Ok, Americans – here is your Eurovision Guide

“Euro-what?” I hear you ask. Great! Set your coffee aside for a few minutes and indulge in a much-required and long-overdue cultural enlightenment.

Eurovision Mania is on, so you better get with it!

Eurovision Song Contest, or “Eurovision”, is an annual music competition that’s been running since 1956 and every year sees some 40 countries participating. And it’s massive. Every participating country selects an original song – usually through some kind of nationally televised show – with an associated live performance and all those entries get to perform in front of tens of thousands of ecstatic Eurovision fans from across the globe.

In short, it’s basically American’s Got Talent merged with The Voice – but structured a bit like Miss U.S.A – with tons more glitter, spex, showtime and glamour and with twice(!) the audience of SuperBowl. Beat that, ‘Murica.

Yes, that’s some 200 million people lining up their Saturday nights (and the preceeding Tuesday and Thursday too, for semi-finals) for this:

The winner is lavished in eternal fame and glory, and their country’s broadcasting company gets the honor of splashing out on next year’s event. As Israel’s Netta and her song ‘Toy’ won last year’s competition in Libson, Portugal, the 64th version of Eurovision is held in Tel Aviv, Israel, beginning today!

Is Israel European?

Perhaps not, but that’s never stopped Eurovision before. Actually, the event is organized by European Broadcasting Union (EBU), an alliance of public service media companies – and includes associate members such as Australian, Algerian, Jordanian and Lebanon organizations. Thus, the geographical boundaries for entries into Eurovision is somewhat flexible – which is why Australia has competed in the competition since 2015!

That’s also the reason Brexit won’t affect the UK’s participation in Eurovision, thank god!

So, what is this thing – and why have I never heard of it?

Depending on who you ask, Eurovision could be anything between a fabulous celebration of European unity through culture and music, or a dull, wasteful affair of pretty freaky performances. No doubt among the competition’s 1500 entries, it has seen its fair share of strange, quirky, silly and outrageous performances (just google some of them). But it also contains the fanciest, most extravagant dresses and costumes imaginable,  friendly rivalry, great music and an outburst of colors. Indeed, a bit like the SuperBowl, the half-time entertainment has been at least as interesting as most of the performances. This year it is even rumored that Madonna is making an appearance!

In other words, across the Atlantic, Eurovision mania has descended and will be this week’s Big Thing. Indeed, at 10 pm local time (3 p.m ET), the first semi-final begins, and the winner usually emerges after a rather complicated voting procedure sometime Saturday night (6 p.m ET).

As for American’s (un)surprising ignorance of the event, it’s even become somewhat of a Youtube phenomena of introducing this long-standing pan-European institution to shockingly unaware Americans and recording their reactions. Some of them are pretty spot-on (“this is the cheesiest of music shows!”). Without passing judgment on the worldy outlooks of Americans, y’all aren’t exactly – erm let’s say – well-versed in the going-ons of places beyond your coasts.

In the Eurovision case, not for lack of trying: in the last few years, Logo actually broadcasted the event, but couldn’t muster more than 50,000-75,000 viewers and so the greatest of European non-sports events won’t be on American TV this year. Hardcore fans (list of international broadcasters) are probably best served by a youtube live-stream.

Of course, the skimpy American coverage by outlets like the New York Times isn’t exactly helping either; their angle of the “Israel-Palestine dispute” compleeeeetely miss the point of Eurovision. The event’s apolitical nature is another thing that makes Eurovision so great: politics is strictly, explicitly, unavoidably relegated to the sidelines. As in political messages and even song lyrics with too definitive political flavors are censured or expelled. For instance, Iceland’s participants this year, the controversial band Hatari, is already challenging this sacred line of No Politics Beyond This Point by their frequent pro-Palestine stunts. Allegedly, they have already been issued a final warning by the organizers; one more political stunt and they’re disqualified.

In sum: Eurovision is the biggest, fanciest, most extravagant and entertaining music event you’ve never heard of. Get on the train. A great start is by watching the recap of this year’s 41 entries.

A Short Note on Fraudulent Banking

In my piece over at American Institute for Economic Research the other week, I discussed the phenomenon of selling property that one does not (yet) own. I mentioned a left-wing and a right-wing version, but focused my efforts mostly on the right-wing “Fractional-Reserve-Banking-is-Fraud” idea.

My main point was to, by analogy, point to other fiduciary relationship – specifically insurance and airline overbooking – that fulfil the same criteria of double-ownership that is so crucial for the right-wing view. Insofar as this analogy holds, rejecting fractional reserve banking as fraudulent and illegal requires one to similarly reject insurance policies and airlines’ practice of overbooking. Regardless of where one comes down on the legal relationship between a depositor and a bank, I thought the theme interesting to explore.

Unknown to me, in one of Hoppe-Hülsmann-Block’s (HHB) early articles they devoted about two pages to addressing my main points. To HHB, there’s a “fundamental distinction” between property and property titles that render these and other analogies “mistaken”: future vs present goods. Money titles such as fractionally issued bank notes are designated present goods whereas insurance policies, parking permits or flight tickets are considered future goods. Money is the “present good par excellence to use Rothbard’s words.

HHB claims that one can legally oversell future goods, but when overselling present goods, one is committing fraud. A narrow distinction, admittedly, and we’ll see that it doesn’t fare so well. Discussing the example of airline overbooking, this distinction does momentarily save HHB from condemning airlines; yes, the airline is selling a flight at a future date, which seems meaningfully different from the instantly-available present goods bank notes ought to be. But the thing about the future is that it inevitably and predictably becomes the present. Once that future arrives, HHB explicitly admits that having more passengers at the gate than they have seats on the plane does amount to fraud. Strangely, however, HHB exonerate airlines since they are “prepared to pay every excess ticket holder off”.

Oh, and fractional reserve banks aren’t?

At this point their already weak defense falls apart. Every instance of historical bank runs include management, shareholders and governments doing precisely that: slowing down the run by paying employees, friends or relatives to deposit funds; acquiring new funding (either debt or equity) to pay off skittish depositors who want their present goods right away; or my own personal favorite, as a good student of Scottish financial history: the Option Clause!

HHB say that airlines are not committing fraud since once at the gate – on the verge of having their oversold future goods transform into present goods – they stand ready to

“repurchase [the passenger’s] ticket at a price (by exchange of another good) that the holder considers more valuable than his present airline seat.”(HHB 1998: 47)

Let’s see what the financially innovative Scots did. Their notes were subject to a legal clause, allowing management to ‘mark’ particular notes when offered up for redemption. That meant deferring the redemption claim for six months, effectively transforming the present good (the money title) into a future good (money title in six months), at the maximum legal rate of interest of 5%. That sounds like a good “the holder considers more valuable”, especially considering that these notes were effortlessly accepted in trade – i.e., the holder could instantly turn around and buy things with this note, its value gradually appreciating as the six-month date arrived.  In practice, this deterrent was only used infrequently, and then almost exclusively against English currency speculators.

Indeed, extrapolating this point, as I do in a forthcoming piece on maturity-mismatch (and have flaunted in Austrian conferences), illustrate how little practical and economic difference there would be between the opposing and deeply-entrenched Fractional-Reserve-Banking camps.

Regardless, it seems the airline-insurance-parking permit analogy still stands.

Two Financial Instruments that made the Modern World

Following my Mr. Darcy piece that outlined the use and convenience of British government debt instruments in the eighteenth (and predominantly the nineteenth) century, I thought to extend the discussion to two particular financial instruments. In addition to the Consols (homogenous, tradeable perpetual government debt) that formed the center of public finance – and whose active secondary market that made them so popular as savings devices – the Bill of Exchange was the prime instrument used by merchants for financing trade and settling debts.

The complementarity of the Consol and the Bill in international finance, roughly from the South Sea Bubble (1720) to the end of Napoleon (1815), was the “secret of success for international finance” (Neal 2015: 101) and arose without an overarching plan, i.e. rather spontaneously. As the Consol is more easily understood for a modern reader, and the Bill is both more ancient and less well understood, I’ll focus the bulk of my attention on the latter.

According to Anderson (1970: 90), the Bill constituted “a decisive turning-point in the development of the English credit system,” but is much older than that. In practice, it was a paper indicating debt and a time for repayment, allowing financing of current trade. Cameron (1967:19) writes that the Bill

was far more ancient than either the banknote or the demand deposit; it had been developed in the Middle Ages. At first the bill was used as a device for avoiding the cost and risks of shipping coin or bullion over great distances, then as a credit instrument which circumvented the Church’s prohibition of usury. When it first came to be used as a means of current payment is a moot question that may never be answered, but that it was so used in eighteenth-century England is beyond doubt.

The Bill was predominantly used in coastal cities in the Mediterranean and around the North-Sea, becoming frequent perhaps in the 1700s. One observer even dates an early instance of its use to 1161, and it was of standard use among traveling traders, merchants and brokers throughout the Middle Ages (Cassis & Cottrell 2015: 12). Occasionally – warranting a discussion of its own – Bills in England became “so widespread that they drove out even banknotes” (Cameron 1967: 19).

