government leadership. Conservatives emphasize the barbarism in human nature and the need for institutions to protect civilization. Progressives are less worried about utopian ideology, because they tend to see humans as inherently good but held back by oppression. Libertarians see human nature as flawed, but they are reluctant to endorse strong government for protection. Instead, they believe that coercion in any form, including government, is more of a problem than a solution.

In fact, some conservatives fear that libertarianism is itself a utopian ideology. Remember Whitaker Chambers thinking that Ayn Rand’s subliminal message was “To a gas chamber–go!”

The Quotable Martin Gurri

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In The Revolt of the Public, he writes,

The rhetoric of democratic politics seems to have gotten out of whack with the reality of what democratic governments can achieve.

Actually, his book has many quotable soundbites, but this one is very central to his main theme. The public has become more informed about the failures of government, but politicians are not encouraging people to lower their expectations. On the contrary, the competitive equilibrium seems to lead toward politicians making ever more extravagant promises.

The Future of the Automobile

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This story claims

Within a generation, automobiles will be endowed with what’s known as Level 4 autonomy—full self-driving artificial intelligence for cars—which will not so much change the game as burn down the casino. Autonomy will make it possible for unmanned automobiles to be summoned, via app, to your location. And not just any passing tramp steamer, but exactly the vehicle you need for the occasion, cleaned and fueled, for as little or as long as you need (offers may vary in your state). When you’re done—poof!—it will go away.

The point is that cars that require drivers tend to be idle a lot of the time, while cars without drivers would not be.

Regulation and Financial Complexity

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CFTC Commissioner J. Christopher Giancarlo said,

At the heart of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swap dealers. The legislative solution was to establish swap data repositories (SDRs) under the Dodd-Frank Act. Although much hard work and effort has gone into establishing SDRs and supplying them with swaps data, seven years after the financial crisis the SDRs still cannot provide regulators with an accurate picture of bank counterparty credit risk in global markets. That is because international regulators have not yet harmonized global reporting protocols and data fields across international jurisdictions. Certain provisions of Dodd-Frank actually hinder such harmonization, despite widespread bipartisan legislative support for their correction over the past two Congresses.

Pointer from Timothy Taylor. Read the whole speech, which is wide-ranging and thought-provoking. Among other topics, Giancarlo discusses the significance of blockchain and the outsized role of the Fed in key securities markets due to its enlarged balance sheet.

My view is that the financial market is a complex, adaptive system, and attempts to reduce systemic risk will backfire. Several years ago, I focused on the discrepancy between knowledge and power. Regulators seek more and more power, and at times they get it. But what they really lack, and will never possess, is the information needed to understand market processes well enough to be able to predict the ultimate effect of regulation on behavior. That information is dispersed, so that no one individual or regulatory body can obtain it.

How to Defeat ISIS

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In most cases, civilized soldiers have defeated primitive warriors only when they adopted the latter’s tactics. In the history of European expansion, soldiers repeatedly had to abandon their civilized techniques and weaphons to win against even the more primitive opponents. The unorthodox techniques adopted were smaller, more mobile units; abandonment of artillery and use of lighter smaller arms; open formations and skirmishing tactics; increased reliance on ambushes, raids, and surprise attacks on settlements; destruction of the enemy’s economic infrastructure (habitations, foodstores, livestock, and means of transport); a strategy of attrition against the enemy manpower; relentless pursuit to take advantage of civilization’s superior logistics; and extensive use of natives as scouts and auxiliaries.

This is from Lawrence Keeley, War Before Civilization: The Myth of the Peaceful Savage, published in 1996, as quoted in Peter Turchin’s Ultrasociety. Turchin goes on to write,

There is no question that civilized states almost always prevail against tribal warriors in the end, but they do so primarily because they are large-scale societies fighting small-scale societies. . .guerrillas simply avoid battles against the numerically and technologically superior government forces.

Both primitive warriors and modern guerrillas rely not on brute force but on mobility, stealth, and surprise.

And a few pages later,

The distinguishing characteristic of human combat is the ability to strike from a distance coupled with mobility.

