Money as a tool

We are so surrounded and accustomed to money defining many of the boundaries and choices of our lives, so used to it being the hard edge of reality, that we forget that money has a history and has changed over time.

Indeed, many of the biggest mistakes in the economy in the last three hundred years have been to do with problems or diseases of money, such as inflation or credit bubbles.

All the same, money is perhaps the most powerful social tool that humanity has ever invented. It is a remarkable social technology, as I discussed here.

It enables transactions. It is a store of value. It coordinates extraordinarily complex webs of production, conveying information in the form of changing prices.

It is an impersonal, dispassionate way to allocate and distribute resources to people, to motivate them to do things, a mechanism to give and take away that seems automatic.

And it is entwined in a hundred ways with our social system. In the modern world, it is usually connected to status -although of course in the past merchant classes were looked down upon by an aristocracy whose wealth was in land.

It loosens or dissolves many social ties and changes values. It represents security or freedom or independence.

James Buchan, a former FT correspondent, wrote an unorthodox but beautifully written and original history of money named Frozen Desire: Meaning of Money. He starts by saying

Money, which we hope to see and hold every day, is diabolically hard to comprehend with words.

For money is incarnate desire. Money takes wishes, however vague or trivial or atrocious,and broadcasts them to the world, like the Mayday of a ship in difficulties.

He quotes Aristotle's Politics on the invention of money. Aristotle believed money came into being to bring into being an international division of labor:

When the inhabitants of one country become more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.

But Aristotle also hated money as wealth or profit, and that was one of the roots of the centuries-long prohibition of usury. Wealth arising from exchange

Is justly censured;for it is unnatural, and a mode by which men gain from each other. The most hated sort, and with the greatest reason, is interest, and not from that or which money was devised. For money came into being for the sake of exchange, but interest makes the money itself greater.

Right from the beginnning, money has evolved in surprising ways that surprise or worry us. And right from the beginning, money has been tangled with many moral convictions that structure it.

Radical Monetary Reform

This is an interesting development - highly radical monetary reform proposals from two staff economists at the IMF. The often excitable Ambrose Evans-Pritchard writes about it in the Telegraph.

The IMF paper, which apparently came out in August, argues for a renewed look at a "Chicago Plan" which Irving Fisher put forward in 1936. It required 100% reserve backing for bank loans, thus eliminating the ability of banks to create credit. And that, IMF authors Benes and Kumhof argue, would eliminate much of the volatility of the business cycle, eliminate the possibility of bank runs, and dramatically reduce both public and private debts. It would not be inflationary, and it would boost output by 10%. They claim they can demonstrate this with a DGSE model in a way which Fisher never could.

This shows just how disillusioned the wider world has become with the banking and financial system. The IMF staff has always had some variety of viewpoints - and of course this is very strictly speaking the view of the authors, not the institution - but it is still hard to see the folks on 19th St NW producing something like this ten years ago.

Would it work? It essentially replaces a largely private money system with a 100% government money system. Fractional reserve banking means that right now a bank only has typically 5-10% of "money" - mostly central bank reserves - underpinning the rest of the asset side of the balance sheet, which is bank-created credit.

In our current system, a bank creates money by issuing a loan, and crediting the borrower with an offsetting deposit at the same time. ( eg if Citibank lends you $10,000, it has a $10,000 loan as its asset, and you have an additional $10,000 in your deposit account to spend). The proposal would stop banks creating money, because they could only re-loan reserves from the central bank.

The problem, of course, is that money systems can be too inflexible, too rigid as well as too volatile. This most often shows up in exchange rate policy. The gold standard had fixed exchange rates (but freer credit). However, it still forced international adjustment by inflation and deflation of the price level, because gold was the fundamental reserve asset, not central bank fiat money. "Ye shall not crucify mankind on a cross of gold", William Jennings Bryan famously said.The euro is a prime contemporary example of the problems monetary inflexibility can cause.

The "Chicago Plan" would require policymakers to carefully calibrate the supply of reserves, and if they did not there would be serious problems. Of course, many economists think rules rather than discretion is better for policy in any case, as the track record for discretionary monetary policy is mixed at best. So making policymakers stick to a rue or money growth might be a good thing.

The plan would not necessarily imply government would allocate loans , or choose specific winners and losers. Banks could still lend to whoever they wanted, but they could not create money at the same time. the lack of leverage would cripple bank profits, however.

There might be more role for equity based venture investors in such a system, offsetting some of the credit supply. And the reduction of government debt looks very attractive in current circumstances.

Patience with banks is wearing thin. Policymakers are clearly very frustrated that they are launching massive balance sheet expansions like QE3, but the transmission mechanism to convey that liquidity to the real economy seems to be blocked in the banking system. The banks generally claim that it is because there is less demand for loans, not their reluctance to lend. But whatever the cause, the Fed, BoE and others are not getting much traction. Cutting out the middleman becomes more attractive, at least in theory.

Clearly the financial system would fight this to the death, as it would remove most of the profits in the industry. But radical as it is, perhaps it deserves serious scrutiny as a plan - if only as a device to hold over the banks. Our system does seem to have an inherent bias and drift towards debt, both private and governmental.

Perhaps we need a better system of money creation calibrated to create flourishing in society rather than simply credit. The legitimacy of the current system has been shaken by the crisis, and much of the intellectual confidence of mainstream economics has been eclipsed. I'll read further reactions to the plan and examination of potential flaws with interest.

 

 

Money dissolves social ties

Buchan also talks in his book( Frozen Desire: Meaning of Money, below) about how money dissolved the feudal order (p56).

Feudal services have none of the precision of a sale or purchase for money; they might be as specific as a spring campaign or as vague ad loyalty of you or yours until death. Money, which extinguished the sensation of obligation - you may wish to return to the bookshop where you bought this book, but you do not have to - would appear to be fatal to this world of enduring interconnections; and that is indeed what happened. Money gnawed at the foundations of feudalism in Europe from the end of the twelfth century, Japan from the seventeenth , and the Arabian sheikhdoms from the twentieth.

Other social technologies soon evolved to change the nature of money. Buchan talks about the invention, or at least publication of double-entry bookkeeping by Luca Pacioli in 1494. ( It may have been used by Venetian and Genoese merchant houses long before.) It was a rational system of debits and credits, much more sophisticated than simply amassing gold in storehouses. That first system of accountancy eventually led to modern large-scale business accounts and objectives, outside ownership by shareholders, and eventually the foreign trade, national accounts and GDP measures of our own day. Says Buchan,

Above all , Luca laid the foundation of the modern conception of profit, not as some vague increase in possession, but as something hard, even crystalline, mathematical and open to empirical test at any to e whatever through an interlocking system of books.

Even land itself was no longer just land. Much of medieval Europe was owned by great monastic estates and feudal lords tied to the land. Before long the land was mortgaged and alienable property and subject to money rents, culminating in the enclosure of common land in 18th century England.

Money replaces social reciprocity and obligation. It changes the nature of ownership and property.

As the nature of the economy changes, the nature of money changes

Let's put history on fast forward. The feudal system dissolved. The trading empires arose, and soon in the great centers of trade like Florence and Genoa banking develops.

Government debt - and bankruptcy - are invented. ( See A History of Florence 1200-1575 for how Florence consolidated its government debt in 1343 and how the "Monte" - mountain of debt - dominated politics for decades.)

Philip II's Spain imports fleets of gold from the new world, squanders it in Habsburg dynastic wars, and then serially defaults on its debt starting in 1557.

The Dutch and then the English strengthen their empires with the invention of central banking, including the Bank of England in 1694, and careful management of a national debt.

Finance strengthens the sinews of war. Or destroys them. Spain disappears as a great power. England's Royal Navy comes to rule the waves.

France impoverishes itself with John Law's Bank disaster. The South Sea bubble causes wild swings of optimism and despair in England in 1720. Bank notes begin to circulate. Stock exchanges begin in coffee houses.

Alexander Hamilton transforms the future of the United States when he does a deal with Thomas Jefferson in 1790. He agrees southern states will get the new national capital, instead of the current location and his own home of New York City. In return Jefferson agrees the federal government will assume state revolutionary war debts and create a national debt. America would not just be a nation of yeoman farmers, as in Jefferson's vision. It would be a financial and industrial and military power. New York City eventually becomes the largest, richest city on the planet, while Washington D.C. remains a small empty southern town right up to the New Deal in the 1930s.

Inflation, sovereign default, credit booms and busts, vast wealth and sudden indigence come and go. Money becomes abstract, related to confidence, sovereign power, property, prudence and ideas of liberty.

