Sunday Poetry: Arthur Schnitzler’s “Dream Story”

Schnitzler’s Masterpiece “Dream Story” for sure is a contender for the best-written dialogues and endings in the history of literature. Nobody manages it to merge dream and reality in such a sophisticated yet subtle way as Schnitzler.

And if you are a cinematic enthusiast, Stanley Kubrick’s filming of the novel called “Eyes Wide Shut” is well worth a glimpse.

The grey dawn was creeping in through the curtains when Fridolin finished. Albertina hadn’t once interrupted him with a curious or impatient question. She probably felt that he could not, and would not, keep anything from her. She lay there quietly, with her arms folded under her head and remained silent long after Fridolin had finished. He was lying by her side and finally bent over her, and looking into her immobile face with the large, bright eyes in which morning seemed to have dawned, he asked, in a voice of both doubt and hope: “What shall we do now, Albertina?”

She smiled, and after a minute, replied: “I think we ought to be grateful that we have come unharmed out of all our adventures, whether they were real or only a dream.” (My emphasis.)

“Are you quite sure of that?” he asked.

“Just as sure as I am that the reality of one night, let alone that of a whole lifetime, is not the whole truth.”

“And no dream,” he said with a slight sigh, “is entirely a dream.”

She took his head and pillowed it on her breast.

“Now I suppose we are awake,” she said, —” for a long time to come.” He was on the point of saying, “Forever,” but before he could speak, she laid her finger on his lips and whispered, as if to herself: “Never inquire into the future.” So they lay silently, dozing a little, dreamlessly, close to one another—until, as on every morning at seven, there was a knock on the door; and, with the usual noises from the street, a victorious ray of light. Through the opening of the curtain, and the clear laughter of a child through the door, the new day began.

As always, I wish you all a pleasant Sunday.

The Myth of the Nazi War Machine

Nazism and fascism, in the popular imagination, are associated with evil, immoral, inhumane treatment across conquered groups and their own subjects alike. These evil actions loom even larger because the thought of an entire society dedicated to military industry, extending its reach across and beyond Europe, inspires ghastly fears not only of evil intent but also astonishing military might that could overwhelm the Allies with the technological wonder of the V2 rocket, the deadly and ever-present U-boat threat, and the German “Royal Tiger” tank that was so well armored that Sherman-fired shells literally bounced off of it. This vision of the Nazis as conquering through technological and industrial superiority is not just a mistake of modern historians, but is actually based on the overestimation of their foes by the Allies and on the disastrously misplaced overconfident messaging of the Germans, Italians, and Japanese that their technology, industrial power, and elan gave them even a chance of victory. The miscalculation of the Hitler in extrapolating his successes in Poland and France to assuming his alliance could overwhelm the combined defenses of over 1.5 billion people represents the most astonishing delusion in military history.

The inspiration for this comes from Victor Davis Hanson’s fascinating economic and industrial history, The Second World Wars. One of his major arguments is that the Axis leaders lost because their commitment to their ideology became a fantasy that they had abilities that directly contradicted the reality of their actual abilities and those of their opponents. I heartily recommend the book and this shorter interview where he lays out the book’s central concepts. My major takeaway was that this fantasy has gone beyond the minds of Hitler, Tojo, and Mussolini, and the vision of a vast industrial empire looming over the world is now imprinted on our memory of World War II. I think it is past time that we recognize Nazism as not only immoral but also incompetent. Below, I hope to share some astonishing statistics that show beyond a shadow of a doubt that the modern concept of Nazi military might is a myth.