There is an unfitting competition among financial historians as to who can produce the most persuasive, informative or complicated schedule for how Bills worked (I know of at least four similar, yet uncredited, renditions). Here’s Anthony Hotson’s (2017: 92) attempt from last year:

1aDeI0Nu0W4AIXASg.jpg

  1. We start, counter-intuitively, in the top-right corner. Andrew, an English exporter of Apples, draws up a Bill on Bas, a Amsterdam maker of Bankets – a Dutch pastry. Bas, having no coin/gold available to pay Andrew – either because he won’t have the funds until after he has sold his apple-flavored(!) Bankets, or because the risk of loss or cost of transportation is too great – accepts the Bill and returns it to Andrew.
  2. Having returned it to Andrew, we now have a debt and a financial instrument; Bas has promised to pay Andrew £x for the apples in 90 days, a common duration for a Bill of exchange.
  3. But like most merchants, Andrew cannot wait 90 days for payment; he has sold and shipped his Apples, but needs funds for himself (feeding his family, or investing in new Apple-harvesting equipment etc). In the heyday of British financial markets, Andrew could simply visit a bank, Bill-broker or the London financial markets himself, and offer to sell the Bill there. Of course, Andrew won’t be able to sell the Bill for £x, since his buyer is effectively providing him with a loan for 90 days. The bank, bill-broker or financial market trader will discount the Bill with the going interest rate (say 6%, for one-quarter of a year, so ~1.5%), paying at most £0.985x for the Bill. Besides, there is a risk-of-default element involved, so the buyer applies a risk premium as well, perhaps buying the Bill at £0.95x.
  4. In the schedule above Hotson uses the Bill trade to show how merchants trading Bills could net out their respective debts and minimize the need to send payment across the British channel. For (3) and (4), then, we replace the banker with an English importer – Dave – of Dutch goods (perhaps tin-glazed pottery) looking for a way to pay his Amsterdam pottery supplier, Cremer. Instead of shipping gold to Amsterdam, Dave may purchase Andrew’s Bill, and settle his account with Cremer by sending along the Bill drawn on Bas. Once the 90 days are up, Cremer can simply wander over to Bas’ pastry shop and present him with the Bill to receive payment for the goods Cremer already shipped to England.

This venture can – and usually was – made infinitely more complicated; we can add brokers and discounting banks in every transaction between Andrew, Bas, Dave and Cremer, as well as a number of endorsers and re-discounters. In his popular book Exorbitant Privilege, Barry Eichengreen recounts a 12-step, several-pages long account for how a U.S. importer of coffee and his Brazilian supplier both get credit and signed papers from their local (New York + Brazil) banks, how both banks send their endorsed bills to their London correspondent banks, and some investor in the London money markets purchase (and perhaps re-sell) the Bill that eventually settles the transaction between the American coffee importer and the Brazilian farmer.

Although it might sound excessive, complicated and impossible to overlook, the entire process simplified business for everyone involved – and allowed business that otherwise couldn’t have been done. In econo-speak, the Bill of Exchange set within a globalizing financial system, extended the market for merchants and farmers and customers alike, lowered transaction costs and solved information asymmetries so that trade could take place.

Turning to the opposite end of the maturity spectrum, the Consol as a perpetual debt by the government was never intended to be repaid. Having a large secondary market of identical instruments, allowed investors or financial traders everywhere to pass Gorton’s No-Questions-Asked criteria for trade. A larger market for government debt, such as after Britain’s wars in the late-1700s and early 1800s, allowed dealers in financial markets to a) be reasonably certain that they could instantly re-sell the instrument when in need of cash, and b) quickly and effortlessly identify it. These aspects contributed to traders applying a smaller risk premium to the instrument and to be much more willing to hold it.

While the Bills were the opposite of Consols in terms of homogeniety (they all consisted of different originators, traders, and commodities), there developed specialized dealers known as Discount Houses whose task it was to assess, buy, and sell Bills available (Battilosso 2016: 223). Essentially, they became the credit rating institutions of the early modern age.

Together these two instruments, the Bills of Exchange and the Consols, laid the foundations for the modern financial capitalism that develops out of the Amsterdam-London nexus of international finance.

Mr. Darcy’s Ten Thousand a Year

On popular demand, I’m reviving a reoccurring theme of mine: teaching economic history through the lens of popular culture. Today: bonds, yields and 18th century English financial planning.

In what is probably my favourite piece ever written, I tried to estimate exactly how rich Mr. Darcy was – Mr. Darcy, of course, of Jane Austen’s classic novel Pride & Prejudice. I showed that whatever method you use to translate incomes to the present, all characters in Austen’s captivating story are astonishingly rich. But, as we well know today, there are large differences even among the superrich; compare Bernie Sanders (small-time millionaire) with George Lucas and Steven Spielberg (single-digit billionaires) or Jeff Bezos (wealthiest man alive).

Using Pride & Prejudice to illustrate some economic point is hardly unconventional (Piketty did this in his Capital in the Twenty-First Century), so let me similarly discuss 18th and 19th century British financial markets using the characters in this well-known tale.

The starting point is the following musing, courtesy of former Oxford Economist Martin Slater’s (2018: 52) The National Debt; how come “female characters in nineteenth-century novels always seem to have a suspiciously exact income of ‘so many pounds per year'”? Where does this money come from? Why is it so exact? And what’s the reason Piketty uses this particular literary example to illustrate the permanence and steady stream of income that capital somehow just throws off?

Consols and Financial Markets

Financial markets are truly awesome – not just in their impressive scope or potential devastation, but in the many different needs they simultaneously fulfil for many different people. Slater ably guides us through the confusing mishmash that is the 17th and 18th century English public finance, but what emerges by 1757, after Henry Pelham’s consolidation of government debt, is two main – and for our purposes, equivalent – securities: the Consolidated 3% Annuities (and the ‘Reduced annuities’), affectionately named ‘Consols’. These were permanent government bonds with annual interest payments of 3%. This means that they had no maturity date, i.e. the holder of the security could expect the government to keep paying 3% of the face value for all future (a Churchill-issued subsequent Consol was actually repaid and retired just a few years ago, after almost a century in service).

Two cool things happen. First, the “initial value” – the face value – of debt running in perpetuity becomes almost irrelevant, since all that matters for the issuer is the ability to maintain interest rate payments; there is no presumption of future repayment. Second, creditors – that is, holders of the Consols who receive the regular interest payments – may trade that asset on financial markets. Since the plethora of different debt assets were now condensed into a single, credible, identical and easily-identified asset, the market for 3% Consols in London developed into a very large and liquid market. With such ease of access and predictable and stable payoffs, the Consols became the instrument of saving for well-off families in Austen’s time.

A note on yields

The Consols, essentially a piece of paper with a face value of £100, entitled the owner to a perpetual stream of payments by the government, in this case 3% – or £3. Now, the actual price at which this paper could be sold in London fluctuated extensively depending on the conditions of the financial market and, most prominently in Austen’s lifetime, the Napoleonic wars. As the £3 annual pay was serviced by the British government, and financial strain during the war increased the risk for defaults (through a foreign invasion or British government itself), the price of Consols was chiefly reflecting the military success.

When the market price of a debt falls below its face value, the effective interest rate (the “yield”) that a prospective investor receives increases; paying £50 for a Consol with face value of £100 and a £3 perpetual interest payment, effectively earns the investor 6% interest instead of 3% (3/50 = 0.06). Since the Consols were the most dominant asset on the largest financial market in the world, their price became “the single most important asset price in the world economy” as Klovland (1994: 165) called it. Here’s the yield on Consols during Austen’s life:

JA, yield on 3%

It reached a low of 3.11% in 1792 (almost at par), and a high of 6.22% in 1798 (below £50) after the suspension of the gold standard.

The Bennets and the fortunes of handsome young men

The families of Pride & Prejudice made good use of this thriving financial market – not specifically for trading but for financial planning (others, such as British economist David Ricardo, and the banking families of Rothschild and Barings, made some of their fortune trading Consols).

In the novel, Mr. Bennet – the protagonist Lizzy’s father – has an income of £2,000 a year (again, see my 2016 piece for three different attempts at “translating” these sums into today’s money). It is not clear what his income comes from, but it’s a fair guess that it stems, like many other landed gentry of the time, from renting out farm lands belonging to the family home Longbourne. In addition, we know that Mrs. Bennet’s portion to the family home is a £5,000 contribution which is the sole inheritance the (five) Bennet daughters are entitled to.

Now, the way well-off families like the Bennets would make use of Consols was to ensure that non-inheriting children had at least some source of income after the passing of their father. The underlying concern in Pride & Prejudice, causing Mrs. Bennet to worry so about fortunate marriages for her daughters, is that the Bennet estate is entailed away to Mr. Collins – and with it the presumed rental income of £2,000 a year. That would leave the girls homeless, reduced to living off Mrs. Bennet’s inheritance of £5,000.