The world starts becoming one interlinked, globalized economy. Money turns into an international system, most importantly the gold standard in the 19th century. Major currencies are linked together by strictly maintained values in gold. Movements of gold for settling international payments would inflate or deflate domestic economies, and increasingly causing outrage among farmers and workers. William Cullen Bryant's speech to the Democratic Party Convention in 1896 is the most famous example:

"Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

But that in a sense is just what happened well into the 1920s and 1930s. The first world war forced countries off the gold standard. The war caused immense inflation, as many governments simply printed money to pay obligations rather than raise taxes. Much of the gold reserves in the world also flowed to the safer USA.

Liaquat Ahamed tells the story in his book Lords of Finance: The Bankers Who Broke the World of how Winton Churchill disastrously put Britain back on the gold standard in 1925. It led to worsening mass unemployment and helped cause the general strike of 1926. Before long the whole world financial and trading system collapsed.


(I will have more to say about this political change later, in reference to Karl Polanyi's bookThe Great Transformation: The Political and Economic Origins of Our Time. Polanyi argues the gold standard soon became politically impossible after democracy meant populations would no longer accept the dislocation of deflation. The current monetary system became socially impossible.)

The interesting thing about the abortive restoration of the gold standard was the conviction among most Treasury officials, central bankers and economists that a return to the gold standard was both practically essential and morally necessary to restore the confidence of savers. ( Of course, inflation did ravage savers for much of the next seventy years.)

The gold standard meant governments could not interfere with or debase the currency. But economic aims alone are no longer sustainable in the twentieth century. The public will not accept the insecurity and volatility and u employment the link to gold apparently brings.

So governments loosen the system, effectively turning it into a dollar standard. Countries settle their accounts in US dollars (or in theory IMF special drawing rights). There is a residual link to gold, but it no longer automatically determines a country's money supply.

The Bretton Woods system of fixed exchange rates, as it is known, remains largely stable for thirty years. This is partly because international financial markets are hobbled. Capital flows are restricted, and exchange controls even apply to ordinary tourists in many countries. There are strict limits on how many pounds sterling a person can exchange for US dollars, for example. Currencies are not fully convertible.

But the Bretton Woods system breaks down in 1971 when Nixon breaks the dollar's link to gold. Currencies float freely, which helps countries adjust to the oil shocks of the 1970s and 1980s. Inflation breaks out. Currencies swing dramatically, despite international efforts like the Plaza accord in 1985.

Soon politicians want to use the monetary system for political ends again. The European Union links the DM, Franc and other currencies into an exchange-rate mechanism. It then evolves into a full-scale currency, the euro, in 1999 and its own banknotes in 2002. China links its currency to the US dollar. It purchases vast amounts of US treasury debt to keep the yuan's value from rising and its exports competitive.

And so to this week, when the euro is tearing itself apart and China is in an unsustainable boom. American consumers are overindebted and underspending. Markets are fragile. People are nervous. The monetary system is at the very heart of the problems.

Our ideas of money and the mechanisms and values money represent can upend society. And so we must be careful to neither stick to an outdated, rigid conception of money, nor allow it to be so flexible that soaring debt, sovereign default and depression are the result.

And here's the real point: our current problems - sovereign debt, recession, economic slowdown - are not just a matter of arithmetic. It is not just a matter of taxes and revenues and spending and credit and demand. It is not just a matter of the size of government.

It is a problem with our conception of money, its functions and limits and boundaries, just as so many times in the past.

As the nature of the economy changes, the nature of money changes. And vice versa.

Social Credit

The discussion of Fisher's "Chicago Plan" below reminded me of another monetary reform movement -Social Credit, proposed by British Engineer C. H. Douglas in 1924. It had much traction in the 1920s and 1930s, and lasted into the 1980s in some variants. The ideas proved very attractive in Western Canada, especially Alberta. The British Columbia Social Credit Party, the SocReds, ruled the province for forty years, until it imploded in 1991, although it had abandoned most of the earlier monetary ideas.

Much of the theory is a little hoary, like Douglass's "A+B theorem" which appears to overlook multiplier effects. But some of it appears of contemporary relevance. For example, he emphasizes the stock of knowledge and technique and wealth. From the Wikipedia article:

Douglas disagreed with classical economists who divided the factors of production into only land, labour and capital. While Douglas did not deny these factors in production, he believed the “cultural inheritance of society” was the primary factor. Cultural inheritance is defined as the knowledge, technique and processes that have been handed down to us incrementally from the origins of civilization. Consequently, mankind does not have to keep “reinventing the wheel”. “We are merely the administrators of that cultural inheritance, and to that extent the cultural inheritance is the property of all of us, without exception.”[9] Adam Smith, David Ricardo and Karl Marx claimed that labour creates all value. While Douglas did not deny that all costs are ultimately due to labour charges of some sort (past or present), he denied that the present labour of the world creates all wealth.

And he was correct in focusing on the nature of money:

According to economists, money is a medium of exchange. Douglas argued that this may have once been the case when the majority of wealth was produced by individuals who subsequently exchanged it with each other. But in modern economies, division of labour splits production into multiple processes, and wealth is produced by people working in association with each other. For instance, an automobile worker does not produce any wealth (i.e., the automobile) by himself, but only in conjunction with other auto workers, the producers of roads, gasoline, insurance, etc. In this view, wealth is a pool upon which people can draw, and money becomes a ticketing system. The efficiency gained by individuals cooperating in the productive process was coined by Douglas as the “unearned increment of association” – historic accumulations of which constitute what Douglas called the cultural heritage. The means of drawing upon this pool is money distributed by the banking system.

Douglas believed that money should not be regarded as a commodity but rather as a ticket, a means of distribution of production.

He was also very conscious of the issue of abundance, which I am very interested in. Scarcity is no longer the essential problem of mankind, but distribution (and incentivizing innovation and good behavior).

Douglas also claimed the problem of production, or scarcity, had long been solved. The new problem was one of distribution. However; so long as orthodox economics makes scarcity a value, banks will continue to believe that they are creating value for the money they produce by making it scarce.[20] Douglas criticized the banking system on two counts:

for being a form of government which has been centralizing its power for centuries, and

for claiming ownership of the money they create.

The former Douglas identified as being anti-social in policy.[21] The latter he claimed was equivalent to claiming ownership of the nation.[22] According to Douglas, money is merely an abstract representation of the real credit of the community, which is the ability of the community to deliver goods and services, when and where they are required.

He proposed a "national dividend" to consumers, a form of basic income, to make up for inherent deficiencies in effective demand.

I don't think the solutions he proposes necessarily work out, although I haven't read the original books and papers. But much of the diagnosis is intriguingly correct.

 

Risk-taking and virtue

I've been thinking more about how we see the world if we use the older Aristotelian tradition of the virtues, following on my discussion of After Virtue below.

Why should anyone care? Is this not quite an abstract philosophical question remote from an economy beset by debt, unemployment, and the rancid remains of a vast financial crash?

We should care because it affects the incentives we live by and the kind of rules our lives follow, the kind of behavior we encourage and respect and therefore the kind of economy and society we have.

Something has gone terribly wrong with our incentives. And that is why going back to our fundamental assumptions about what we admire and encourage is a good idea.

Let's take a concrete example. The right and the business community often argues we need to reward risk-taking - for example, starting a business or investing in a risky venture. Or trading CDOs or swaptions.

But it does not have to be purely a matter of monetary incentives to take risks, or monetary compensation for successful outcomes.

Risk-taking is in many ways a version of one of the older virtues - courage. And it lies, like other virtues, between two vices. There is rashness or speculative excess on the one hand. And there is being too conservative, too cautious and unwilling to have any skin in the game on the other.

In McIntyre's scheme, the general virtue, like courage or honesty, is exercised in a specific practice - being an entrepreneur or investor, say - and embedded in institutions which provide external rewards.

The economic issue is getting people to take the right degree of risk. And it is that which the bonus incentives in the banks obscured. (It is more than just a principal-agent problem, in technical economic terms as well.)

So you get ought to get respect and a reward for exercising the virtue, not just - or even primarily - the monetary reward.

It makes risk-taking a matter of character and judgment, not just probability and math. That is also attractive.

Many of the explanations for the financial crisis come down to excessive incentives to take risks. So a different way to look at risk behavior matters, beyond just the expected payoff, value-at-risk or hedging strategy. Risk is not probability ( a theme I will return to later.)

Money and Virtue

One of our problems is virtue is invisible to money. The worst cowardly vicious thief can still be rich. Money is value-neutral. That is one of its advantages in a liberal society. Money can be a means to any end.

And that is why many groups - the great religions, the older professions and academia, the arts and sciences, aristocracy and military castes - have always been suspicious of money. It did not usually prove any worth, even if they still liked to have it.

Indeed, it could often undercut other values. Traditional societies tend to corrode quite quickly in the face of the vigor, energy and flexibility of monetary, commercial societies.

Merchants were looked down upon by the priestly and aristocratic castes of traditional societies. In India, for example, Brahmins and Kshatriyas looked down upon the Vaisya merchant castes, and all looked down upon the laboring Shudra castes.