Actually, on the topic of defeating ISIS, I confess to being to the dovish side of President Obama at this point. I think that an actual war to defeat ISIS would be bloody and brutal. Meanwhile, it strikes me as wrong to be engaging in acts of war with no formal declaration of war and at best a vague commitment to winning.

If the point of not sending in our people (I hate the term “boots on the ground”–as if we were talking about inanimate leather artifacts) is that this is someone else’s war, then I think that is an argument for staying out of it altogether. The counter-argument is that ISIS are really bad people, they could get worse before they get better, and some of their badness spills over into this country. Maybe the counter-argument is right, and I could see myself making it at some point. But as of this moment, I think that on balance the better policy is to avoid involvement altogether.

Separately, Amar Bhide arrives at the same conclusion, but by a slightly different route, stressing the evils of colonialism. I think Bhide assigns too much blame to colonial history, when there are also other sources of problems in the region. For example, I doubt that anyone would try to trace the Sunni-Shi’ite conflict to western imperialism.

The Perils of Angel Investing

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You know I just had to read an article with the title Why I stopped angel investing (and you should never start). Tucker Max writes,

I can think of two portfolio companies specifically, both of which have raised major rounds from big name VC funds, where I have to actively refrain from punching founders in their stubborn, arrogant faces.

Actually, the sentences that I related to the most were these:

personally, I gotta be in the arena, competing, putting myself on the line. I can’t just watch. Once I understood this, the decision to stop angel investing was pretty clear.

I noticed this when someone put me in touch with the head of a firm that does early-stage investments. She showed me a few companies they were investing in, and I found that all I could think about was how I would position the companies differently and take different approaches in terms of staging their business. It does not matter whether I was right or wrong, but it showed me that I could not just sit back and watch someone else use my money to do things that I would not do if I were running the business myself. It would be way too stressful for me.

Finally, about successful angel investors, he writes,

they have the social clout to not get run over by VC’s and literally pushed out of an investment.

That’s the most frustrating part of angel investing. You manage to actually back a winner, and then a VC firm with clever lawyers just takes it away from you for nothing.

Opaque Leverage and Self-Deception

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Regarding the movie The Big Short, Tyler Cowen wrote,

There is no central villain, none whatsoever. The filmmakers succeed in showing how the collective actions of many, operating together, can give rise to structural problems and systemic risk. And yet the story remains suspenseful.

People prefer stories with villains.

I think that the story of the financial crisis has to include leverage. Individual home buyers did not put up much of their own capital. The lenders did not put up much of their own capital. The mortgage securities were structured and rated so that banks could hold them with minimal capital.

However, some of this leverage was opaque. People did not understand the way that AIG was contractually obligated to put up billions in collateral if prices moved against them. People did not understand that while Fannie Mae and Freddie Mac were reporting that their sub-prime exposure was less than 2 percent, their exposure to risky loans was closer to 30 percent. People did not understand that mortgage securities rated AAA were not really comparable to AAA-rated bonds. People did not understand that banks had created “structured investment vehicles” and other dodges that made them much more levered than they appeared to be. And by “people,” in all cases I mean regulators and investors.

But finally, the opaque leverage was less intentional bad behavior on the part of financial executives than it was self-deception. Suppose that you had asked executives in 2007 to answer honestly, “Relative to what people outside the firm think, how exposed are you to a decline in house prices and problems in the mortgage market?” My guess is that almost all of them would have said, “We are less exposed than other people think.” And they would have been telling the truth from their point of view.

That is what made the speculators in The Big Short so special. They managed to dig through to reality.

And don’t forget that I coined the term, “Suits vs. Geeks Divide.”

Socialism and Income Distribution

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John Hinderaker writes,

Only under socialism could Fidel Castro become the richest warlord, relative to his subjects’ wealth, in recorded history. (And that was the least of his sins.) Only under socialism could Maria Gabriela Chavez, daughter of socialist tribune of the people Hugo Chavez, beloved by the American left, waltz off with a $4 billion fortune. But then, she was a piker: Chavez’s Minister of the Treasury stashed $11 billion in Swiss bank accounts.

One way to acquire enormous wealth is to be perceived as an egalitarian.