Austen began writing First Impressions (the initial title for Pride & Prejudice) in October 1796. During the decade leading up to this, the yield on Consols had been firmly within the interval 3.5-4.5%, hovering around 4% for years. It should thus not surprise us that Mrs. Bennet’s fortune of £5,000 presumably consisting of Consols, would have been purchased at around £75, predictably yielding the family an annual return of 4%. Indeed, the characters of Pride & Prejudice seem to be squarely set on 4% being the general norm. For instance, in a desperate attempt to enhance his already-inane proposal to Lizzy, Mr. Collins explicitly says:

“To fortune I am perfectly indifferent, and shall make no demand of that nature on your father, since I am well aware that it could not be complied with; and that one thousand pounds in the 4 per cents, which will not be yours till after your mother’s decease, is all that you may ever be entitled to.”

(Chapter 19, p. 133 in the 2009 HarperCollins edition)

Here we see the great use that Consols offered families like the Bennets. Once the Bennet parents pass away, the £5,000 of Consols could be divided equally among her children; Lizzy’s share would be a thousand pounds, which earns her an annual 4% interest return, or £40 (although maybe several year’s earnings for a regular worker, this was a rather small sum for such rich families – in contemplating Lizzy’s sister Lydia’s imprudent marriage, we learn that Mr. Bennet spent almost £100/year on Lydia’s purchases and pocket money alone). Being liquid financial assets, dividing up the Consols among children was very easy, and their steady income stream ensured that they would have at least some income. Bar Napoleonic conquest, the interest payment on the Consols would reliably show up year after year.

As for the handsome young men, Mr. Bingley’s case is easier than Mr. Darcy’s. We know that Bingley’s income is not agricultural, but investments from a fortune of almost  £100,000 inherited from his father, who had not yet acquired an estate. The fortune was “acquired by trade”, where (being from the North) cotton or shipping are prime candidates, but the slave trade is also a possibility. We also know that the ambiguity of his annual income (£4,000 or £5,000) lies well within the return from a fortune of that size invested in Consols. Indeed, for Bingley to hold that kind of fortune, earn that income and still not have an estate of his own, suggests that his financial wealth consists predominantly of Consols – perhaps complemented with some other stock (Bank of England or East India Company stock are plausible candidates). Clearly, new money.

Mr. Darcy, on the other hand, is plainly old money. And a lot of it. There are subtle hints in the novel that Pemberley has been in the Darcy family for generations. What we don’t know is precisely how his £10,000 a year is earned. When visiting Pemberley in Derbyshire with her aunt and uncle, Lizzy is told by the housekeeper that Mr. Darcy is such a generous and fair man: “ask any of his tenants”, she says, which indicates that Mr. Darcy, has a fair number of them – as one would expect from a sizeable estate like Pemberley. Now, what we don’t know is if the entirety of his £10,000 a year is reaped from rental income; it could be that some of his income is financial – or that either his financial or rental income is excluded from this rumoured number. Beyond a mention of his sister, Georgiana’s, fortune of £30,000 – which for convenience would likely be held in Consols – we know very little about the personal finances of Mr. Darcy.

The use and abuse of Consols

The financial market for government debt in the late-18th and early 19th century was not created with financial planning in mind, but by incremental improvements to previous government funding problems. The outcome, however, was a striking success for Britain, whose thriving financial market in no small part accounted for Britannia’s Century until WWI.

Moreover, as contemporary economists from Ricardo and John Stuart Mill to Malthus and Lauderdale observed, the recurring interest payments, funded by taxes, may have had quite large macroeconomic consequences. Taxing ‘productive’ investments and trade in order to fund ‘unproductive’ holders of government debt was, it was argued, harmful to the country – and in a time where government expenditures largely consisted of the military and debt maintenance, the impacts of funding the debt was of prime political interest.

Piketty’s use of Austen’s England (and Balzac’s France) was used for precisely the same distinction. Wealth, in Piketty’s view, perpetuates itself, and effortlessly earns its return (never mind the work, risk and selection issues involved). By continually paying the interest on its debt, the governments of Austen’s Britain financed the leisurly lifestyles of the rich, just as the “natural” return of the modern-day rich contribute and maintain today’s inequality.

The Consol was a revolutionary invention, but it is possible that it was not part of Mr. Darcy’s Ten Thousand a Year.

Let’s Find Out – or: the Power of Reference

The core message of a number of books I’ve recently had the great pleasure to read has been fairly simple. Have a look. Check it out. Put your numbers in perspective. In a world awash with statistics and cognitive biases imploring us to cheer mindlessly for our own team, having the skill and wherewithal to step back and carefully ask: “can this really be so?” is golden.

One of recently passed celebrity professor and YouTube phenomenon Hans Rosling’s most profound advice for countering misinformation about the state of the world is precisely this: put all numbers in perspective. Never accept unaccompanied numbers – never believe the numerator without checking the denominator. What matters, as Bryan Caplan never ceases to emphasize as the GMU Economics creed, “are statistics, not emotions – and arguments, not stories.”

But, a statistic may never be left alone, Rosling maintains, but always compared to other relevant numbers. What share of its total category does this statistic represent? What was it last year, 5 or 10 or 20 years ago? Is there some self-evident change in associated behavior that is relevant or ought to explain it? A century ago street cars used to kill and injure hundreds of people every year, but since very few American cities make use of street cars today, the casualty is fortunately much lower. If we keep in mind that miles travelled by cars far outnumber miles travelled by street cars, reporting the number of street car deaths – while probably correct – entirely miss the point when discussing traffic safety. In How Not To Be Wrong, Mathematics professor Jordan Ellenberg quipped

Dividing one number by another is mere computation ; knowing what to divide by what is mathematics.

Here’s another example. If I told you about 23 000 individual deaths and spent a brief 10 second on each of them, going through the list would take me almost three days. On a personal level like that, 23 000 deaths is an absurd, insane, catastrophe-style event that few people are emotionally equipped to handle – essentially the size of my hometown, wiped out in a single year. If I told you those 23 000 deaths were due to antibiotic resistant diseases in the U.S. last year, the pandemic scenarios working through your mind quickly escalate. That many! Let’s find the nearest bunker!

If I then told you that cancer and heart diseases (each!) claim the lives of about 20x that, the fear of lethal apocalyptic germs consuming the world ought to quickly recede. Oh.

Here’s another example. It is entirely correct to point out that the number of people killed in worldwide airplane accidents in 2018 (556 people) was much higher than the year before (44 people) and the year before that (325 people). Would one be excused for believing that air travel is getting more risky and dangerous? Forbes, for instance, ran a roughly accurate story claiming that airline fatalities increased by 900%.

Not in the slightest. The number of fatalities from air travel has been falling for decades, all while the number of flights and miles travelled have increased exponentially, meaning that the per-flight, per-mile or per-passenger risk of death has kept dropping. Not to mention that alternative modes of travelling like driving is magnitudes more dangerous.

While Rosling teaches us to figure out what the base rate is, i.e. putting our statistic into appropriate perspective, one of Philip Tetlock’s tricks for becoming a ‘Superforecaster’ is to use Bayesian updating of one’s beliefs. This picks up precisely where Rosling’s idea left off. Once we know where to start, we have to amass more information, numbers and observations from other points of view – Bayesian updating is a popular method to incorporate and synthesize new information with the old.

In short “Calculation, like logic, is your friend” (Landsburg 2018: 44). Statistics matter and numbers can deceive. In order to better understand our realities and see through mistakes that others make – either intentionally to deceive or persuade, or unintentionally through ignorance – we must embrace the core message of people like Ellenberg, Tetlock, Duffy, Rosling or Pinker.

Always Be Comparing Thy Numbers. Never accept an unaccompanied statistic. Never trust numerators without denominators.

The Nonsensical Meaning of Sustainability

Along with ‘Inequality’ and ‘Democratic socialism’, ‘Sustainability‘ is one of the words that captures the essence of my generation. A sustainable project, event or business is met with “wow”s and “oooh!”s, an indicator of its owner’s moral righteousness and altogether praiseworthy character.

But its meaning is far from clear from all but its most fervent supporters. Dealing with the extraction of resources, the use of ecological reserves or harvesting of crops, a process is allegedly ‘sustainable’ if the naturally occurring regeneration exceeds the current levels of extraction. Simply put, don’t use more than what is (annually?) renewed. Moreover, a process branded as sustainable usually involve a mix of some other virtue signalling activities of our time: carbon emission neutrality or offsetting; at least a superficial concern for one’s environmental impact; energy produced in ‘renewable’ ways (read: nothing but solar, wind or hydro); or the use of recycled materials.

If this sounds unobjectionable and self-evident to you, this piece is for you. Despite the fancy branding, the SDGs, the fervor of self-proclaimed do-gooders, is the ‘sustainability’ of an activity really what we care about?