These days we are very suspicious of distinctions of respect or status, or any incentives which are not monetary. Older ideas like honor or duty have faded away. And maybe often that is a good thing. Nationalism or ethnic identity sometimes rears its head.

But we have few incentives other than money - and perhaps celebrity and political power - to motivate people in broader society. Maybe that is where a lot of the problem lies.

It's another coffee shop question.

What should our incentives be?

How you Evade Collapse in Dynamic Systems

We're talking about Jane Jacob's book, The Nature of Economies, starting here. So, as we saw in the last post, differentiation and expansion change an economy over time just like a natural ecosystem.

But how does it maintain itself? How does it evade collapse? Traditional economics tended to believe the economy had a natural equilibrium. But you can't just assume stability (as if we could doubt that when we look at the current economic situation.) Natural systems continually have to adapt to change. They can and do collapse. And so Jacobs, in her evocative dialogue, looks at how that happens.

The economy is not a static entity. It a dynamic system, and , says Jacobs, there are four main methods by which dynamic systems evade collapse: bifurcations, positive-feedback loops, negative feedback controls, and emergency adaptations. They do not exclude each other. All four can be used at the same time.

A bifurcation, she says , is a term from chaos theory. It literally means a fork in the road. It is when

A system's instabilities of some sort have become so serious that for it to continue operating as it has been is not a practical option. It must make a radical change - take a fork in the road, travel into new territory.p87

For example, when Rome outgrew its water supply the Romans built aqueducts. A small business may evade collapse by finding a new market or producing a new product. Bifurcations change the very systems that gave them birth.

But they often have unintended and even unforeseeable consequences.

We live on an eternally restless planet. .. Its very creativity and fecundity require endless further corrections. No help for that. Pessimistically, we can despair at being trapped in economic and social systems impossible to perfect or even to make tolerably secure except, at best , for the time being. Or optimistically, we can take zest in the fact that the world affords, among its riches, endless streams of interesting and constructive opportunities to correct and correct and correct what we do. (p92).

Sometimes the only way to survive is to change - to find a new niche, to adapt.

Feedback

Feedback is at the heart of maintaining stability. First, positive feedback loops:

Ecosystems are crammed with loops... Plants support animals that help fertilize plants; luxuriant plant growth supports more animals , and so on. It's impossible to imagine how either ecosystems or economies could fend off collapse in the absence of beneficent loops... Positive-feedback loops are the very structure, the very context within which bifurcations and diversity can emerge. (p94)

Feedback refers to information regarding a system that the system reports and responds to. This information can be carried by any medium - monetary, demographic, mechanical, chemical, electrical, whatever. The feedback triggers an effective response to its information. (p95)

The emphasis on feedback is very interesting. It is a more generalized and fruitful way to look at a wide range of economic and business behavior.

This is no doubt what is going on when a lot of more advanced companies search for "metrics". It's a matter of finding information that can be responded to to keep a balance. And that is what the price system does as well for the economy. There certainly was little emphasis on feedback as such in my economics textbooks at college.


It is not all good news, however. Positive feedback loops can sometimes turn into vicious circles of one problem reinforcing itself. In the wrong circumstances positive feedback intensify instability, she says. For example, overfishing led to investment in larger trawlers to maintain the value of the catch and employment, and the Grand Banks ecosystem collapsed.

Incidentally, "positive" and "negative" just refer to a tendency to reinforce or cancel out information, not any kind of value judgement.

That brings us to negative feedback. In fact, in her view Adam Smith was far ahead of naturalists in seeing prices as feedback information, although he didn't use the term. High prices stimulated production. Continual adjustments in negative feedback loops "created order out of volatile, uncoordinated confusing conglomerations of countless different enterprises and individuals, narrowly pursuing countless picayune opportunities and their own interests."

But, she argues, "economics failed to progress much further as a science", because it tried to make this one negative feedback concept explain too much.

Smith overemphasized economic specialization rather than diversification. Economics in general paid no attention to self-refuelling cycles. But high prices stimulate substitutes - differentiation - as well as more supply. The system changes. That element of innovation and new niches did not get enough attention.

However, Jabobs says, Smith was brilliant in realizing that feedback is only as good as the accuracy of the reporting of its information. So distorted prices - and inflation - are still seen today as fundamental problems for the economy.

In fact, as a sidenote, this is one of the paradoxes of central banking. It is hard to demonstrate that inflation causes as much damage as the public (or central bankers) believe, at least at steady rates in the single digits. The main avenue is to argue that inflation distorts price signals and hence reduces allocative efficiency. But this does not produce much actual evidence of problems. People and institutiions. easily adapt to that. In fact, the real reason for public hatred of inflation likely has more to do with the credibility and legitimacy of government, and the distribution of costs between creditors and debtors.

In any case, money is the main feedback mechanism in the economy. But it is not the only feedback mechanism that can or should exist.

Nature says money is a feedback-carrying mechanism.. Money is useful to economic self-regulation in the process we've come to call negative feedback control. But the usefulness of money is far from enough to explain how economies work. p12

I completely agree with this. We tend to reify money, but it is a tool, an institution which is constantly changing. We looked at some of the history of money here.

Crisis - and non-crisis

Finally, the fourth category of corrections are emergency adaptations to address temporary instabilities. For example, animals hibernate, plants adapt to survive droughts or forest fires or hurricanes. Bodies fight disease through fever.

But such crisis reactions can be damaging if kept on after the end of the crisis, as often happens. Keynes' deficit financing, she says, was intended to be a new negative feedback control which would keep the economy on course like a steersman correcting the course of a ship. But most governments hung on to it in good times as well, which created a "vicious circle of intractable indebtedness."

These four factors, she says, round out the key processes that maintain stability. There may be others, but it's not clear what they would be.

So to understand how economies work, don't think so much about fiscal policy in isolation, or quantitative easing. Think about feedback and loops and ecology.

I think this is highly persuasive, and at a generalized level ought to be applied to any ideas about how the economy ought to work better. It is also something else to bear in mind when we think about incentives. Incentives ought to be seen as part of those four mechanisms, not in isolation.

There's just a little more to say - about niches and fitness.

 

So this means ....

Money is not as simple as the coins or notes in your pocket.

It has a history; it has constantly evolved, together with related social technologies like credit, banking, accountancy and the state;

It is very different to even fifty years ago ; a world system of fixed exchange rates and restricted capital flows has changed into an unstable interlinked, complex web;

We are not very good at understanding its nature, as shown by inflation - the cancer of money- asset bubbles and financial disasters.

Money depend on institutions and trust and confidence.

If the whole economy is changing, the nature of money inevitably is too.

We use money to keep the score ... But what is it for?

The joy of shared public goods

G and I were walking along the Hudson river last night, in Battery Park and Hudson River Park. It was just beautiful. The design is remarkable- railings, brickwork, stone, beautiful local grasses and trees, places to sit, and views out on the water. This is the kind of social spending - on public goods which can be accessed or used by everybody - which should not be cut, but increased as society gets richer. National parks, libraries, road systems, open air concerts, summer festivals. It doesn't have to be purely governmental spending, either, as the Central Park Conservancy or the Business Improvement Districts which spend money on streetscapes in New York show. National Defense and law and order are also public goods in a broader sense.

The problem is most governmental spending is increasingly direct transfers to specific individuals - redistribution or welfare spending or pensions. These are generally private goods, consumed by their recipients alone.

And I think that is why government spending and tax has become increasingly controversial in the US. You may have social objectives for the spending, to be sure, like limiting poverty among the elderly. But the universal nature of social security or Medicare mean much of the spending is a direct transfer to well-off individuals.

There is also an increasing public perception that much public money is used to benefit the special interests in Washington, whether big corporations, banks, or teachers' unions. It is not spending for the common good. ( I also talked about this here.)

So part of the tea party rage is of course a matter of arithmetic - the size and upward trend of the deficits. But I think there is a much broader and deeper problem with the legitimacy of government taxation and spending. To many, tax looks more like confiscation, forcibly exacted to benefit others and to serve ends which are not your own.

Tax has lost touch with the common good. And I see that as a real problem, because I think many things in the federal budget should be increased. Cancer or energy research, for example. NASA. NOAA. But everything could be degraded by a general fratricidal fight over overall taxation and spend levels, and the size of the government.

We need instead a better debate about what government spending should do. The progressive left, in using government as a tool for their social objectives or distributional goals, is going to end up squeezing or destroying spending on the common good and public resources which benefit everybody. Welfare spending is going to delegitimize spending on public goods in general. We have beautiful parks in New York. But we increasingly need private money and local hypothecated taxes on people within the immediate area of a few blocks to make them work.

