Category: Economics and Finance

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Detroit

You can blame its decline on the decline of the automobile industry: once the fifth largest city in America, now the 11th largest, $18 billion in debt, or you can blame it on the Big Three automakers, Democratic government, buying off the UAW, black misrule and white flight, all or any of them. Here are three dots which I invite you to connect.

https://fredoneverything.org/absolute-obvious-unacknowledged-disaster-a-racial-snapshot-of-america/

Cronyism and corruption? Or the third world status of the people who still inhabit it and who voted in the governments that pillaged the cities and the taxpayers? All of the above? Who voted the crooks in? Who were the crooks? The UAW? the black city government?

I invite you watch The Wire. It is an artistic masterpiece, and it details what happens when a city – Baltimore in this case – becomes 64% black. The bodies of black male drug dealers pile up, and no one cares except a few cops, many of them black, some of them white.

The Wire shows that not one city institution: city hall, the cops, or the school system is working effectively. Without saying a word, the Wire addresses what decadence and decline look like. The irony lies  in watching all the Baltimore politicians and cops in magnificent government buildings, belle époque  creations of the 19th century, when whites dominated, and now their successors wander through halls like barbarians of 400 AD wandering through the Roman forum. There will never be enough wealth in Baltimore to rebuild them.

 

 

 

 

Everything was hellish before 1800

The biggest fact in the world that needs to be explained is how and why we have become so rich, compared to how the human race had lived for ever  before the last few centuries.

 

This graph portrays the economic progress in the last two hundred years as measured by life expectancy, GDP per capita, percentage not living in extreme poverty, energy consumption, war-making capacity, and percentage of people living in democracy.

These are the facts. Why, then, when things are getting better so fast, are we beset by concerns for global warming, climate catastrophes, income disparities, and every form of oppression, including completely imaginary ones? Why the atmosphere of general cultural pessimism?

The question that Deirdre McCloskey asked herself in her book Bourgeois Dignity was why the economics profession was unable to answer this question satisfactorily: why have things gotten better? her answer was that there occurred in western Europe and change in the deal: innovation came to be allowed, indeed encouraged, and you got to keep the economic value of your innovation. Hence the change int he human condition proceeded from a change in ideas. Not from trade, especially not from slavery, not from exploration, not from ripping off the ecology, but from allowing innovation.

You do not have to accept this explanation, but if you read McCloskey you will have difficulty in accepting another.

 

The sins of the economics profession

Deirdre McCloskey is the author of several important books, she is an economist of renown, and she is a proud defender of the bourgeois deal: you get to keep what you make and you are allowed, indeed encouraged, to innovate. She locates several inadequacies in the mindset of economists, in a little pamphlet available off the Intertubes. I recommend it, especially if you are economist. She describes her fellow practitioners in the following terms.

  • Economists, for example, are Institutionally Ignorant,which is to say that they don’t have much curiosity
    about the world they are trying to explain. For example—this will surprise you—academic economists, especially since Samuelsonianism took over, have come to think it is simply irrelevant, a waste of time, to do actual field work in the businesses they talk about.

  • Outsiders would likewise be amazed at the Historical Ignorance of the economist. They think that the scientific evidence about economies before the past few years would surely figure in an economist’s data. It doesn’t…. People call themselves economists who have never read a page of Adam Smith or Karl Marx or John Maynard Keynes. It would be like being an anthropologist who had never heard of Malinowski or an evolutionary biologist who had never heard of Darwin.

     

  • The more general Cultural Barbarism of economists is well illustrated by their Philosophical Naïveté. Few economists read outside economics. It is unnerving to gaze about the library of a distinguished professor of economics and find no books at all except on applied math and statistics: these are the worldly philosophers who run our nation? Uh-oh. So naturally the professors of economics have childish ideas about, say, epistemology….