  1. The Allies rode in cars, the Germans rode horses. In 1939, the only transportation available to 85% of German infantry other than walking was horses. By 1945…it was still 85%. In total, the US and UK produced almost 4 million general-use vehicles, compared to 160,000 German vehicles. That is a 25-fold advantage. The Allies also had 1 million infantry-supporting artillery compared to less than 100,000 for all of the Axis.
  2. Where were the supplies? The Allies had 46 million tonnes of merchant shipping vessels to the Axis’ 5 million, five times as much aluminum (key for engines and planes), and by 1943 had cut off all German access to rare metals such as tungsten, one of the key metals used in munitions, manufacturing, and electronics. The US supplied Britain and the USSR through the Lend-Lease Act with almost $700 billion (inflation-adjusted 2019 dollars) in supplies throughout the war, which is roughly double the entire German annual GDP in 1939.
  3. The Allies swam to victory on a sea of oil. Though Rommel came within a battle of accessing the British Middle-Eastern oil fields, the Axis still had astonishingly little fuel (which they needed to power their King Tiger, which drank a gallon of gas every 700 yards, the vast Luftwaffe that put over 130,000 planes into action, and their gigantic battleship Bismark). The Axis as a whole used 66 million metric tonnes of oil, while the Allies used a billion. A 15X advantage.
  4. The panzers were neither numerous nor superior technologically. The Mark 1 and 2 panzers that conquered France were actually less numerous and less technologically advanced than France’s. While blitzkrieg and elan overwhelmed the French, even the Mark 4–the most commonly used panzer in the late war–underperformed Shermans in infantry support and reliability and were even considered inferior to the Soviet T34 by Hitler himself. Even including the outmoded Czech tanks repurposed by the Germans, they fielded only 67,000 tanks on all fronts to face 270,000 Allied tanks (with no help from Italy, with a pitiful 3,300 tanks, and Japan largely ignored mobile land armor and created only 4,500 tanks). The environment of idealogical zeal in Germany prevented a military researcher from telling Hitler about the true tank numbers of the Soviets, as Hitler himself recognized later in the war by repeating that if he had known the true number of T34’s he faced, he would never have invaded. The US and USSR deployed massive numbers of upgraded Shermans and the workhorse T34s, while Germany sank huge investments into specialized and scary duds the Royal Tiger–300,000 man-hours and ten times as much as a Sherman. Only 1,300 Royal Tigers were ever produced, and their 70 tonnes of weight, constant mechanical issues, and cost undercut their supremacy in tank-on-tank duels. The US and Britain used precision bombing to inflict major tank losses on Germany, and while German tanks outfought Soviet tanks roughly 4:1, by 1945 the Soviets still had 25,000 tanks against the Germans’ 6,000.
  5. Collaboration helps both tech and strategy. The Allies worked together–the Sherman’s underpowered 75mm (corrected) could be upgraded with a British gun because of interoperability of parts, and the US and Brits delivered over 12,000 tanks and 18,000 planes to the Soviets under Lend-Lease; the Germans did not even have replaceable parts for their own tanks, and the Germans never helped their Italian allies (who had lost a land invasion even to the collapsing French) develop industrial capabilities. Bletchley Park gave advance warning to US merchant convoys, but the Italians and Japanese found out that Hitler had invaded the USSR only after troops had crossed into Ukraine.
  6. Fascism is not industrially sound. Even though the Nazis put an astonishing 75% of their GDP toward the military by 1944 and despite taking on unsustainable debt to sustain their production, their GDP in 1939 was $384 billion, roughly equal to the Soviets and $100 billion less than the UK and France combined. By the end of the war, this fell to $310 billion, compared to a whopping $1.4 trillion US GDP. However, even these numbers do not fully represent how non-mechanized, non-scalable, and non-industrial Germany was even under military dictatorship. While German science and engineering had been pre-eminent pre-WW I, the central control and obsession with infeasible, custom projects before and during the war meant that the Germans had a lower percentage of their population that could be mobilized for wartime production than their opponents, not to mention that their GDP per capita was half of that of the US, and yet the Axis still took on opponents that had productive populations five times their size.