Yes, the tea party may need to be more flexible on taxes. But progressive social spending has also reached the limits of its legitimacy. A lot of people do not want to be taxed to support progressive goals. Government cannot be a device to transfer money from struggling working age familiies to the increasingly wealthy elderly, for one thing

Arguing against abundance and Keynes

Here is an alternative view on abundance, by Stephen Moore of the powerful low-tax campaign group Club For Growth. He argues that the Keynesian idea that abundance can be a problem is just not true.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

There is no doubt that lack of goods can , and IS, a huge problem for much of humanity, and that Soviet Russia was a slow-moving economic catastrophe.

Demand is not the issue for me. I am not inclined to defend standard Keynesianism. In the simplistic sense, that is not so much about a problem of abundance as too many goods chasing too little buying power at a point in time. The actual level of income and wealth At at point in time can be very low.

This is obvious if you think about it. Keynes thought there was insufficient demand in the Great Depression. But society was less than quarter as wealthy and abundant as it is today.

Moore is arguing microeconomics works, and the aggregate macroeconomics of demand management has led us astray. But this is still a debate about managing the economy over the cycle, not the long haul. At some point the flows in the economy get dominated by the transformations in the economy, like ice changing to water which later changes to steam.

There are plenty of entrepreneurs who are innovating now not to give us new products to buy, but new products we get for free. This very web hosting service, blogger, is an example. I don't pay Google a cent for it, even if they can make money by using it to sell other services like advertising.

The very fact that so many needs are becoming very cheap relative to income - but some are not - changes the nature of the economy and people's lives.

The reason I keep coming back to Keynes' partially whimsical essay Economic Possibilities for our Grandchildren is because it takes a long range view. What happens when abundance is not the primary problem, but a stage we've already achieved? When many valuable things are given away for free, or drug patents expire, and copyrights time out?

There are clearly no consumers lined up to desperately buy things off empty shelves in the US. But a lot of people in the middle class still struggle with making ends meet in this, the wealthiest and most powerful country in recorded history.

A lot of the problem is that money is an enormously powerful tool, but it also evolves and has its own problems. "Money illusion" is a well-known term in economics, largely about being unable to understand the effects of inflation. But problems of misperception of money go much deeper.

You're wrong, Mr Nobel Laureate

Joseph Stiglitz has an article in Vanity Fair which argues that although monetary policy helped cause the crisis, it can't fix it. Only a huge new investment program can. He says that his research shows that the Great Depression is better understood as a weakened economy undergoing structural change even before policy errors or trade wars hit.

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery

Fixing the banking system isn't enough, he argues.

The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

The problem is his suggested cures are all standard liberal nostrums. He may be a Nobel-winning economist, but his ideas at least in this case lack imagination. Huge new government spending programs for "investment" and higher taxes. More money for education, more money to help the states to close budget shortfalls.

In other words, more money flowing to public service unions that reliably fund Democrats and boost their pensions at the expense of public services.

I agree when he argues we need more money spent on infrastructure. That, at least, is genuine 'investment'. But it has to be sensible investment, not pork.
"Today we are moving from manufacturing to a service economy.", he says. No, we're not. We're moving from a service economy to something which lies beyond an service economy. He doesn't get that the problem is actually deeper than he concedes. And THAT's the problem.

Romney: Inspired by Paper-Clips

I was left cold by Romney's speech last night. I found the speech a focus-group-driven attempt to tick boxes for various demographics. It was bland, politics-as-usual, and timid.

We learned much more about his personal inclinations. Some of that was frankly impressive, especially the stories of helping others as a pastor. He is an accomplished man, with a lovely family.

But he just does not seem to have any ideas, or desire to do specific things. He is an administrator, not a leader. Any politician in the last sixty years could - and mostly did - promise to create jobs. That is not new.

He claimed he would run the economy better because of his business experience. (I guess we can just be glad he didn't break out PowerPoint slides.) But we heard a lot back in 2000 about how George W. was the first President with an MBA, too. It didn't work out so well.

 

There is too much emphasis on vague business talk, and too little about where he wants to take the country. He wants the keys to the car, but just wants to leave it in the garage while he tinkers with the engine.

He tried to talk more about his own life story. But his primary problem is not woodenness or reticence. It is a sense of purpose. It's the vision thing.

You can't simply extol "business" as a vague catch-all term of praise, and think that is enough of a sense of direction.

America has a well-justified fascination with the entrepreneur who starts with nothing except an idea in an empty garage, and builds something great. It is the contemporary version of the pioneer who heads off to the frontier and builds a cabin with his own hands. Building something new on the frontier strikes all the right chords. It's a dream with deep roots. That's what the signs in the hall "We Built It" are trying to evoke.

But the reason to respect business is not the Fortune-500 courtier or bureaucrat, administering the routine budgeting and HR policies. It isn't the massive corporation or bank with a smooth lobbying operation in DC. It isn't the rentier and coupon-clipper or the smarter tax lawyer. That's not the essence of America. There were plenty of courtiers and big organization people at the court of George III.

Instead, it is the streak of innovation and daring and flexibility that we should praise. It is the sailing off to an unknown shore, like the Pilgrims. It is the cabin in the wilderness. It is the lure of the open road and the distant peaks.

But what did we see last night? What did Bain Capital contribute to America? Staples, we heard. A slightly cheaper place to buy paper clips. Mitt was very focused on the price of paper clips.

Paper Clips.

Sigh.

I find it hard to imagine voting Democrat. To me, they're tainted by their hard left wing. And Obama certainly does not have an inspiring record as a "community organizer." But I really don't find this paper-clip driven Romney approach very ... inspiring.


I am deeply skeptical about his private equity experience. Private equity is mostly not about frontiers or new visions or markets. (Not even venture capital does that these days). It is the paper-clip driven side of business.

I've seen one episode of private equity investment up close, and I found them to be accountancy-driven, out-of-touch failures, with little understanding of actual business growth or strategy. (They lost a lot of money, too). They could ride a credit bubble, yes, and make a lot of money over time because of attractive tax treatment of carried interest. But bank covenants were more important than hard thinking about the product or customers. Financial engineering substituted for understanding the market. It wasn't business skill or daring or understanding customers, or a desire to innovate. All they had to do was leverage up and collect checks.

Private equity is often largely an ability to negotiate financing from foolish banks at attractive terms. It is more like crony capitalism than genuine wealth creation or innovation. There's not much difference between many private equity honchos and Chinese Communist Party apparatchiks who make a lot of money out of borrowing money at preferential terms from the tame state bank, and milking dividends while the going is good. With enough loose credit, anyone can look like a business genius - for a while. That isn't a skill which is going to put America back to work.

What America needs is not really better administration - although it wouldn't hurt. It isn't simply a negative vision of cutting back government.

It is a sense of the renewal of the promise of America. And America is more than just dreaming of a cheaper paper-clip. It isn't more efficiency we need. It's a sense of purpose.

 

Aristotle: Household, Wealth, Common Property

We're talking about Aristotle's The Politics , starting here.

The household

The first few chapters, on the household, do seem like a relic of a distant 350 BC, and are best hurried through. It is hard to relate to the small farms or city households of ancient Athens or the Troad. This household management, oikonomia , is however the origin of the term "economic."

Most objectionately to modern readers, he believes some people lack the capacity for deliberative reason, so that they are slaves by nature ( although ancient slavery was not racially based). He also takes for granted strict division between the sexes. The head of the household must have moral virtue in its entirety; others, such as women, children, and slaves, in lesser degree.

He was perhaps more enlightened than many of his time , but he was of his time. He took for granted that, as a matter of practical necessity, some had to labor, not least because they were not suited to do anything else.

Of course, for us automation has removed much of the raw mechanical labor from life, although the economy still has an insatiable appetite for cheap labor in many agricultural and service industries. And we more optimistic about people's capacity for reason (although sometimes I wonder, if you see any episode of Access Hollywood or other celebrity glop).

What he says also entails one expects much more from the free, independent head of household in moral terms than children or servants or dependents. We still believe that of children, of course. Perhaps the capacity for moral virtue differs, and that is something we set aside in contemporary debate.

Wealth

He talks about the acquisition of property, and the definition of wealth. Wealth, properly thought of, is a tool:

Solon in one of his poems said "no bound is set on riches for men." But there is a limit, as in the other skills; for none of them have any tools which are unlimited in size or number, and wealth is a collection of tools for use in the administration of a household or state. (P 79 in the Penguin edition).

Of course, one can acquire goods without limit, but the function of the household is to use them.

The reason why some people get this notion into their heads may be that they are eager for life but not the good life; so, desire for life being unlimited, they desire an unlimited amount of what enables life to go on. Others again, while aiming at the good life, seek what is conducive to the pleasures of the body. So, as this too appears to depend on the possession of property, their whole activity centers to business. For where enjoyment consists in excess, men look for that skill which produces the excess that is enjoyed. (p85)

This of course is still a live political issue - is there a point where we have enough? How much is enough? (the title of a book I looked out a few weeks ago). It is also very much linked to questions of environmentalism. There is a very old tradition which sees the answer to human happiness not in prosperity and abundance but in limiting human desires. That ancient ascetic creed can surface today in those who want us to abandon growth and return to a significantly simpler lifestyle.