    The economists know nothing of the main finding of linguistics, philosophy, and literary criticism in the twentieth century, namely, that we have ways of world making, language games, senses of an ending that cannot be reduced to formal grammars, even in principle (economists have themselves stumbled on analogous findings in their own highly non-humanistic work,such as the finding of “rational expectations” or “the cheap talk paradox”).
  • And economists are tempted to arrogance in social engineering….
  •  And I have to mention finally the very widespread opinion that economists are prone to the sin of pride: personal arrogance. Some names that come up in this connection are: Paul Krugman (gold medal in this category), Robert Lucas (Nobel 1995), and Deirdre McCloskey (bronze). Lots of intellectual professions are arrogant. Physicists, for example, are
    contemptuous of chemists, whom they regard as imperfect versions of themselves. In fact physicists are  contemptuous of most people. But when a physicist at North Carolina named Robert Palmer went in 1989 to a conference in which physicists and economists were to educate each other he remarked, “I used to think that physicists were the most arrogant people in the world. The economists were, if anything, more arrogant.” I’m afraid he’s right on this score. Though of course in general he’s a dope: a mere physicist.

McCloskey’s deepest argument with her profession is that it neither theorizes nor observes, though it believes it is doing both. The arguments are longer than are suitable for this space, and I commend you to read The Secret Sins of Economics in its brief entirety. In essence she says it is not enough to demonstrate whether some thing has some effect, you have to ask how much is the effect. How much? is the critical question, not whether? Most economists avoid interrogating the real world in all its messiness to find out. Her conclusions are:

 

  • Until economics stops believing, contrary to its own principles, that an intellectual free lunch is to be gotten from
    qualitative theorems [whether questions] and statistical significance it will be stuck on the ground waiting at the cargo-cult airport, at any rate in its high-end activities uninterested in (Really) How Much. High-end theoretical and econometric papers will be published. Careers will be made, thank you very much. Many outstanding fellows (and no women) will get chairs at Princeton and Chicago. But our understanding of the economic world will continue to be crippled by the spreading, ramifying, hideous sins.
    Woe, woe is me.
    Oy vey ist mir.
    Pity the poor economists. The sins of economics come from pride in formalization, the making of great machines and
    monsters.

 

A sample of McCloskey is found at Youtube:

 

How Piketty misses the point

 

Thomas Piketty is a French economist who obsesses about the distribution of wealth. Deirdre McCloskey is an economist and philosopher who emphasizes the moral and ideational aspects of how we became so wealthy over the last several centuries. She calls it the Great Enrichment. She chastizes her fellow economists in how they have failed to explain the most salient feature of human existence since 1700: why is it that humans are sixty times wealthier than they were in 1700? Why is world poverty falling? This, she says, is the vital question. Economists who fuss about income inequality are missing the vital point.

McCloskey is the author of Bourgeois Dignity and many other great books.

Here she is on Piketty:

 

The most fundamental problem in Piketty’s book, then, is that he misses the main act. In focusing solely on the distribution of income, he overlooks the most surprising secular event in history: the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more. Many humans are now stunningly better off than their ancestors were.

This includes a gigantic improvement of the poorest — your ancestors and mine. By dramatic increases in the size of the pie, the poor have been lifted to 90 or 95 percent of equal sustenance and dignity, as against the 10 or 5 percent attainable by redistribution without enlarging the pie.

What caused the Great Enrichment? It cannot be explained by the accumulation of capital, as the very name “capitalism” implies. Our riches were not made by piling brick upon brick, bachelor’s degree upon bachelor’s degree, bank balance upon bank balance, but by piling idea upon idea. The bricks, BAs, and bank balances were of course necessary. Oxygen is necessary for a fire. But it would be unenlightening to explain the Chicago Fire of 1871 by the presence of oxygen in the earth’s atmosphere.

The original and sustaining causes of the modern world were indeed ethical, not material. They were the widening adoption of two new ideas: the liberal economic idea of liberty for ordinary people and the democratic social idea of dignity for them. This, in turn, released human creativity from its ancient trammels. Radically creative destruction piled up ideas, such as the railways creatively destroying walking and the stage coaches, or electricity creatively destroying kerosene lighting and the hand washing of clothes, or universities creatively destroying literary ignorance and low productivity in agriculture. The Great Enrichment requires not accumulation of capital or the exploitation of workers but what I call the Bourgeois Deal. In the historical lottery the idea of an equalizing liberty and dignity was the winning ticket, and the bourgeoisie held it.