  7. The V2 was a terrible investment. After losing the Battle of Britain (largely because of inferior training, radar, and plane production), the Nazis tried to use ballistic missiles to bomb the Brits into submission. The less technologically sophisticated V1 delivered a respectable 1,000 kg of explosives, but despite launching over 10,000, by mid-1944 the British countermeasures stopped 80% of these, and many misfired, failed to explode, or had guidance system malfunctions. The V2 was more sophisticated, but was never mass produced: only 3,000 were launched, and more Nazis were killed as part of the development of the rocket than Brits by their launch. The V1 and V2 programs combined cost 50% more than the Manhattan project, and even compared to the US’s most expensive bombing program (developing the B29), the cost-per-explosives-delivered was thirty times higher for the V2.
  8. The Luftwaffe was completely overmatched even by the RAF alone. Before the Battle of Britain, the Luftwaffe (2,500 planes) outnumbered the RAF (about 1,500), and the RAF was using more outdated Hurricanes than they were the newer Spitfire; however, the Brits scaled up training and production and even put novel innovations into their manufacturing within the 3 months of battle.
  9. The Germans underestimated the scalability of their opponent’s production. By the end of the war, the Brits manufactured 177,000 planes, 44,000 more than Germany. Crucially, though they started the war with far fewer experienced pilots, the Brits used this production advantage to train their pilots far better (in fact, the Brits had over 40,000 training aircraft). The US was similarly underprepared in terms of both aircraft production and training, but within a year had increased production from one B-24 every two weeks in 1940 to one every two hours in 1942. The US manufactured almost 300,000 planes by the end of the war, with far superior bombers (the figher-resistant B-17 and the giant, sophisticated Super Fortress B-29). However, the German air force personnel still needed to be more numerous than either the US or Britain because of the lack of mechanization.
  10. The Germans could not replace their pilots. By early 1945, the Germans were losing 30% of their pilots every month, even after giving up on bombing campaigns because of high pilot and plane attrition. They never scaled training and were sending completely green pilots against well-trained Allied opponents who had numerical, technological, and experience superiority by 1943 and air supremacy by 1944.
  11. The Germans did not deploy new air technologies to their advantage. While the jet engine and V2 rockets would revolutionize air power after the war, they did not impact the outcome of the war except to drain German R&D. Germany also failed to develop a functional heavy bomber, did not update their fighters’ technology during the war, never fully or effectively deployed radar, and never matched the Allies’ anti-aircraft defenses.
  12. The Allies could win through strategic bombing, but the reverse was not true. Both sides targeted industry and killed civilians en masse in strategic campaigns, but Germany never had the ability to strategically reduce their enemies’ production. Though Germany dropped 760,000 tonnes of ordnance on the Soviets and systematically destroyed production west of the Urals, the Soviets moved their industry to the East and continued outproducing their opponents with respect to tanks, vehicles, artillery, machine guns, and munitions. The Germans never produced a functional 4-engine bomber, so they could not use strategic bombing to undercut industry beyond this; the Blitz killed 40,000 civilians and destroyed over a million homes, but never developed into a threat against British military production. This also cost the Luftwaffe over 2,200 planes and 3,500 of their best pilots. However, nearly every major German and Japanese city was reduced by an unbelievable 3.5 million tonnes of ordnance dropped by the Allies, which killed over 700,000 German and Japanese civilians and destroyed the majority of both empires’ military production.
  13. The U-boat campaign became a colossal failure by 1943. Though the unrestricted submarine warfare of 1940-41 was sinking enough merchant vessels to truly threaten British supplies, Allied countermeasures–code-cracking, sonar, depth charges, Hedgehogs, Squids, and the use of surface aircraft to screen fleets–systematically destroyed the U-boats, which had losses of over 80% by the end of the war. In fact, the Germans barely managed to exceed the total merchant losses inflicted in World War I, and in May-June 1943 only sank two ships for every U-boat lost, ending the Battle of the Atlantic in just two disastrous months. The US was producing ships and supplies so quickly and in such vast quantities that the U-boats needed to sink 700,000 tonnes of shipping every month just to keep up with this production, which they did in only one month (November 1942); this number sank to less than a tenth of that by early 1943.