There are at least two major confusions with the assessment of activities as sustainable or its despised opposite: unsustainable. First, and most frequently occurring, is the belief that we aim to pursue our current endeavor in the same way for all eternity. If you think about it, the indignant objection of unsustainability is often quite meaningless, worthy of nothing but a ‘so what?’ response; everything we do at any given moment is in a sense “unsustainable”:

  • if I keep typing on my computer I will eventually starve;
  • if I keep lifting weights or endlessly running on that treadmill, I will collapse;
  • if I keep eating this chocolate cake of mine, I will be sick.

So? Everyone who has ever engaged in those activities understand that there are ends to them, that we’re only doing them for a particular purpose for a certain period of time, and that extrapolating snapshots of reality is quite silly; I do not intend to continue this activity until the brink of whatever physical boundary there might – or might not – be. Until I approach some “safe” distance to that brink, I’ll happily indulge in my chocolate cake, lift my weights or type away at my keyboard. In economic speak we are trading off one resource for another, until saturation or the fulfillment of some other aim becomes more important (prime example is Environmental Kuznets Curves).

The other confusion is to believe that economic systems cannot change and that humans cannot adapt. It is emphatically irrelevant that there is a physically limited amount of oil in the ground, since price systems and their incentives effectively ration oil use according to urgently-induced needs and encourage substitutes when those are needed. More importantly, the price system for raw materials incorporate and incentivize technological improvements that 1) through discovering new deposits literally expands “the” amount of resources,  2) shape cost-effective processes to hard-to-access deposits we couldn’t profitably exploit before, 3) improve the bang for our buck, i.e. how much output we can squeeze out of a given quantity of material. Thus, there might ultimately be a physical limit, but not an economic limit.

Let me give an iconic example: chopping down trees quicker than the forest grows. Such an activity seem pretty ‘unsustainable’ since the declining size of the forest implies that one day there will no longer be a forest. So what? There might be urgent present reasons for doing that (say, for instance, no other source of heat/fuel for cooking or no other source of income) that are very likely to change in a fairly short time frame (ie, before complete deforestation has occurred); the current prices of pulp or firewood may be meaningfully higher than their anticipated future prices (‘selling’ off some capital assets would therefore be fairly prudent); there might be future technological innovations that a) (re-)grows forests quicker, b) offers a better substitute to the current use of wood, c) allows us to cheaply make use of more from what we chop down.

Almost any practice taken as a snap-shot in time is literally ‘unsustainable’. Naively believing that they will mindlessly continue linearly into the future is quite silly; hailing processes that don’t as righteous and ‘sustainable’ is similarly silly. Human societies and their economic process are dynamic systems capable of (read: constantly) change.

By saying that something is unsustainable, my generation wants to convey the idea that these activities are immoral and that they shouldn’t continue. It’s a naive and erroneously nonsensical conviction.

The Paradox of Prediction

In one of famous investor Howard Marks’ memos to clients of Oaktree Capital, the eccentric and successful fund manager hits on an interesting aspect of prediction markets and probability alike. In 1993 Marks wrote:

Being ‘right’ doesn’t lead to superior performance if the consensus forecast is also right. […] Extreme predictions are rarely right, but they’re the ones that make you big money.

Let’s unpack this.

In economics, the recent past is often a good indicator for the present: if GDP growth was 3% last quarter, it is likely around 3% the next quarter as well. Similarly, since CPI growth was 2.4% last year and 2.1% the year before, a reasonable forecast for CPI growth for 2019 is north of 2%.

If you forecast extrapolation like this, you’d be right most of the time – but you won’t make any money, neither in betting markets nor financial markets. That is, Marks explains, because the consensus among forecasters are also hoovering around extrapolations from the recent past (give or take some), and so buyers and sellers in these markets price the assets accordingly. We don’t have to go as far as the semi-strong versions of the Efficient Market Hypothesis which claim that the best guesses of all publicly available information is already incorporated into the prices of securities, but the tendency is the same.

  • if you forecasted 5% GDP growth when most everyone else forecasted 3%, and the S&P500 increased by say 50% when everyone estimated +5%, you presumably made a lot more money than most through, say, higher S&P500 exposure or insane bullish leverage.
  • If you forecasted -5% GDP growth when most everyone else forecasted 3%, and the S&P500 fell 40% when everyone estimated +5%, you presumably made a lot more money than most through staying out out S&P500 entirely (holding cash, bonds or gold etc).

But if you look at all the forecasts over time by people who predicted radically divergent outcomes, you’ll find that they quite frequently predict radically divergent outcomes – and so they would be spectacularly wrong most of the time since extrapolation is usually correct. But occasionally they do get it right. In hammering the point home, Marks says:

the fact that he was right once doesn’t tell you anything. The views of that forecaster would not be of any value to you unless he was right consistently. And nobody is right consistently in making deviant forecasts.

The forecasts that do make you serious money are those that radically deviate from the extrapolated past and/or current consensus. Once in a while – call it shocks, bubble mania or creative destruction – something large happens, and the real world outcomes land pretty far from the consensus predictions. If your forecast led you to act accordingly, and you happened to be right, you stand the make a lot of money:

Predicting future development of markets thus put us in an interesting position: the high-probability forecasts of extrapolated recent past are fairly useless, since they cannot make an investor any money; the low-probability forecasts of radically deviant change can make you money, but there is no way to identify them among the quacks, charlatans, and permabears. Indeed, the kind of people who accurately call radically deviant outcomes are the ones who frequently make such radically deviant projections and whose track record of accurately forecasting the future are therefore close to zero.

Provocatively enough, Marks concludes that forecasting is not valuable, but I think the bigger lesson applies in a wider intellectual sense to everyone claiming to have predicted certain events (market collapses, financial crises etc).

No, you didn’t. You’re a consistently bullish over-optimist, a consistent doomsday sayer, or you got lucky; correctly calling 1 outcome out of 647 attempts is not indicative of your forecasting skills; correctly calling 1 outcome on 1 attempt is called ‘luck’, even if it seems like an impressive feat. Indeed, once we realize that there are literally thousands of people doing that all the time, ex post there will invariably be somebody who *predicted* it.

Stay skeptical.

Monetary Progression and the Bitcoiner’s History of Money

In the world of cryptocurrencies there’s a hype for a certain kind of monetary history that inevitably leads to bitcoin, thereby informing its users and zealots about the immense value of their endeavor. Don’t get me wrong – I laud most of what they do, and I’m much looking forward to see where it’s all going. But their (mis)use of monetary history is quite appalling for somebody who studies these things, especially since this particular story is so crucial and fundamental to what bitcoiners see themselves advancing.

Let me sketch out some problems. Their history of money (see also Nick Szabo’s lengthy piece for a more eloquent example) goes something like this:

  • In the beginning, there was self-sufficiency and the little trade that occurred place took place through barter.
  • In a Mengerian process of increased saleability (Menger’s word is generally translated as ‘saleableness’, rather than ‘saleability’), some objects became better and more convenient for trade than others, and those objects emerged as early primative money. Normally cherry-pick some of the most salient examples here, like hide, cowrie shells, wampum or Rai stones.
  • Throughout time, precious metals won out as the best objects to use as money, initially silver and gradually, as economies grew richer, large-scale payments using gold overtook silver.
  • In the early twentieth century, evil governments monopolized the production of money and through increasingly global schemes eventually cut the ties to hard money and put the world on a paper money fiat standard, ensuring steady (and sometimes not-so-steady) inflation.
  • Rising up against this modern Goliath are the technologically savvy bitcoiners, thwarting the evil money producing empires and launching their own revolutionary and unstoppable money; the only thing that stands in its way to worldwide success are crooked bankers backed by their evil governments and propaganda as to how useless and inapt bitcoin is.

This progressively upward story is pretty compelling: better money overtake worse money until one major player unfairly took over gold – the then-best money – replacing it with something inferior that the Davids of the crypto world now intents to reverse. I’m sure it’ll make a good movie one day. Too bad that it’s not true.

Virtually every step of this monetary account is mistaken.

First, governments have almost always defined – or at least seriously impacted – decisions over what money individuals have chosen to use. From the early Mesopotamian civilizations to the late-19th century Gold Standard that bitcoin is often compared to, various rulers were pretty much always involved. Angela Redish writes in her 1993 article ‘Anchors Aweigh’ that

under commodity standards – in practice – the [monetary] anchor was put in place not by fundamental natural forces but by decisions of human monetary authorities. (p. 778)

Governments ensured the push to gold in the 18th and 19th centuries, not a spontaneous order-decentralized Mengerian process: Newton’s infamous underpricing of silver in 1717, initiating what’s known as the silver shortage; Gold standard laws passed by states; large-scale network effects in play in trading with merchants in those countries.

Secondly, Bills of Exchange – ie privately issued debt – rather than precious metals were the dominant international money, say 1500-1900. Aha! says the bitcoiner, but they were denominated in gold or at least backed by gold and so the precious metal were in fact the real outside money. Nope. Most bills of exchange were denominated in the major unit of account of the dominant financial centre at the time (from the 15th to the 20th century progressively Bruges, Antwerp, Amsterdam and London), quite often using a ghost money, in reference to the purchasing power of a centuries-old coins or social convention.