I think the answer is it is almost impossible to define what "enough" is, or what wealth itself is, without some conception of the good life and flourishing. Seeing wealth primarily as a tool for particular purposes, something to use and activate, rather than a pile of gold or financial assets is productive. It can be hard to transform financial assets into a flourishing, happy, secure life, as many celebrity divorcees or high-profile occupational burnouts know.

Aristotle also somewhat disapproves of trade and charging interest, "since it arises not from nature but from men's gaining from each other", views which were to still resonate late into the modern period, and underpinned nobility looking down on the merchant classes. We have seen this before, (including a quote from the Politics) in the deep suspicion of many religious and philosophical traditions of the institution of money.

But pragmatist that he is, he can have a shrewd appreciation of business. Thales of Miletus, he says, was criticized for making little money from philosophy. So one year he cornered the olive oil presses on his island just before a good harvest.

He made a lot of money, and so demonstrated that it is easy for philosophers to become rich, if they want to; but that is not their object in life. .. the principle can be applied more generally: the way to make money is to get, if you can, monopoly for yourself. (P90).

And that is also why we have to be very careful of monopolies and businsss restrictions and regulation sometimes.

It is also an illustration of how most ideas in the humanities and social sciences are rediscoveries or permutations of much older themes. Michael Porter would advise the way to profitability is to build barriers to entry (Competitive Strategy: Techniques for Analyzing Industries and Competitors). Warren Buffett looks for businesses with a "moat."

Against common property

Aristotle then turns to the state and comparative politics, looking at a number of constitutions including Athens, Sparta, Crete and Carthage.

He has a modern skepticism for Plato's notion of communal ownership or modern socialist property, not to mention sharing wives and children:

The greater the number of owners, the less respect for common property. People are much more careful of their personal possessions than of those owned communally; they exercise care over common property only insofar as they are personally affected. Other reasons apart, the thought that someone else is looking after it tends to make them careless of it. P108

That is also true for organizations, which is why assigning responsibility and accountability is often so important.

What was later called "to each according to his needs" is also met with skepticism by Aristotle.

For if the work done and the benefits accrued are equal, well and good; but if not, there will inevitably be ill-feeling between those who get a good income without doing much work and those who work harder but get no corresponding extra benefit. To live together and share in any human concern is hard enough to achieve at the best of times, and such a state of affairs makes it doubly hard. P114

This has a very contemporary ring about it, no doubt because it is such a timeless human response. So common ownership of property has inherent difficulties. At least, he says, existing laws are strengthened by familiarity.

Far better is the present system - provided that it has the added attraction of being a matter of habit and of being controlled by sound laws.

Even if you could fix a level of common possessions, and achieve absolute material equality,

to fix a moderate amount for all, that would still be no use: for it is more necessary to equalize appetites than possesions, and that can only be done by adequate education under the laws. ... And civil strife is caused by inequality in distinctions no less than inequality in property, though for opposite reasons on each side; that is to say, the many are incensed by the inequality in property, whereas more accomplished people are incensed if honors are shared equally, for then, as the tag has it, 'good and bad are held in equal esteem. p129

This is very important for my interests, as an obvious response to economic abundance is some kind of minimum or basic income. It is an essential illustration of the issues which surround distribution more generally.

The matter of equal esteem and distinctions is also important. It suggests the difficulties of those small slivers of society which have actually achieved abundance in the past. The behavior of aristocracies (or as Aristotle would more likely say, oligarchies) is highly instructive. When landed estates mean they have no immediate material needs, the result has often been a focus on rank and status and courtier affectation, not a higher form of achievement or freedom.

It also is clear that many of our contemporary political issues are claims or conflicts about equality of esteem, more than economic equality.

Moreoever,

Secondly, the depravity of mankind is an insatiable thing. At first they are content with a dole of a mere two obols, then, when that is traditional, they go on asking for more and their demands become unlimited. For there is no natural limit to wants and most people spend their lives trying to satisfy them. p131

Such is the fate of the welfare state as it develops toward fiscal catastrophe, perhaps. And it is a general warning about the complications and difficulties of redistributing wealth.

In general, he is concerned with the immediate psychology of how people will see things and behave in practice, rather than ultimate principle, which is why it is useful wisdom.

We of course instinctively see how what he says helps explain why the USSR and other communist states got into trouble. But it is also a warning against some of our own practices, though that may be harder to see.

 

Change

He is very conservative with a small c.

.. it is clear that there are some occasions which call for change and that there are some laws that need to be changed. But looking at it in another way we must say that there will be need of the very greatest caution. ..A man will receive less benefit from changing a law than damage from becoming accustomed to disobeying authority. .. The law has no power to secure obedience save the power of habit, and that takes a long time to become effective. Hence easy change from established laws to new laws means weakening the power of the law. p138-9

Habituation is a major theme in his ethical approach. There can be significant downside to basing institutions and expectations on the thin and fragile ground of rational choice alone.

What should reformers take from that? Not that reform or major change is impossible, or ought not to be attempted. But that you have to be aware of the practical difficulties and downsides, and do something to avoid or confront or control them. As I said before the election, the left's dreams often turn into darkness , because they look at one shining principle at the expense of daily reality and psychology.

Progress should be measured not by intentions but by actual flourishing lives.

Of course, seeing this as wry, shrewd advice depends on assuming that some elements of human nature are constant, and the human predicament has some timeless elements that unite us with someone who lived so long ago. In international relations, there has been a long debate over Thucydides, and whether his similar observations of power politics and war and history in Ancient Greece (The History of the Peloponnesian War) still have application today.  

I would say that we do advance a little in social understanding over time. But not as much as we think.

I'll look at more tomorrow.


 

 

The Coffee Shop Question restated

It has been too long since I restated the questions underlying this blog. Here is my take back in August.

How do we deal with abundance in the economy so we get the most of what we actually want?

I still think this is a good starting point. The different themes are marinating in my mind as I read different books and articles, but every so often they need to be brought together.
Let's break it down into separate arguments and propositions. (This is much longer than any previous entry.)

What people want

1. Most of our economic problems as a society are not problems of scarcity any more. They are problems of abundance.

We can increasingly produce the goods and services that we want for very little money. Our problem (at least in the west) is not hunger. It's obesity. It's not lack of possessions. It's where to put them.
Some things are still scarce , including energy. And much of the developing world, especially Africa, is still lacking in many essentials. But many of our instincts and ideas, developed over countless millennia of scarcity, are now wrong.

2. Problems of abundance require we have to make skillful choices about what we want.

If the "economic problem " as Keynes called it, is solved and basic necessities are taken care of, we have to think about what we want to do with our resources. Keynes thought the problem of leisure would come to dominate society, based on the bored, frustrated wealthy upper classes he saw at the time. Wealthy aristocracies in the past have generally squandered their wealth on status competition, court politics and war.

3. People increasingly want not more stuff, but more engagement, more purpose, more connection, and more meaning.

They want life to be interesting and varied and stimulating. Why do people pay so much to live squeezed in small apartments in cities like New York or Paris? Because every day is different in a big city.
People want to feel independent. They want to feel connected with others. They want to feel a sense of achievement and satisfaction with their lives.

We have a huge welfare state to provide basic incomes to people.But the recipients people are often bored, drifting, disconsolate and socially isolated. Income or monetary transfers alone are not enough to make people happy.

The failure of our frameworks

4. Most of our thinking on ethics and social science and political philosophy in the last fifty years completely ignored what we want.

Consumer preferences were taken as a given in economics. Liberal political theory stressed the neutrality of the state, and process above ends (with the exception of equality).

Psychology has offered some ideas, including, famously, Maslow's hierarchy of needs. And other issues like enviromentalism have supplied some new purposes, like sustainability. But we don't ask enough what our needs are now that basic material needs are largely satisfied.

Markets and evolution

5. The market system is astonishingly good at generating goods and services consumers want in an innovative and efficient way. But it is less relevant if most of the things we want are not goods and services.

People have a natural instinct to barter and exchange. The whole psychology of exchange has been vastly beneficial over time. Western societies have generally been much better off for being "nations of shopkeepers", rather than looking down on commercial activity as most societies did in the past.

6. The economy is also a naturally evolving system.

The market generates both variation and selection pressure. It creates more and more sophistication and complexity over time, just like natural evolution.

This does not mean we have to be socially darwinian, which has a bad track record. But we have to understand the actual dynamic nature of the economy, seeing it as more of a process than a static equilibrium as in traditional economics.