  14. The US actually waged a successful submarine campaign. Unlike the Germans, the US completely neutered the Japanese merchant fleet using submarines, which also inflicted over 55% of total Japanese fleet losses during the war, with minimal losses of submarine crews. Using just 235 submarines, the US sank 1,000 ships, compared to roughly 2,000 sunk by Germany (which cost almost 800 U-boat losses).
  15. Naval war had changed, and only the US responded. After the sinking of the HMS Prince of Wales near Singapore, all nations should have recognized that naval air forces were the new way to rule the waves. And yet, the Germans only ever built a single aircraft carrier despite their need to support operations in North Africa, and built the Tirpitz, a gigantic Bismarck-class battleship (that cost as much as 20 submarines), which barely participated in any offensive action before being destroyed by successive air raids. Germany never assembled a fleet capable of actually invading Britain, so even if they had won the Battle of Britain, there were no serious plans to actually conquer the island. Japan recognized the importance of aircraft carriers, and built 18, but the US vastly overmatched them with at least 100 (many of them more efficient light carriers), and Japan failed to predict how naval air supremacy would effectively cut them off from their empire and enable systematic destruction of their homeland without a single US landing on Japanese home soil.
  16. The Nazis forgot blitzkrieg. The rapid advances of Germany in 1939 is largely attributable to the decentralized command structure that enabled leaders on the front to respond flexibly based on mission-driven instructions rather than bureaucracy. However, as early as Dunkirk (when Hitler himself held back his tank forces out of fear), the command structure had already shifted toward top-down bureaucracy that drummed out gifted commanders and made disastrous blunders through plodding focuses on besieging Sevastopol and Stalingrad rather than chasing the reeling Soviets. Later, the inflexibility of defenses and “no-retreat” commands that allowed encirclement of key German forces replayed in reverse the inflexibility of the Maginot line and Stalin’s early mistakes, showing that the fascist system prevented learning from one’s enemy and even robbed the Germans of their own institutional advantages over the course of the war.
  17. Even the elan was illusory. Both Germany and Japan knew they were numerically inferior and depended on military tradition and zeal to overcome this. While German armies generally went 1:1 or better (especially in 1941 against the Soviets, when they killed or captured 4 million badly-led, outdated Soviet infantry), even the US–fighting across an ocean, with green infantry and on the offensive against the dug-in Germans–matched the Germans in commitment to war and inflicted casualties at 1:1. At the darkest hour, alone against the entire continent and while losing their important Pacific bases one by one, the Brits threw themselves into saving themselves and the world from fascists; only secret police and brute force kept the Nazis afloat once the tide had turned. The German high command was neutered by the need for secrecy and the systematic replacement of talented generals with loyal idiots, and the many mutinies, surrenders, and assassination attempts by Nazi leaders show that the illusory unity of fascism was in fact weaker under pressure than the commitment and cooperation of democratic systems.
  18. The Nazis never actually had plans that could win an existential war. Blitzkrieg scored some successes against the underprepared Poles and demoralized French, but these major regional victories were fundamentally of a different character than the conflicts the Nazis proceeded to start. While the Germans did take over a million square miles from the Soviets while destroying a 4-million-strong army, the industry was eventually transferred beyond the Urals and the Soviets replenished their army with, over 4 years, a further 30 million men. But most of all, even if Hitler somehow achieved what Napoleon himself could not, neither he nor Tojo had any ability to attack Detroit, so an implacable, distant foe was able to rain down destruction without ever facing a threat on home soil. The Nazis simply did not have the technology, money, or even the plans to conquer their most industrially powerful opponent, and perhaps the greatest tragedy of the entire war is that 60 million people died to prove something that was obvious from the start.