Thirdly, monetary history is, contrary to what bitcoiners might believe, not a steady upward race towards harder and harder money. Monetary functions such as the medium of exchange and the unit of account were seldomly even united into one asset such as we tend to think about money today (one asset, serving 2, 3 or 4 functions). Rather, many different currencies and units of accounts co-emerged, evolved, overtook one another in response to shifting market prices or government interventions, declined, disappeared or re-appeared as ghost money. My favorite – albeit biased – example is early modern Sweden with its copper-based trimetallism (copper, silver, gold), varying units of account, seven strictly separated coins and notes (for instance, both Stockholms Banco and what would later develop into Sveriges Riksbank, had to keep accounts in all seven currencies, repaying deposits in the same currency as deposited), as well as governmental price controls for exports of copper, partly counteracting effects of Gresham’s Law.

The two major mistakes I believe bitcoiners make in their selective reading of monetary theory and history are:

1) they don’t seem to understand that money supply is not the only dimension that money users value. The hardness of money – ie, the difficulty to increase supply – as an anchoring of price levels or stability in purchasing power is one dimension of money’s quality – far from the only. Reliability, user experience (not you tech nerds, but normal people), storage and transaction costs, default-risk as well as network effects might be valued higher from the consumers’ point of view.

2) Network effects: paradoxically, bitcoiners in quibbling with proponents of other coins (Ethereum, ripple, dash etc) seem very well aware of the network effects operating in money (see ‘winner-takes-it-all’ arguments). Unfortunately, they seem to opportunistically ignore the switching costs involved for both individuals and the monetary system as a whole. Even if bitcoin were a better money that could service one or more of the function of money better than our current monetary system, that would not be enough in the presence of pretty large switching costs. Bitcoin as money has to be sufficiently superior to warrant a switch.

Bitcoiners love to invoke history of money and its progression from inferior to superior money – a story in which bitcoin seems like the natural next progression. Unfortunately, most of their accounts are lacking in theory, and definitely in history. The monetary economist and early Nobel Laureate John Hicks used to say that monetary theory “belongs to monetary history, in a way that economic theory does not always belong to economic history.”

Current disputes over bitcoin and central banking epitomize that completely.

Asking questions about women in the academy

Doing the economist’s job well, Nobel Laureate Paul Romer once quipped, “means disagreeing openly when someone makes an assertion that seems wrong.”

Following this inspirational guideline of mine in the constrained, hostile, and fairly anti-intellectual environment that is Twitter sometimes goes astray. That the modern intellectual left is vicious we all know, even if it’s only through observing them from afar. Accidentally engaging with them over the last twenty-four hours provided some hands-on experience for which I’m not sure I’m grateful. Admittedly, most interactions on twitter loses all nuance and (un)intentionally inflammatory tweets spin off even more anger from the opposite tribe. However, this episode was still pretty interesting.

It started with Noah Smith’s shout-out for economic history. Instead of taking the win for our often neglected and ignored field, some twitterstorians objected to the small number of women scholars highlighted in Noah’s piece. Fair enough, Noah did neglect a number of top economic historians (many of them women) which any brief and incomprehensive overview of a field would do.

His omission raised a question I’ve been hooked on for a while: why are the authors of the most important publications in my subfields (financial history, banking history, central banking) almost exclusively male?

Maybe, I offered tongue-in-cheek in the exaggerated language of Twitter, because the contribution of women aren’t good enough…?

Being the twenty-first century – and Twitter – this obviously meant “women are inferior – he’s a heretic! GET HIM!”. And so it began: diversity is important in its own right; there are scholarly entry gates guarded by men; your judgment of what’s important is subjective, duped, and oppressive; what I happen to care about “is socially conditioned” and so cannot be trusted; indeed, there is no objectivity and all scholarly contribution are equally valuable.

Now, most of this is just standard postmodern relativism stuff that I couldn’t care less about (though, I am curious as to how it is that the acolytes of this religion came to their supreme knowledge of the world, given that all information and judgments are socially conditioned – the attentive reader recognises the revival of Historical Materialism here). But the “unequal” outcome is worthy of attention, and principally the issue of where to place the blame and to suggest remedies that might prove effective.

On a first-pass analysis we would ask about the sample. Is it really a reflection of gender oppression and sexist bias when the (top) outcome in a field does not conform to 50:50 gender ratios? Of course not. There are countless, perfectly reasonable explanations, from hangover from decades past (when that indeed was the case), the Greater Male Variability hypothesis, or that women – for whatever reason – have been disproportionately interested in some fields rather than others, leaving those others to be annoyingly male.

  • If we believe that revolutionising and top academic contributions have a long production line – meaning that today’s composition of academics is determined by the composition of bright students, say, 30-40 years ago – we should not be surprised that the top-5% (or 10% or whatever) of current academic output is predominantly male. Indeed, there have been many more of them, for longer periods of time: chances are they would have managed to produce the best work.
  • If we believe the Greater Male Variability hypothesis we can model even a perfectly unbiased and equal opportunity setting between men and women and still end up with the top contribution belonging to men. If higher-value research requires smarter people working harder, and both of those characteristics are distributed unequally between the sexes (as the Greater Male Variability hypothesis suggests), then it follows naturally that most top contributions would be men.
  • In an extension of the insight above, it may be the case that women – for entirely non-malevolent reasons – have interests that diverge from men’s (establishing precise reasons would be a task for psychology and evolutionary biology, for which I’m highly unqualified). Indeed, this is the entire foundation on which the value of diversity is argued: women (or other identity groups) have different enriching experiences, approach problems differently and can thus uncover research nobody thought to look at. If this is true, then why would we expect that superpower to be applied equally across all fields simultaneously? No, indeed, we’d expect to see some fields or some regions or some parts of society dominated by women before others, leaving other fields to be overwhelmingly male. Indeed, any society that values individual choice will unavoidably see differences in participation rates, academic outcomes and performance for precisely such individual-choice reasons.

Note that none of this excludes the possibility of spiteful sexist oppression, but it means judging academic participation on the basis of surveys responses or that only 2 out of 11 economic historians cited in an op-ed were women, may be premature judgments indeed.

In Defense of Not Having a Clue

Timely, both in our post-truth world and for my current thinking, Bobby Duffy of the British polling company IPSOS Mori recently released The Perils of Perception, stealing the subtitle I have (humbly enough) planned for years: Why We’re Wrong About Nearly Everything. Duffy and IPSOS’s Perils of Perception surveys are hardly unknown for an informed audience, but the book’s collection and succint summary of the psychological literature behind our astonishingly uninformed opinions, nevertheless provide much food for thought.

Producing reactions of chuckles, indignation, anger, and unseeming self-indulgent pride, Duffy takes me on a journey of the sometimes unbelievably large divergence between the state of the world and our polled beliefs about the world. And we’re not primarily talking about unobservable things like “values” here; we’re almost always talking about objective, uncontroversial measures of things we keep pretty good track of: wealth inequality, share of immigrants in society, medically defined obesity, number of Facebook accounts, murder and unemployment rates. On subject after subject, people guess the most outlandish things: almost 80% of Britons believed that the number of deaths from terrorist attacks between 2002 and 2016 were more or about the same as 1985-2000, when the actual number was a reduction of 81% (p. 131); Argentinians and Brazilians seem to believe that roughly a third and a quarter of their population, respectivelly, are foreign-born, when the actual numbers are low single-digits (p. 97); American and British men believe that American and British women aged 18-29 have had sex as many as 23 times in the last month, when the real (admittedly self-reported) number is something like 5 times (p. 57).

We can keep adding astonishing misperceptions all day: Americans believe that more than every third person aged 25-34 live with their parents (reality: 12%), but Britons are even worse, guessing almost half (43%) of this age bracket, when reality is something like 14%; Australians on average believe that 32% of their population has diabetes (reality more like 5%) and Germans (31% vs 7%), Italians (35% vs 5%), Indians (47% vs 9%) and Britons (27% vs 5%) are similarly mistaken.

The most fascinating cognitive misconception is Britain’s infected relationship with inequality. Admittedly a confusing topic, where even top-economists get their statistical analyses wrong, inequality makes more than just the British public go bananas. When asked how large a share of British household wealth is owned by the top-1% (p. 90), Britons on average answered 59% when the reality is 23% (with French and Australian respondents similarly deluded: 56% against 23% for France and 54% against 21% for Australia). The follow-up question is even more remarkable: asked what the distribution should be, the average response is in the low-20s, which, for most European countries, is where it actually is. In France, ironically enough given its current tax riots, the respondents’ reported ideal household wealth proportion owned by the top-1% is higher than it already is (27% vs 23%). Rather than favoring upward redistribution, Duffy draws the correct conclusion:

“we need to know what people think the current situation is before we ask them what they think it should be […] not knowing how wrong we are about realities can lead us to very wrong conclusions about what we should do.” (p. 93)

Another one of my favorite results is the guesses for how prevalent teen pregnancies are in various countries. All of the 37 listed countries (p. 60) report numbers around less than 3% (except South Africa and noticeable Latin American and South-East Asian outliers at 4-6%), but respondents on average quote absolutely insane numbers: Brazil (48%), South Africa (44%) Japan (27%), US (24%), UK (19%).