Government and controlling misbehavior

7. We need an immune system for survival.

Evolution of large creatures is always in a 'red queen' with parasites and viruses, which evolve even faster. And in the same way one of the essential things about an economic or political system is to motivate people not to exploit it or misbehave. Crime is just like a spreading opportunistic infection.

8. Not only is the market exchange and money system very efficient, it also is very good at that kind of incentive and control of defectors.

It contains an immune system of incentives and deprivation of income. But it also relies on many other social technologies to work well, like contract law and money.

9. The growth of the state in the 20th century reflected the evolution of the economy.

Many of the things we wanted as society grew wealthier were not goods and services. Democracy gre in the 19th century as a wealthier middle class wanted participation in decision-making. The welfare state grew above all to provide security (next up the hierarchy of needs).

10. But the welfare state, rights, and entitlements do not have a good immune system.

They also changed incentives in a damaging way, and ithe welfare state is rapidly becoming fiscally unsustainable in its current form. This is partly because the welfare state has trouble controlling defectors, and vested interest coalitions build up to seize a permanent stream of benefits. Liberals hate the idea of the "underserving poor", but without that redistribution is increasingly difficult and government itself is undermined. Political allocation of goods and services has limits as a social technology. Sometimes stigmas are actually functional. Culture matters.

11. As government has evolved away from public goods, it has become more controversial and inefficient.

Government was originally about defense and other public goods (such as roads, harbors or the mail). Big government was the new tool of the 20th century, to deliver income security and medical benefits. Redistribution and provision of a social safety net scaled back the operation of the market in society. Much of the political debate in the last thirty years has got stuck on the size of the state versus the market.

Employment, Jobs and Work

12. The pace of change can outrun our ability to deal with it.

Productivity is going through a major acceleration again. Much of the routine jobs in society may disappear. But social technologies take time to adapt and compensate.

13. It may also outrun our ability to create new jobs.

In the past, technological change destroyed old jobs but created many new ones. 95% of people used to work on the farm. Now in developed countries like the US less than 5% do. Manufacturing grew, and then the service economy. There are more people employed than ever.

But this latest wave of change may not create new jobs in the formal economy, because we do not want more traded exchanges. Money can't buy you love, as the song goes.

14. The new goods and services that we enthusiastically embrace don't employ many people, and are often given away free because the marginal cost is so low.

Apple is the most valuable company in the world, but does not employ many people. It employs even less if you count out the retail stores. Many people are employed producing iphones and macbooks in factories in China, but even there, the manufacturing company is planning to automate most of the production.

15. This is a major problem because jobs are the bedrock of the market economy.

We have known for decades that GDP is not closely related to happiness or social welfare or sustainability. The reason that we still persistently care about GDP data so much is because it is closely linked to availability of jobs.

Jobs are far and away our source of income, and we need income to survive. Jobs define much of people's identity and provide (at least in better jobs) much of their sense of purpose. But the whole notion of the paid job in the formal sector could be in trouble.

Income, Wealth and Assets

16. The problem is we think primarily in streams of income, rather than assets and ownership structures.

Ownership and property are both social technologies and institutions which constantly evolve. We used to have a feudal system in the west, with grants from the monarch in return for services owed. Land used to be the primary form of wealth and ownership. Communal forms such as monasteries and colleges owned much of the land. Precious metal was the primary form of liquid wealth.

But we have created new kinds of assets - joint stock corporations and equity markets, paper money, fractional reserve banking, Financial markets display far too much ingenuity for their own good creating new kinds of assets and legal structures, such as credit default swaps or esoteric options.

17. Many of the valuable things in society are increasingly intangible, with very low marginal costs.

Many of the most important assets in the economy are intangible altogether, like human capital, organizational skills and culture, or patents.

Capital is not factories any more, so much as knowledge. But knowledge is very different from tangible ownership. It needs skill and education to acquire, but it is easily replicable, transferrable and non-rivalrous.
 
18. We get confused about assets and have serious problems with asset bubbles and ownership.

The whole nature of the economy is changing as it is driven more by the balance sheet - valuation of assets - rather than the flow of income - GDP. We get increasingly serious booms and busts like the housing bubble. An asset-based economy is driven by expectations about the future, the discount rate (interest rates) of future events, emotions, risk and psychology. Our legal system is getting mired and blocked up dealing with patent litigation, copyright and intellectual property.

19. The changing nature of assets means we need to rethink what wealth is.

We need to think about what wealth is in a substantive sense rather than simply an accounting total. If you have one hundred million dollars in the bank, you are obviously regarded as wealthy. But what does it mean to your life? What can the wealth get you? How do you recognize wealth?

Of course it means the ability to buy luxuries or property. But that is less of a differentiator than it used to be. Every secretary in Tokyo can get her Hermes handbag. It is hard to recognize variations in wealth from clothing on the street any more. Everyone has access to latest technology and trinkets, like the new iphone. Wealthy people do not even necessarily have larger apartments or houses, even if the address is better. They just live in the Upper East Side or Kensington, rather than Crown Heights or Peckham.

Changing relative prices

20. Many of the historical changes in society are driven by changes in relative prices.

There are long-term variations in inflation, the price of land or commodities or labor, the terms of trade between manufactures and commodities, the price of different kinds of energy, and may others. Current economic changes are also driving deeper relative price changes.

21. Deflation is already taking care of much of the basic needs of society, with the exception of real estate, education and medical care.

The rising cost of university education in the US is squeezing the middle class, and the rising cost of medical care is having an increasingly devastating effect on other areas, including fiscal policy and disposable wages.

Time, Work and Leisure

22. The thing that is most scarce is time.

There is never more than 24 hours in a day. Yet we mostly squander it. We have deeply confused ideas about work and leisure. The relative cost of leisure compared with another hour of work rises as wages rise. This perversely means people are working more, driving up asset prices more, and have less time to use the things they buy.

23. Working hours are surprisingly inflexible.

People have little choice about the number of hours they work. The full-time job of 35-50 hours a week is still the core feature of most people's lives - all the more so as women moved into the labor force in the past fifty years. There is surprisingly little scope for trading off more income for more time. This is partly because it is often more efficient for employers to spread fixed costs such as benefits or office space over fewer people working longer hours. But it also reflects that our social institutions surrounding work have failed to evolve much.

24. You need some skills or education to make the most of leisure.

Few people find doing nothing at all attractive for long. More leisure time is not attractive for many if it just means more time slumped in front of the tv rather than more money.

What is the economy for?

25. We need a positive vision of human functioning, a teleology.

We need to go back to a more Aristotelian view, in which we can say some ends are better than others - at least for purposes of setting up society to further them. There is a common human nature, even if it is expressed in different religions or ideologies. Of course, people differ in their natural personality, traits and inclinations, So we always need much complexity and diversity and intricacy. But they differ within a range.

26. There is a great deal of common ground on what makes people flourish.

People have different ideas and wants and beliefs and ends. But modern liberalism has exaggerated the differences. There is a common core. And it is about more than just provision of basic means, like Rawl's primary goods. It is about more convergence on ends.

One of the most interesting things about recent work in positive psychology is it offers more unified, coherent evidence on what makes people satisfied, engaged and happy. We can move closer to ends, even if we do not specify them, instead of just focusing on providing general purpose means like money. We may never agree on people's beliefs, or theological systems, or particular cultural references for individualism or group cohesion. But we can agree on a core of practical things that help people flourish.

27.The purpose of the economy ought to be to stretch and engage people, to allow them to develop themselves, to offer stimulation and joy.

It already does much of that - as a byproduct to providing goods and services. The economy is steadily evolving to provide more engagement and stimulation. A city like New York is a vast buzzing kaleidoscope of stimulation. But we need that to be the primary aim, not to generate income to pay for market exchange of goods and services. Our intermediate objectives are increasingly leading us astray. We need to refocus on the goal itself.

New social technologies

28. The problems in the economy are not ones of scarcity. They are problems of worn-out social technologies.

Ways to cooperate and work together evolve, just as cars or microchips do. Over time, we generate new social technologies (or institutions in the broad sense). Development economists have come to realize that the main obstacle to growth in poorer countries is not actual technology or physical capital - like building factories or highways - but institutional flaws like corruption, kelptocratic government or poor protection of property rights. In the same way, in the developed world the main challenge is institutional. Many of our institutions and structures, like 20th century bureaucracy, traditional managerialism and the welfare state, are now obstacles.

29. Market prices do not capture many of the things we want.

The market will always be an important arena and social technology. But as goods and services become less of a primary aim, the market and monetary exchange ought to become less of a primary institution as well.

30. New social technologies are rapidly evolving. The software underlying the economy's hardware is rapidly being rewritten.

Examples include open source production of goods and services (like Wikipedia). and the astonishing availability of knowledge on google. The real significance of social networks or twitter may turn out to be they evolve into new ways of coordination, cooperation and participation.