That even over the long run there remain some poor people does not mean the system is not working for the poor, so long as their condition is continuing to improve, as it is, and so long as the percentage of the desperately poor is heading toward zero, as it is. That people still sometimes die in hospitals does not mean that medicine is to be replaced by witch doctors, so long as death rates are falling and so long as the death rate would not fall under the care of the witch doctors. It is a brave book Thomas Piketty has written. But it is mistaken.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

“The idea of equalizing liberty and dignity” – emblazon that idea into your memory, and save it for your next argument with some twee leftist.

 

 

 

 

Back in the real world … the truth about income inequality

In the current leftist parallel universe, the media elites try to figure out if a guy, whose favourite daughter is an Orthodox Jew,  is a closet Nazi, and Blacks, who were never slaves, are fighting Whites who were never Nazis, over Confederate statues erected by Democrats whilst blaming Trump. Meanwhile in the real world, this was the state of income equality in 2014, when Obama held the reins. It is doubtful much has changed since then.

With serious issues like income inequality on the front burner, it is strange to see that the Left is instead focused on trivialities like this, Man stabbed after haircut gets him mistaken for a neo-Nazi, but as CNN stated, before hastily deleting the headline, “Activists seek peace through violence“

Peter Thiel

I could try to be as clever but I think that anything I want to say about the state of the world has been said better by Peter Thiel in this interview in March of 2017.

And speaking of a world where stagnation is expected, end even desired, Thiel argues that Obama’s regime was fundamentally into transferring wealth into the very rich, while seeming to care about the poor. This guy is deeper and smarter than I am, and I am okay with that. Listen to his critique of Obama from the point of view of the original Marxists. He describes Obama’s philosophy as “pessimistic epicurianism”: that is a whole new level of insight and insult. He fears the return of the Malthusian calculus: because of stalling technological progress, population may grow to the limits of starvation, a starvation fed by corn syrup. He insults Obama by saying he does not even live up to the scientific optimism of Karl Marx.

2016 Forbes 400 and source of wealth

The following statistics are from the above chart.

Forbes 400 aggregate net worth: $2,398 billion

Finance & Investments as source of net worth: $291 billion or 20.5% of the total.

This is inconsistent with Chrystia Freelanld’s assertion that “… the majority of the super-rich have made their money out of finance not manufacturing.” In fact, if you remove Warren Buffett from the list then finance & investments as a source of net worth drops to 18.4% from 20.5%.

It is widely accepted that one is more likely to become wealthy from finance & investments in US than in other countries, so this statistic is likely to be even less in other countries. As economies move from manufacturing to a service based economy, it is not surprising that manufacturing contributes less to the overall net worth.

Amazon is a good example. It doesn’t manufacture anything but has a lock on cloud-based hosting and online retail which places Bezos in third-place on the Forbes 400 list. The top-5 in that list exemplify the overall list. Technology is the source of wealth for three of the top five, with finance and manufacturing rounding out the list.

Also see, “Has our economy become too ‘financialized’?” which was written in 2016. In particular the assertion that “In the United States, finance, insurance and real estate (known as FIRE) now account for 20 percent of gross domestic product, compared with only 10 percent in 1947.” Technology and Natural Monopoly might be a better explanation for the rise of Gini coefficient.

It is also instructive to note this fact: When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks.

Another explanation for the increase in wealth concentration might be the rise of passive investing in which disproportionate amount of money is invested in companies without regard to merit.

The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.

In a note titled “The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism,” a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

“A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management,” they write.

Chrystia Freeland on the Plutocrats, Angus Deaton on the American white poor

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Our Minister of Foreign Affairs, Chrystia Freeland, was once a senior economics writer at Thomson Reuters and The Financial Times. She is the author of Plutocrats (2012).