Note that there are many ways to trick people in surveys and report statistics unfaithfully and if you don’t believe my or Duffy’s account of the IPSOS data, go figure it out for yourself. Regardless, is the take-away lesson from the imagine presented really that people are monumentally stupid? Ignorant in the literal sense of the world (“uninstructed, untututored, untaught”), or even worse than ignorant, having systematically and unidirectionally mistaken ideas about the world?

Let me confess to one very ironic reaction while reading the book, before arguing that it’s really not the correct conclusion.

Throughout reading Duffy’s entertaining work, learning about one extraordinarily silly response after another, the purring of my self-indulgent pride and anger at others’ stupidity gradually increased. Glad that, if nothing else, that I’m not as stupid as these people (and I’m not: I consistently do fairly well on most questions – at least for the countries I have some insight into: Sweden, UK, USA, Australia) all I wanna do is slap them in the face with the truth, in a reaction not unlike the fact-checking initiatives and fact-providing journalists, editorial pages, magazines, and pundits after the Trump and Brexit votes. As intuitively seems the case when people neither grasp nor have access to basic information – objective, undeniable facts, if you wish – a solution might be to bash them in the head or shower them with avalanches of data. Mixed metaphors aside, couldn’t we simply provide what seems to be rather statistically challenged and uninformed people with some extra data, force them to read, watch, and learn – hoping that in the process they will update their beliefs?

Frustratingly enough, the very same research that indicate’s peoples inability to understand reality also suggests that attempts of presenting them with contrary evidence run into what psychologists have aptly named ‘The Backfire Effect’. Like all force-feeding, forcing facts down the throats of factually resistent ignoramuses makes them double down on their convictions. My desire to cure them of their systematic ignorance is more likely to see them enshrine their erroneous beliefs further.

Then I realize my mistake: this is my field. Or at least a core interest of the field that is my professional career. It would be strange if I didn’t have a fairly informed idea about what I spend most waking hours studying. But the people polled by IPSOS are not economists, statisticians or data-savvy political scientists – a tenth of them can’t even do elementary percent (p. 74) – they’re regular blokes and gals whose interest, knowledge and brainpower is focused on quite different things. If IPSOS had polled me on Premier League results, NBA records, chords or tunes in well-known music, chemical components of a regular pen or even how to effectively iron my shirt, my responses would be equally dumbfunded.

Now, here’s the difference and why it matters: the respondents of the above data are routinely required to have an opinion on things they evidently know less-than-nothing about. I’m not. They’re asked to vote for a government, assess its policies, form a political opinion based on what they (mis)perceive the world to be, make decisions on their pension plans or daily purchases. And, quite a lot of them are poorly equipped to do that.

Conversely, I’m poorly equipped to repair literally anything, work a machine, run a home or apply my clumsy hands to any kind of creative or artful endeavour. Luckily for me, the world rarely requires me to. Division of Labor works.

What’s so hard with accepting absence of knowledge? I literally know nothing about God’s plans, how my screen is lit up, my car propels me forward or where to get food at 2 a.m. in Shanghai. What’s so wrong with extending the respectable position of “I don’t have a clue” to areas where you’re habitually expected to have a clue (politics, philosophy, virtues of immigration, economics)?

Note that this is not a value judgment that the knowledge and understanding of some fields are more important than others, but a charge against the societal institutions that (unnaturally) forces us to. Why do I need a position on immigration? Why am I required (or “entitled”, if you believe it’s a useful duty) to select a government, passing laws and dealing with questions I’m thoroughly unequipped to answer? Why ought I have a halfway reasonable idea about what team is likely to win next year’s Superbowl, Eurovision, or Miss USA?

Books like Duffy’s (Or Rosling’s, or Norberg‘s or Pinkers) are important, educational and entertaining to-a-t for someone like me. But we should remember that the implicit premium they place on certain kinds of knowledge (statistics and numerical memory, economics, history) are useful in very selected areas of life – and rightly so. I have no knowledge of art, literature, construction, sports, chemistry or aptness to repair or make a single thing. Why should I have?

Similarly, there ought to be no reason for the Average Joe to know the extent of diabetes, immigration or wealth inequality in his country.

Innovation and the Failure of the Great Man Theory

We tend to think about innovation as inventions and particularly about the inventors associated with them: Newton, Edison, Jobs, Archimedes, Watt, Arkwright.  This Great Man Theory of incredible technical innovation is mostly implicitly held by quite a few of us, celebrating these great men and their deeds.

Matt Ridley, the author of The Rational Optimist and The Evolution of Everything among other credentials, has spent a lot of time and effort in recent years arguing against this theory. In his recent Hayek Lecture to the British Institute of Economic Affairs he convincingly outlines his case: so many independent innovations take place roughly at the same time by different people. The Great Man Theory leads us to believe that  hadn’t it been for Edison, we’ll all be in the dark and humanity deprived ofall the benefits that came with the innovation.

Not so. There were a great number of contemporary inventors who came upon versions of the lightbulb (Ridley cites 21 or 23 or them, depending on whom you include) around the same time as Edison. The story can be repeated for most other great inventions we know of: laws of thermodynamics, calculus, most metals, typewriting machines, jet engines, the ATM, Oxygen. Indeed, the phenomenon is so common that it has its own term: simultaneous invention.

It seems, in complete contrast to the Great Man Theory, that history provided a certain problem, a sufficient number of people working on solving it at a certain time, and eventually similar inventions taking place around the same time. The process is, Ridley concludes, “gradual, incremental, collective yet inescapable inevitable […] it was bound to happen when it did”.

Interestingly enough for those of us schooled and fascinated by spontaneous orders and bottom-up social and economic phenomena, the Great Man Theory is remarkably similar to other beliefs about the world. It is a symptom of the same reasoned short-comings that makes us humans susceptible to believing in zero-sum thinking, top-down organizing and “design-implies-a-designer”. Instead of grasping the deep insights of gains from trade, spontaneous order or evolution, we are tempted by the militaristically directed organizations that we believe we understand rather than the emergent order of many independently acting individuals’ trials and errors.

Precisely this bias makes us susceptible to the mistake Mariana Mazzucato has become famous for wholeheartedly embracing: the idea that, whatever the innovation, government probably did it. That government innovation is productive – or at least more productive than is commonly presumed – and indeed societies can greatly benefit from ramping up government R&D spending. Nevermind incentives, track records or statistical robustness.

Indeed, what Ridley points to is precisely that valuable and life-changing innovation cannot be directed. Admittedly, some innovation does occur in labs, but only a vanishingly small part. Mazzucato and other top-downers could have benefited greatly from listening to Ridley (or reading his book The Rational Optimist; or reading Demsetz’ devastating 1969 article ‘Information and Efficiency’).

Coming full circle and espousing the Hayekian insights, Ridley notes that the price is everything. Specifically the reduction in prices is what matters for innovations to be spread and adopted rather than the ideas themselves. Very little happens in terms of adoption and transmission until prices start to fall dramatically (hint, hint, Bitcoin… or nuclear energy, or renewable energy…). Like the printing press and the steam engine, interesting things start to happen when prices fall – not because an innovation is particularly cool in some subsection of society.

Innovation is a deeply decentralized yet deeply collective process. We face similar challenges that occassionally come to similar conclusions – and history would in all likelihood have progress exactly the same had we not had a Newton or Edison or Jobs.

The Factual Basis of Political Opinions

“Ideology is a menace” Paul Collier says in his forthcoming book The Future of Capitalism and I couldn’t agree more: ideology (and by extension morality) “binds and blinds”, as psychology professor Jonathan Haidt describes i. And ideology, especially utopian dreams by dedicated rulers, is what allows – indeed accounts for – the darkest episodes of humanity. There is a strange dissonance among people for whom political positions, ideology and politics are supremely important:

  • They portray their position as if supported by facts and empirical claims about the world (or at least spit out such claims as if they did believe that)
  • At the same time, believing that their “core values” and “ideological convictions” are immune to factual objections (“these are my values; this is my opinion”)

My purpose here is to illustrate that all political positions, at least in part, have their basis in empirically verifiable claims about the world. What political pundits fail to understand is not only that facts rule the world, but that facts also limits the range of positions one can plausible take. You may read the following as an extension of “everyone is entitled to his or her own opinions, but not to his or her own facts”. Let me show you:

  • “I like ice-cream” is an innocent and unobjectionable opinion to have. Innocent because hey, who doesn’t like ice-cream, and unobjectionable because there is no way we can verify whether you actually like ice-cream. We can’t effortlessly observe the reactions in your brain from eating ice-cream or even criticize such a position.
  • “Ice-cream is the best thing in the world”, again unobjectionable, but perhaps not so innocent. Intelligent people may very well disagree over value scales, and it’s possible that for this particular person, ice-cream ranks higher than other potential candidates (pleasure, food, world peace, social harmony, resurrection of dinosaurs etc).
  • “I like ice-cream because it cures cancer”. This statement, however, is neither unobjectionable nor innocent. First, you’re making a causal claim about curing cancer, for which we have facts and a fair amount of evidence weighing on the matter. Secondly, you’re making a value judgment on the kinds of things you like (namely those that cure cancer). Consequently, that would imply that you like other things that cure cancer.