Some actual technologies become social technologies, if only by displacement. Television is often a social technology for passivity and passing time.

Religion is a vastly important social technology. But it has come to play a much less central role in the west, which creates many social gaps.

31. We need new and better social technologies for our current concepts of income and wealth.

We need an institutional "land reform" to make the new economy work. People should have some assets as a matter of membership or citizenship. But we need strong incentives and ways to control defectors, or the system will rapidly lose all legitimacy.

That means proportionately less will flow through market exchanges. But this does not mean more should flow through government. This does not mean a "third way" 1990s style, with a mix of market and government solutions. It means something new, a rethink of assets and how we measure them.

32. We need new social technologies for the 21st century to help people flourish and stretch their skills.

We need new incentives for people to acquire skills and education and stimulation. Some may not be interested, or want to engage with anything. We need to understand people's preferences and choices when they have freedom much better.

33. We need to orient the system away from more provision of goods and services and towards more provision of stimulation and purpose and meaning.

We also need a more concrete sense of what the economy should deliver - the boundary of utopia. We need to focus on what it means for daily life. What would an ideal day be like? And how do we get more of them?

And that will do for today! The coffee is drunk, the table is vacated and I am about to press upload at home. I will gradually refine, rewrite and hone this in the future.

Intrinsic Rewards and Games

We're looking at Reality Is Broken: Why Games Make Us Better and How They Can Change the World, starting here.

One of the main points she makes is linking games to recent developments in the psychological theory of motivation.

 

One of the lessons of the new positive psychology is extrinsic motivation does not actually bring much happiness:

 

The researchers’ unequivocal conclusion: “The attainment of extrinsic, or ‘American Dream,’ goals—money, fame, and being considered physically attractive by others—does not contribute to happiness at all.” In fact, they reported, far from creating well-being, achieving extrinsic rewards “actually does contribute to some ill-being.”

 

Instead, happiness comes from instrinsic satisfaction, relatioships and personal growth, as a matter of empirical evidence

On the other hand, in the same study the University of Rochester researchers found that individuals who focused on intrinsically rewarding activity, working hard to develop their personal strengths and build social relationships, for example, were measurably happier over the entire two-year period completely regardless of external life circumstances like salary or social status.

Part of the reason for this is the "hedonic treadmill". As soon as we have a bigger house or car, we get used to it very quickly. It no longer brings additional happiness.

Instead, purposeful activity and experience is a more reliable way to happiness.

We wean ourselves off consumption and acquisition as sources of pleasure and develop our hedonic resilience. As research psychologist Sonja Lyubomirsky, a leading expert on intrinsic reward, explains: “One of the chief reasons for the durability of happiness activities is that . . . they are hard won. You’ve devoted time and effort.... You have made these practices happen, and you have the ability to make them happen again. This sense of capability and responsibility is a powerful boost in and of itself.”

And here's perhaps the most important point in the book. There is no inherent scarcity when it comes to contributors to happiness. Happiness does not actually rely on material goods or money or material resources.

As long as we’re focused on intrinsic and not extrinsic reward, we never run out of the raw materials for making our own happiness. We’re hardwired with neurochemical systems to make all the happiness we need. We just have to work hard at things that activate us and immerse ourselves in challenging activities we enjoy for their own sake.

We can create all the experience points and levelling up and feedback and motivation we want using similar principles to games. It doesn't count in M3 or inflation pressure. We can set up challenging activities that provide the right amount of flow if we have the right measures and technology to do so.

So games are not simply a waste of time, she says.

More importantly, it’s evidence that gamers aren’t escaping their real lives by playing games. They’re actively making their real lives more rewarding. ... Until and unless the real work world changes for the better, games like WoW will fulfill a fundamental human need: the need to feel productive. That’s what it takes for work to satisfy us: it must present us with clear, immediately actionable goals as well as direct, vivid feedback. World of Warcraft does all of this brilliantly, and it does so continuously. As a result, every single day, gamers worldwide spend a collective 30 million hours working in World of Warcraft

Although she doesn't put it quite this way, you can think of the game structures here as a different kind of coordination device. Money and markets are brilliant social technology to accomplish that goal, and have enjoyed increasing success for over two thousand years. But now we don't need so many material doodahs as before. We need more happiness.

Team sports have traditionally delivered a feeling of purpose and participation, but are difficult to scale and to convert into actual real accomplishment.

For now, things like World of Warcraft (which I downloaded and played for the first time over the weekend) are just games. But the technology now clearly exists to coordinate millions of people towards common purposes, with satisfying feedback and development. It has only been possible for about twenty years, and only taken off in the last ten. It is very early days.

Games are a motivation and coordination technology. They are a purpose technology. If the deepest question facing the economy now is how do we deliver more purpose, meaning and happiness rather than just material goods alone, then that is very important.

 

 

 

On the edge of another Crisis?

It was a bad day in US equities yesterday, with the S&P down 2%. US 10-year yields plunged as well, touching 2.2%. Italian yields have spiked again this morning, up 19bp at one point. There are signs of problems in European money markets. it all feels like another Lehman-style hurricane is forming.

So how do I feel about it? I have a strange kind of detachment on one level. We've seen so much stress and turmoil these last four years it doesn't seem that new any more. It doesn't have the feeling yet of dropping off a cliff into the unknown yet that October 2008 did.

But there is also a sense of more chronic, deeper cracking up going on. The fire brigade was called out in 2008 and 2009 and doused the world with liquidity. The central banks cut rates and governments spent trillions on stimulus.

We don't have those policy options now. They're done and we won't be able to put out the next fire so easily.

I just want to build up more money in cash (and not money market funds either).

I'm not selling out of equities. Like last time I'll grimly ride the storm through rather than try to time the market. There could be short-term rallies as well, especially if we occasionally get good data.

But this feels bad. Italy in particular could be a Hurricane-level storm if it continues.

Dialogue: Ethos

I've been visiting my parents. I was talking to my father about his long experience in a private school linked to one of the major Protestant mainline denominations. G is fed up trying to make people work together, I say. I remember you often said what was most important about any school was its ethos, I say, and it's very difficult to provide a good education without one?

Yes, he says. It's very much how you tell a good school from a bad one.

How do you achieve a good ethos?

Well, he says, it takes generations to achieve. It isn't something you can do quickly. But I think much of it comes down to having a clear sense of what you are aiming at, a sense of purpose. In fact, I think that is much easier when you have a religious affiliation for the school. It somehow makes having a clear aim and context more obvious. That is where many of the public, state schools have difficulty, because they can't really find that sense of purpose.

That's interesting, I say. Pubic schools have to be much more neutral.

Yes, he says. You need some kind of aim or purpose, otherwise people can get completely self-interested. They end up only interested in it for the money, or are just going through the motions. You need to have something beyond immediate self-interest that people will engage with.

I think it's more than just education where you see this, I say. Take finance. Focusing just on money hasn't worked out well even in money management, brokerage and so on. There used to be much more emphasis on keeping one's word, character, or duty towards the client. One of the underlying reasons for the crisis is we drifted away from that. I think we've placed such emphasis on neutrality and impartiality in public life that we've lost a sense of purpose, or ethos. If the ethical side has gone off the rails, nothing in the economics is going to work properly.

Yes, he says. Sounds like something you should write a book about.

Later in the day, I ask, if a school is drifting, how do you fix it? Let's say you don't have generations to build up the ethos but have to try to improve things now? How do you get people to behave better and cooperate with each other? You need to put in a new head, he says. A new leader with a new broom to clear things out. It has to be someone who doesn't care if they're popular, who are going to make sure that things are going to change. You need the right person to do that. There can be a lot of inertia and resistance, from the staff, from the students too who don't like tighter rules and expectations.

But what do they actually do, I say? What do they clean out?

You tighten things up, he says. You start with the staff, and make sure timekeeping and reporting are good. You make sure students wear their clothes or uniforms properly. You make sure classes start on time and kids are doing their homework. You'll almost certainly get resistance. People don't like change. Some of the staff will have got lazy and may leave. So you get the small things right, as if someone cares about maintaining standards. And then it's a matter of expectations. Every student, every single one is expected to do as well as they can. Not all may be academic, but all can be expected to do as well as their potential. That kind of solid expectation matters.

Interesting, I say. It's probably why even the military spend so much time initially on observation of spit and polish. Yes, probably, even if its very different, he says. Just making sure little things are tighter tends to change the atmosphere and how people behave. Otherwise people get slack and lazy.

I think organizations have a natural life cycle, I say. Bureaucracy and time-serving and risk-aversion gradually build up. Yes, he says, you can even see it in things like churches, where you may get a wave of renewal. But then the next generation comes along that doesn't feel it and it all becomes routine and taken for granted. You need occasional waves of renewal.