I urge you to read it. Chrystia wrote this book without rancor or malice, which only makes the results more devastating. The 1%, and the one tenth of 1% , have become fantastically richer since the late 1970s. Though they have worked hard for their money, the majority of the super-rich have made their money out of finance not manufacturing.

Freeland concludes her book with a warning about cognitive capture: the process whereby the super rich come to believe their interests really are the most important in society, and the capture of legislatures composed largely of members of the 1% means that the interests of the truly very rich will be attended to by those who only have a few millions, and want to join.

Speaking of the Venetian Republic, that famous example of a highly successful commercial empire, she traces its decline from measures it took to close off access to its wealthiest classes by young entrepreneurs. The closure was a change of the rules on joint ventures, whereby the rich financed the young and adventurous. It was called la Serrata.

She fears for the same tendency in the world of the ultra rich today.

“This cultural Serrata matters because it increases the political myopia of the plutocrats. Add to that ordinary greed and a society that has turned its capitalists into popular heroes and you have an economic elite primed to repeat the mistake of the Venetian merchants – to drink its own Kool-Aid (or maybe prosecco is the better metaphor) to conflate its own self-interests with the interest of society as a whole. Low taxes, light-touch regulation, weak unions, and unlimited campaign contributions are certainly in the best interests of the plutocrats, but that doesn’t mean they are the right way to maintain the economic system that created today’s super elite.”

I shall make some inferences from having read this book, which may not be justified, but which I suspect are true.

  1. The author of this book is a very clever cookie, and it is a credit to Canada that somehow she has climbed this far.
  2. Her analysis of what it means to live in a society dominated by plutocrats is the same as Trump’s: the domestic working class is being neglected and the plutocrats do not give a damn for maintaining first world salaries or wage rates.

Points one and two can be demoinstrated by reading her book. My third inference is more conjectural.

3. The reason the Trudeau Liberals have refrained from criticism and restrained themselves from doing anything stupid in relation to Trump, the reason they have appointed a serious senior finance journalist to the international affairs ministry, is that their analysis of the large picture –  framed in the light of arguments made by Freeland – is not much that different from Trump’s intuitive take on the position we have arrived at. Too much plutocracy; too much influence of the plutocrats over politics and governments.

If you doubt Freeland’s take for partizan reasons (fool!), I would like to refer you to Angus Deaton, the Princeton economist (of Scottish origin) and Nobel winner whose work on inequality, and increasing mortality rates in the American working class, should inform everyone who is trying to make sense of politics these days.

For my part, I recommend Plutocrats for a sane and carefully researched appreciation of the large picture. It is an easy read, and that is a compliment.

A more scholarly and broader ranging interpretation is given in Deaton’s book, The Great Escape: Health, Wealth and the Origins of Inequality,  which I have just ordered. The key charts you should look at are found in Deaton’s discussion in the Wharton business school article “Is Despair Killing the White Working Class?”

The article contains one graph which shows why Trump won, which you have to click on to expand to its full size. The complete article and its charts are found here.

 

What they don’t tell you about capitalism

 

I have been dipping into Ha-Joon Chang’s “23 things they don’t tell you about capitalism“. I recommend it. Its author, Ha-Joon Chang, lectures at Cambridge. He provides a useful corrective to a lot of economic myth-making we have absorbed of late. He seems neither Friedmanite nor Marxist, so much as an acute observer of the gap between theory and reality and an exponent of the political element in economics.

I pulled him off the shelf this morning while trying to find a place for Fawcett’s book on Liberalism. (Bookshelf space provides the necessary Darwinian selective pressure in these parts).

I opened to chapter three, and read:

The wage gaps between the rich and poor countries exist not mainly because of differences in individual productivity, but mainly because of immigration control. If there were free migration, most workers in rich countries could be, and would be, replaced by workers from poor countries. In other words, wages are largely politically determined. (p.23)

[Westerners’] high productivities are possible only because of the historically inherited collective institutions on which they stand.

First, will someone tell me why Trump is not exactly right in enforcing US immigration law at US borders in order to protect the US working class?