Without being skilled in medicine, I’m pretty sure the evidence is overwhelmingly against this wonderful cancer-treating property of ice-cream, meaning that your causal claim is simply wrong. That also means that you have to update your position through a) finding a new reason to like ice-cream, thus either invoking some other empirical or causal statement we can verify or revert back to the subjective statements of preferences above, b) renege on your ice-cream position. There are no other alternatives.

Now, replace “ice-cream” above with *minimum wages* and “cancer” with “poverty” or any other politically contested issue of your choice, and the fundamental point here should be obvious: your “opinions” are not simply innocent statements of your unverifiable subjective preferences, but rely on some factual basis. If political opinions, then, consists of subjective value preferences and statements about the world and/or causal connections between things, you are no longer “entitled to your own opinions”. You may form your preferences any way you like – subject to them being internally consistent – but you cannot hold opinions that are based on incorrect observations or causal derivations about the world.

Let me invoke my national heritage, illustrating the point more clearly from a recent discussion on Swedish television.  The “inflammatory” Jordan Peterson, as part of his world tour, visited Norway and Sweden over the past weekend. On Friday he was a guest at Skavlan, one of the most-viewed shows in either country (boasting occasionally of more viewers than the largest sport events) and – naturally– discussed feminism and gender differences. After explaining the scientific evidence for biological gender differences*, and the observed tendency for maximally (gender) egalitarian societies to have the largest rather than smallest gender-related outcomes, Peterson concludes:

“there are only two reasons men and women differ. One is cultural, and the other is biological. And if you minimize the cultural differences, you maximize the biological differences… I know – everyone’s shocked when they hear this – this isn’t shocking news, people have known this in the scientific community for at least 25 years.”

After giving the example of diverging gender rates among engineers and nurses he elaborates on equality of opportunity, to which one of the other talk show guests, Annie Lööf (MP and leader of the fourth largest party with 9% of the parliamentary seats) responds with feelings and personal anecdotes. Here’s the relevant segment transcribed (for context and clarity, I slightly amended their statements):

Peterson: “One of the answers is that you maximize people’s free choice. […] If you maximize free choice, then you also maximize differences in choice between people – and so you can’t have both of those [maximal equality of opportunity and minimal differences along gender lines]”

Lööf: “because we are human beings [there will always be differences in choice]; I can’t see why it differs between me and Skavlan for instance; of course it differs in biological things, but not in choices. I think more about how we raise them [children], how we live and that education, culture and attitudes form a human being whether or not they are a girl or a boy.”

Peterson: “Yes, yes. That is what people who think that the differences between people are primarily culturally constructed believe, but it is not what the evidence suggests.”

Lööf: “Ok, we don’t agree on that”.

So here’s the point: this is not a dispute over preferences. Whether or not biology influences (even constitute, to follow Pinker) the choices we make is not an “I like ice-cream” kind of dispute, where you can unobjectionably pick whatever flavor you like and the rest of us simply have to agree or disagree. This is a dispute of facts. Lööf’s position on gender differences and her desire to politically alter outcomes of people’s choices is explicitly based on her belief that the behaviour of human beings is culturally predicated and thus malleable. If that causal and empirical proposition is incorrect (which Peterson suggests it is), she can no longer readily hold that position. Instead, what does she do? She says: “Ok, we don’t agree”, as if the dispute was over ice-cream!

Political strategizing or virtue signalling aside, this perfectly illustrates the problem of political “opinions”: they espouse ideological positions as the outcome of enlightened or informed fact-based positions, but when those empirical statements are disproved, they revert to being expressions of subjective preference without a consequent diminution of their worth! Conservatives still gladly hum along to Trump’s protectionism, despite overwhelmingly being contradicted in the factual part of their opinion; progressives heedlessly champion rent control, believing that it helps the poor when it overwhelmingly hurts the poor. And both camps act as if the rest of us should pay attention or go out of our way to support them over what, at best, amounts to “I like ice-cream” proposals.

Ideology is a menace, and political “opinions” are the forefront of that ideological menace.

____

*(For a comprehensive overview of the scientific knowledge of psychological differences between men and women, see Steven Pinker’s The Blank Slate – or Pinker’s much-viewed TED-talk outline.)

The Capitalist Peace: What Happened to the Golden Arches Theory?

Many are familiar with the Democratic Peace Theory, the idea that two democracies have never waged war against one another. The point is widely recognized as one of the major benefits of democracy, and the hand-in-hand development of more democracies and fewer/less-devastating wars than virtually any other period of human history, is a tempting and enticing explanation.

Now, it is not overly difficult to come up with counter-examples to the Democratic Peace Theory, and indeed there’s an entire Wikipedia page dedicated to it. Here are some notable and obvious counters:

  • Yugoslavian wars of the 1990s
  • First Kashmir War between India and Pakistan War (1947-49)
  • Various wars between Israel and its neighbors (1967, 1973, 2006 etc)
  • The Football war (1969)
  • Paquisha and Cenepa wars (1981, 1995)

Some people even include the First World War and various 18th and 19th century armed conflicts between major powers (American War of Independence comes to mind), but the question of when a country becomes a democracy naturally arises.

There’s another, equally enticing explanation, the main rationale underlying European Integration: The Capitalist Peace, or in a more entertaining and relatable version: The Golden Arches Theory – as advanced by New York Times columnist Thomas Friedman in the mid-1990s:

No two countries that both have a McDonald’s have ever fought a war against one another.

Countries, frankly, “have too much to lose to ever go to war with one another.” As a proposition it seems reasonable, an extension of the phrase apocryphally attributed to Bastiat: “When goods don’t cross borders, soldiers will”. And not because your Big Mac meal comes with a side of peace-and-love or enhanced conflict-resolution skills, but because the introduction of McDonald’s stores represents close economic interdependence and global supply chains. After all, if your suppliers, your customers or your collegues consists of people on the other side of a potential military conflict, a war seems even less useful. Besides – paraphrasing Terry Anderson and Peter Hill in their superb The Not So Wild Wild Westtrading is cheaper than raiding. Even as adamant a critic as George Monbiot admits that a fair number of McDonald’s outlets “symbolised the transition” from poor and potentially trouble-making countries, to richer and peace-loving ones.

Not unlike poor Thomas Malthus, whose convicing theory had been correct up until that  point, reality rapidly decided to invalidate Friedman’s tongue-in-cheek explanation. Not long after it was published, the McDonald’s-ised nations of Pakistan and India decided to up their antics in the Kargil war, quickly undermining its near-flawless explanatory power of Friedman’s. Not one to leave all the fun to others, Russia engaged in no more than two wars in the 2000s to undermine the Golden Arches theory: the 2008 war with Georgia, and more recently the Crimean crisis. Adherring to their namesake creation, McDonald’s pull-out from Crimea was just a tad too late to vindicate Friedman.

The Capitalist Peace, the academic extension of the general truism that trading is cheaper than raiding, came undone pretty quickly thanks in part to our Russian friends. The updated version, the Dell Theory of Conflict Prevention, may unfortunately fall into the same trap as the Democratic Peace Theory: invoking ambiguous definitions that may ultimately collapse to mere than tautologies.

Do You have Silver?

In an episode of the Netflix medieval series The Last Kingdom, the protagonist Uthred, trying to purchase a sword from a blacksmith in a town he is just passing by, is instantly asked “Do you have silver?”.

In one scene, insignificant to the plot, the series creators neatly raised some fundamental questions in monetary economics, illustrating the relative use of credit and cash and the importance of finality.

For many centuries, the very payment system between people set severe constraints on what kinds of transactions they could – or dared – engage in. There are two main ways of providing payments (with quite a few variations within these categories): cash or credit.

Cash (sometimes referred to as ‘money transactions’) refers to payments with direct finality; the economic chain is instantly settled, and gives rise to no other economic relation. Examples here would be pure barter (where one object is traded for another) or commodity money (where an object is traded for a common media of exchange, with history providing countless fascinating examples: cattle, skin, olive oil, feathers, pearls etc).

The other category, credit, involves trading someone else’s liability or incurring a new one. Modern credit cards easily comes to mind: swiping that card settles the trade between the vendor and the customer who used the card only by creating two new (future) economic relations – a promise by the credit card company to transfer funds to the vendor, and a promise by the customer to pay the credit card company at the end of the month. The same features can be – and were – applied in many early societies; I give you some of my items, and you owe me; later I may transfer this “claim” to somebody else is the community in exchange for something I wanted, and instead of owing me, you owe them.