What happens, though, I say, if problems in a school or other organization are really entrenched and you don't have the ability or tools to change people? Shut it down, he says immediately. Sometimes that's all you can do, things get so entrenched there's no way forward and you are much better off starting fresh all over again.

It's a simplistic question, I say, but why do some people more than others resist improvement or change? They get used to the routine and don't like change? Laziness, often, he says. I don't know why. Perhaps they forget why they went into a career or organization in the first place. Routine makes them forget. Some people just want security and don't want any risk or standards or change. I suppose at some level it is just personality. Some people really are just lazy.

 

What is the value of second-tier art?

We've been travelling around the Southwest on vacation this week. We passed through Taos, NM a few days ago. Taos is a beautiful little arts town, centered around its adobe-built plaza and pueblo revival buildings. There are dozens of little galleries. The roads throughout the surrounding area have signs for "pottery this way" or "working artist." There are hundreds of artists resident in the area.

How do people make a living at it? Commercial art galleries always seem so deserted, with one staff member always at a corner desk hidden behind a computer and trying to look busy. I'd be surprised if they make more than two or three sales on a good day. The average for a painting or sculpted mirror in the area is around $750 up. Of that, probably less than half goes to the artist, and they no doubt have to pay tax on that. Better known artists in the main galleries sell for $5000 or more. Even the, only a few make a very good living. There is a limited market.

In economic terms, it's a tournament, like a sports league that starts with a hundred teams and ends up with one winner. Thousands start in the arts, only a few rise to the pinnacle and capture most of the fame and financial rewards. Success is inherently scarce. The rest hope for an occasional sale in a small gallery, but are mostly frustrated and obscure.

Most of the arts are like this. Only a tiny proportion of actors, musicians, rock bands, painters, ceramicists, opera singers "make it." Some of it is a matter of talent rising to the top, of course. But often it is sheer chance - which is why I suspect so many Hollywood artists trend liberal, as they have a sense that their wealth was chance rather than earned or justified. And very often success is a matter of skill at manipulating connections and contacts.

Art and money mix in strange ways. Selling art wraps together many different issues and flash points. It is tangled with wealth. In many cases, art IS wealth, the clearest expression of wealth that exists. The loot of the robber barons, like Frick and Carnegie and Getty and Morgan, ended up as treasure houses of art. Miners and steelworkers and wildcatters toiled for decades to produce the wealth that funded the great American museums, where their sweat has been transmuted into Picassos and Serras.

People naturally incline to spend more money in aesthetic pursuits as they grow wealthier. The first generation often makes a fortune in meat processing or engineering or finance. The children and grandchildren spend it on art. The Millicent Rogers Museum in Taos is one example. The Allerton Gardens in Kaui is another. Trust fund babes hang out in Williamsburg and write novels.

Art is tangled up with status, of course, all the more so as people increasingly have access to the same mainstream goods. You can't buy a better iPad even if you are a billionaire. They sell Prado and Armani in midwestern department stores. But you can put unique and expensive art on your walls.

Taste is the real class marker more than money.

And art is always tangled up with expression of particular values. Art is often the secular religion of the modern world, MoMA or LACMA its cathedrals. It is an expression of identity and state power and patronage.

So thinking about art, in both its aesthetic and commercial senses, tells us a lot about what people want and value when they are not materially constrained. It tells us a lot about how society may evolve in the future, as it grows wealthier. We may (hopefully) spend more wealth on beauty and aesthetic pleasure. But the art world also carries other less attractive features. It is hierarchical. It is bitchy. It is faddish and political. People can express themselves. And they can also be ignored and disdained and excluded.

There are many tiers in the art world, and despite an illustrious past Taos is not up there with New York galleries or Art Basel or the Venice Biennale.(Seven Days in the Art World is a fascinating insight into that sphere.)

The bottom tier is the souvenir and craft shops around the plaza in Taos ("schlocky", says the local guidebook). People buy turquoise necklaces and fridge magnets and made-in-china navajo rugs. Why? The human aesthetic instinct and a desire for decoration. Memories, something to give Aunt Mabel. Buying something a little more exotic than is readily available at home. It's not expensive, and it's not "art", of course. But it is aesthetic pleasure, and even average joe can buy a necklace chain for his wife with joy.

A step up from that is the second-tier galleries, which in Taos are located a block or two off the plaza. There must be so many people who paint or pot primarily as a means of self-expression, even if it means a fairly threadbare existence.

This is a fascinating thing. I've been talking throughout this blog about focusing the economy more on the ends of flourishing, developing the good life, because the sheer efficiency of the market economy is saturating lower levels of basic survival needs. For a lot of people, producing mediocre art is the thing they would love most of all to do. Is this a bad thing?

Getting into even a second-tier commercial gallery in a small remote town is an achievement in itself, something that most aspiring daubers never do. But walking around many of the smaller galleries it is difficult to avoid the thought that much of it is not very good. Real aesthetic talent stands out when you see it.

How can we tell? After all, perhaps it needs a very discriminating eye to evaluate it - although clearly the galleries here are appealing to well-healed tourists who might suddenly fall in love with a painting at random. Yet the art in the better, more expensive galleries immediately seems so much better. (We liked this one).

Finally, there is the top tier art, the realm of Sotheby's and museum curators and the jet set. There are the collectors and the dealers and the PR people. It is the art market. It is art for display and investment and scholarship, rather than love.

Yet the market tends to yield to public goods after a while. Private owners donate to public museums, and the greatest art becomes the common heritage, the common-wealth of people. Over time, the stock of those public goods, those assets, steadily grows. Maybe that tells us something too. The nature of posession changes as we go up the hierarchy of needs.

A thought experiment

Let's imagine we have an economy which before long lets people do just what they want - perhaps not at a lavish standard of living, but free to spend time as they choose. (We imagined a desert island back here). Maybe some people will just sit at the bar all day. But a lot of people will dearly love to paint, or write bad novels, or poetry, or ceramics. They will want to sit around in espresso bars and debate the latest trends. There's inherent motivation to do so.

Let's say ordinary people have more chance to indulge their aesthetic inclinations, as only rich heiresses could do in the past. What kind of society does that produce?

There is surely an independent value in having many more people able to paint and write and play in a band, even if society ends up with more unread novels and unplayed music tracks. It isn't something that many people will pay much for, of course. The exchange value is low. But there is value in letting people flourish and develop their talents - and some of it wil turn out to be astonishingly good. Perhaps more of the work will circulate by gift and exchange and donation than it ever would if people have to sell it to make a living. Perhaps everyone can have mediocre original art on their walls.

This is one of the fundamental issues we will have to confront as the economy evolves. A lot of the things people want to do have little or no market or exchange value. But people want to do them anyway. And the wealtheir or less constrained they get, the more they want do to them.

Will real aesthetic value drown in a sea of medocrity? Publishers and editors and gallery owners used to sift out the gems from the dross. But there is scope for lots of little worlds, little scenes, small groups. You may never be recognized as a major international artist. But you may be recognized as significant in Taos circles, or even in your church or reading group or extended family.

In any case, it is getting harder to define quality, at least beyond a minimum qualifying threshold. The gatekeeper role is breaking down in so many areas. You don't have to have a contract with a major publisher or know the right literary circles to get published as a novelist any more. You can upload to the world on Kindle, and it's increasingly not clear that Simon & Schuster or Penguin can market your book any better than you can. Choosing the next big hit has always involved some luck, as the rejction slips for plenty of famous novels and screenplays show.

Making it big in the art world is potentially corrupt, as well. The Poetry world, for example, seems to revolve around people giving those they know prizes and vice versa. Committees and art seem to repel each other.

Maybe we will get more mediocrity. But maybe we will also get more plurality and differetiation and local presence.

Maybe we will get less modernist originality, at least in aggregate. But we may get more beauty. A little extra aesthetic beauty can be transformative, and not even that expensive in monetary terms. A little extra design talent could alter the living conditions of all the people who live in deeply ugly tower blocks and cookie-cutter mansions.

Talent still matters. But perhaps even bad art is better than no art.

Maybe the second-tier art sometimes needs more of a purpose or an idea. It isn't always clear if the fault is in what the artist thinks will sell to uneducated consumers - demand rather than supply. And perhaps the artist's perspective often is just not that interesting. Self-expression as such just isn't that interesting to other people if it does not resonate with more universal themes. The great art of the past was mostly linked to much larger themes or subjects - religious expression in quattrocento Florence, status markers of elite taste (everywhere and at all times), particular commercial imperatives or market demand, like portraitture in golden age Dutch art. Maybe it is a matter of more education, so that the art says something.


All art is quite useless, Oscar Wilde famously said. But the little latte towns and tourist-trap galleries and craft stalls tell us something about what people want if they are given the chance. It tells us something about the good life. The value of second-tier art is letting people flourish and develop their talents. And maybe occasionally other people might like it.