Second, is not his observation perfectly consistent with what Vdare, American Rennaissance, Razib Khan, and jayman argue from their respective points of view about “inherited collective institutions”?

It is amazing what agreements are possible among thinking people when one escape’s the narrow strictures of political correctness.

 

Liberalism: a broad church

 

 

I have bad news for most readers of Barrelstrength. According to Edmund Fawcett’s comprehensive and insightful review of liberal thought, Liberalism, the Life of an Idea, we are all liberals.

Not Liberals, as in the Supreme Governing Party of Canada. And not ‘liberals’, that assemblage of social justice warriors, grievance identitarians, statists, and special interest groups that compose the left wing of the US Democratic party.

That’s okay with me. I am not a throne-and-altar reactionary, a racial supremacist, a Marxist, a Muslim supremacist or any species of totalitarian.  Any label that can encompass Friedrich Hayek, J.S. Mill, Karl Popper, J.M. Keynes, Isaiah Berlin, Milton Friedman, and a host of practicing politicians of the 19th and 20th centuries, encompasses me.

Fawcett in his introduction writes:

“…There is no uncontested and purely philosophical test I can think of for the descriptive adequacy of an account of liberalism, and looking for one strikes me as a level confusion. Rich as liberalism is in ideas, liberals in history were not pursuing a philosophical theory. They were not doing applied philosophy. The philosophy of liberalism is an exhilirating, fruitful endeavour, but is beyond the range of this book, which is to tell an undertold political story.

“Looked at from the point of view of citizens, liberalism is a practice of politics for people who will not be bossed about or pushed around by a superior power, whether the power of the state, the power of wealth or the power of society . Looked at from the point of view of government, liberalism is a practical response by state and law to the predicament of capitalist modernity. From either point of view , my story takes liberalism naturalistically as a norm generated adaptation to historical circumstances, not as speculative anthropology, politico-moral philosophy, or social biology.” (pp.24-25)

Fawcett says it is pointless to seek enemies within the liberal tent; they have enough without.

His views of what constitutes liberalism is more akin to a pack of dogs each pulling one sled in loose fan-shaped harnesses, than a team harnessed in one direction. Sometimes one dog prevails over the others, sometimes they run smoothly together. “I take liberalism for a practice governed by four loose ideas” (p.11).

  • Conflicts of interests or ideas are inescapable;
  • Human power cannot be counted on to behave well;
  • Human character and human society are not static but dynamic;
  • Power is obliged to respect moral limits on what it compel people to do

His views of conservatism are  less important and  significantly misguided, but his focus is not on that topic.

Conservatives, to schematize, believed in the unchallengeable authority of rulers and custom. They thought of human character as largely set and of society’s scope for wholesale improvement as small or non-existent. They took liberal respect for people’s chosen enterprises and opinions. especially of they took unfamiliar or disruptive form, as harmful to orthodoxy and social order. It shortchanged duty, deference and obedience. Conservatives took society for a harmonious, orderly whole  before critical modernity promoted self-seeking disaffection and liberal capitalism sowed discord between the classes.

By far the best analysis of the emotional bases of political differences is set out in Jonathan Haidt’s The Righteous Mind and we need not dilate upon Fawcett’s impoverished understanding  of what makes ‘conservatives’ feel and think differently than ‘liberals’. From the point of view of Fawcett, it is highly likely that everyone reading this article is a ‘liberal’, as he understands the term, including all the people who consider themselves ‘conservative’. Each book has a different subject matter, and Haidt’s examines the differences among the sled dogs, not their common harness.

Insofar as Fawcett situates liberalism as an ongoing political response to the technological, social, and economic revolutions we have been experiencing since 1800, I think he is broadly right in the catholicity of his understanding of the phenomenon.

In short, Edmund Fawcett has produced a richly informative, concise, and badly needed review of the main streams of western thought since 1800. I urge any self-identified conservative not to concern himself with Fawcett’s limitations, and to enjoy a well-written, stimulating expansion of one’s understanding of two centuries’ worth of history and progress.