Some of the difficulties of monetary economics are here quickly revealed. In order for credit to work, a sufficient level of trust, repeated dealings or enforcement mechanisms must exist. If one or more parties do not trust each other, the two are unlikely to trade again or cannot socially or legally force the other into upholding his or her contract, they may refuse the deal up-front and lose the benefits of trade (the “backward induct,” in Game Theory-speak). Nevertheless going through with this transaction requires a different payment system: instant finality, such as provided with cash. Here’s the conundrum that troubles monetary economists:

The frictions that are needed to make money essential typically make credit infeasible and environments where credit is feasible are ones where money is typically not essential (Ugolini, The Evolution of Central Banking, p. 169)

If we trust each other enough (or have enough repeat dealings and a system of keeping track of everyone’s debts), there is no need for cash. If there is need for cash, that means we do not trust each other (or can’t keep track/enforce debts), indicating the presence of “frictions” that make us reluctant to use credit at all.

Let’s go back to our Last Kingdom protagonist. It is clear that the two characters are strangers (no previous dealings, no trust) and from simply passing through a village, no reason for the blacksmith to believe that there may be repeat dealings. A credit transaction is thus clearly out of question. Instead he directly asks for silver (cash), which initially seems to solve the problem. However, two further issues emerge:

  1. if all transactions were like this, the amount of cash everyone must carry around in the economy would be enormous. A common problem in medieval and even early modern societies were the lack of coins. If enough cash was simply not there and recourse to credit system unfeasible, we quickly realise how difficult transacting would be.
  2. even if the customer had enough cash, the very reason they were reluctant to use credit in the first place (no trust, no repeat dealings, no credible enforcement) harms their ability to transact in cash. Howso? Because both parties can opportunistically defect from the agreement. If the sword is paid for up front, the blacksmith can take the money and run – since they are strangers and unlikely to meet again, the cost of cheating is comparatively low. If the sword is paid for at delivery, the customer can easily renege on payment once delivery is obtained.

Is there no way out?

Uthred and the blacksmith use a method most of us are familiar with – indeed, probably even used as kids – pay half up-front, and half on delivery, with the possibility of a bonus payment (tip) at the end. Risk-minimising, yet offering payoff through the gains from trade.

Good monetary economics does precisely that: illustrating how monetary systems, including payment systems, can facilitate transactions and expand rather than limit the available gains from trade. It concerns itself with one of those spheres of (economic) life that we don’t notice until they breaks down. Try completing everyday transactions in countries with small-change shortage for a neat flashback to eighteenth century Britain or U.S., or in countries impaired by hyperinflation or sanctions. Monetary economics, in essence, is fascinating in its complexity of otherwise quite mundane things. Thanks to The Last Kingdom team for illustrating that.

Are Swedish University Tuitions Fees Really Free?

University tuition fees are always popular talking points in politics, media, and over family dinner tables: higher education is some kind of right; it’s life-changing for the individual and super-beneficial for society, thus governments ought to pay for them on economic as well as equity grounds (please read with sarcasm). In general, the arguments for entirely government-funded universities is popular way beyond the Bernie Sanders wing of American politics. It’s a heated debate in the UK and Australia, whose universities typically charge students tuition fees, and a no-brainer in most Scandinavian countries, whose universities have long had up-front tuition fees of zero.

Many people in the English-speaking world idolize Scandinavia, always selectively and always for the wrong reasons. One example is the university-aged cohort enviously drooling over Sweden’s generous support for students in higher education and, naturally, its tradition of not charging tuition fees even for top universities. These people are seldom as well informed about what it actually means – or that costs of attending university is probably lower in both England and Australia. Let me show you some vital differences between these three countries, and thereby shedding some much-needed light on the shallow debate over tution fees:

The entire idea with university education is that it pays off – not just socially, but economically – from the individual’s point of view: better jobs, higher lifetime earnings or lower risks of unemployment (there’s some dispute here, and insofar as it ever existed, the wage premium from a university degree has definitely shrunk over the last decades). The bottom line remains: if a university education increases your lifetime earnings and thus acts as an investment that yield individual benefits down the line, then individuals can appropriately and equitably finance that investment with debt. As an individual you have the financial means to pay back your loan with interest; as a lender, you have a market to earn money – neither of which is much different from, say, a small business borrowing money to invest and build-up his business. This is not controversial, and indeed naturally follows from the very common sense principle that those who enjoy the benefits ought to at least contribute towards its costs.

Another general reason for why we wouldn’t want to artificially price a service such as university education at zero is strictly economical; it bumps up demand above what is economically-warranted. University educations are scarce economic goods with all the properties we’re normally concerned about (has an opportunity cost in its use of rivalrous resources, with benefits accruing primarily to the individuals involved in the transaction), the use and distribution of which needs to be subject to the same market-test as every other good. Prices serve a socially-beneficial purpose, and that mechanism applies even in sectors people mistakenly believe to be public or social, access to which forms some kind of special “human right.”

From a political or social-justice point of view, such arguments tend to carry very little weight, which is why the funding-side matters so much. Because of debt-aversion or cultural reasons, lower socioeconomic stratas of societies tend not to go to university as much as progressives want them to – scrapping tuition fees thus seems like a benefit to those sectors of society. When the financing of those fees come out of general taxation however, they can easily turn regressive in their correct economic meaning, disproportionately benefiting those well off rather than the poor and under-privileged they intended to help:

The idea that graduates should make no contribution towards the tertiary education they will significantly benefit from it, while expecting the minimum wage hairdresser in Hull, or waiter in Wokingham to pick up the bill by paying higher taxes (or that their unborn children and grandchildren should have to pay them due to higher borrowing) is highly regressive.

Although not nearly enough people say it, university is not for everyone. The price tag confronts students, who perhaps would go to university to fulfill an expectation rather than for any wider economic or societal benefit, with a cost as well as a benefit of attending university.

Having said that, I suggest that attending university is probably more expensive in your utopian Sweden than in England or Australia. The two models these three countries have set up look very different at first: in Sweden the government pays the tuition and subsidies your studies; in England and Australia you have to take out debt in order to cover tuition fees. A cost is always bigger than no cost – how can I claim the reverse?

With the following provision: Australian and English students don’t have to pay back their debts until they earn above a certain income level (UK: £18,330; Australia: $55,874). That is, those students whose yearly earnings never reach these levels will have their university degree paid for by the government regardless. That means that the Scandinavian and Anglophone models are almost identical: no or low costs accrue for students today, in exchange for higher costs in the future provided you earn enough income. Clearly, paying additional income taxes when earning high incomes but not on low incomes (Sweden) or paying back my student debt to the government only if I earn high incomes rather than low (England, Australia) amounts to the same thing. Changing the label of a financial transfer from the individual to the government from “debt-repayment” to “tax” has very little meaning in reality.

In one way, the Aussie-English system is somewhat more efficient since it internalises costs to only those who benefited from the service rather than blanket taxing everyone above a certain income threshold: it allows high-income earners who did not reach such financial success from going to university to avoid paying the general penalty-tax on high-incomes that Swedish high-earners do.

Let me show the more technical aspect: In England, earning above £18,330 places you at a position in the 54th percentile, higher than the majority of income-earners. Similarly, in Australia, $55,874 places you above 52% of Aussie income-earners. For Sweden, with the highest marginal income taxes in the world, a similar statistics is trickier to estimate since there is no official cut-off point above which you need to repay it. Instead, I have to estimate the line at which you “start paying” the relevant tax. What line is then the correct one? Sweden has something like 14 different steps in its effective marginal tax schedule, ranging from 0% for monthly incomes below 18,900 SEK (~$2,070) to 69.8% for incomes above 660,000 SEK (~$72,350) or even 75% in estimations that include sales taxes of top-marginal taxes:


If we would place the income levels at which Australian and English students start paying back the cost of their university education, they’d both find themselves in the middle range facing a 45.8% effective marginal tax – suggesting that they would have greatly exceeded the income level at which Swedish students pay back their tuition fees. Moreover, the Australian threshold would exchange into 367,092 SEK as of today, for a position in the 81st percentile – that is higher than 81% of Swedish income-earners. The U.K., having a somewhat lower threshold, converts to 217,577 SEK and would place them in the 48th percentile, earning more than 48% of Swedish income-earners – we’re clearly not talking about very poor people here.

The fact that income-earners in Sweden face a much-elevated marginal tax schedule as well as the simplified calculations above do indicate that despite its level of tuition fees at zero, it is more expensive to attend university in Sweden than it is in England or Australia. Since Australia’s pay-back threshold is so high relative to the income distribution of Sweden (81%), it’s conceivably much cheaper for Australian students to attend university than for it is for Swedish students, even though the tuition list prices may differ (the American debate is much exaggerated precisely because so few people pay the universities’ official list prices).

Letting governments via general taxation completely fund universities is a regressive measure that probably hurts the poor more than it helps the rich. The solution to this is not some quota-scholarships-encourage-certain-groups-version but rather to a) increase and reinstate tuition fees where applicable or b) cut government funding to universities, or ideally get government out of the sector entirely.

That’s a progressive policy in respect to universities. Accepting that, however, would be anathema for most people in politics, left and right.