Overall, the Nazis failed to recognize how air and naval air superiority would impact the war effort, still believed that infantry zeal could overcome technological superiority, could not keep pace with the scale of the Allies’ industry or speed of their technological advances, spent inefficiently on R&D duds, never solved crucial resource issues, and sacrificed millions of their own subjects in no-retreat disasters. Fooled by their early success, delusions of grandeur, and belief in their own propaganda, Hitler and his collaborators not only instituted a morally repugnant regime but destroyed themselves. Fascism a scary ideology that promises great power for great personal sacrifice, but while the sacrifice was real, the power was illusory: as a system, it actually underperformed democracy technologically, strategically, industrially, and militarily in nearly every important category. Hopefully, this diametrical failure is evidence enough for even those who are morally open to fascism to discard it as simply unworkable. And maybe, if we dispel the myth of Nazi industry, we can head off any future experiments in fascism and give due recognition to the awe-inspiring productivity of systems that recognize the value of liberty.

This is in no way exhaustive, and in the interest of space I have not included the analogous Italian and Japanese military delusions and industrial shortcomings in World War II. I hope that this shortlist of facts inspires you to learn more and tell posterity that fascism is not only evil but delusional and incompetent.

All facts taken from The Second World Wars, Wikipedia, or general internet trawling.

Davies’ “Extreme Economies” – Part 2: Failure

In the previous part of this three-part review, I looked at Davies’ first subsection (“Survival”) where he ventured to some of the most secluded and extreme places of the world – a maximum security prison, a refugee camp, a tsunami disaster – and found thriving markets. Not in that pejorative and predatory way markets are usually denounced by their opponents, but in a cooperative, resilient and fascinating way.

In this second part, subtitled “The Economics of Lost Potential”, Davies brings us on a journey of extreme places where markets did not deliver this desirable escape from exceptionally restrictive circumstances.

There might be many reasons for why Extreme Economies has become a widely read and praised book. Beyond the vivid characters and fascinating environments described by Davies, this swinging between opposing perspectives is certainly one. Whether your priors are to oppose markets or to favour them, there is something here for you. Davies isn’t “judgy” or “preachy” and the story comes off as more balanced because of it.

If the previous section showed how markets flourish and solve problems even under the most strained conditions, this section shows how they don’t.

Darien, Panama

We first venture to the Darien Gap, the 160-kilometre dense rainforest that separates the northern and southern sections of the Pan-American Highway – an otherwise unbroken road from Alaska to the southern tip of Argentina.

To a student of financial history, “Darien” brings up William Paterson’s miserable Company of Scotland scheme in the 1690s; trying to make Scotland great (again?), the scheme raised a large share of scarce Scottish capital and spectacularly squandered it on trying to build a colony halfway around the world. In the first chapter of subsection ‘Failure’, Davies skilfully recounts the Darien Disaster, “Scotland’s greatest economic catastrophe” (p. 114).

Judging from Davies’ ventures into the jungle bordering Panama and Colombia, it wouldn’t be a far cry to call the present state of affairs a similar economic catastrophe. Rather than failed colonies, the failed potential of Darien lies elsewhere: its environmental challenges coupled with the trade and markets that failed to emerge despite readily available mutual gains for trade.

A stunning landscape of mile after mile filled with rainforests and rivers and the occasional lush farmland, the people of the Gap make a living through extracting what the land provides. If you’re deep into environmentalism, you might even say unsustainably so. Davies’ point is to illustrate a more well-known economic problem: when unowned or communally owned resources suffer from the tragedy of the commons – the tendency is for such resources to be overexploited and ultimately destroyed.

Whether through logging companies exceeding their quotas or locals chopping trees out of desperation to survive, the story in Darien is altogether conventional. At the edge of the Gap, “the people of Yaviza do what they can. [T]he environment is an asset, and for many people living in Yaviza getting by is only possible by chipping a bit off a selling it” (p. 120).

What’s striking here is that in times of need (as Davies himself showed in the chapter on Aceh) that’s exactly what we want assets to do! We can show this in down-to-earth, real-world examples like Acehnese women drawing on their jewellery as emergency savings, or in formal economic models such as the C-CAPM, the Consumption Capital Asset Pricing Model, familiar to every business and finance student.

On a much cruder level: if the mere survival of some of the poorest people on earth depend on chopping down precious trees – well, precious to far-away Westerners, anyway – accusing those people of destroying our shared environment is mind-blowingly daft. To rationalise that equation, you have to put a very large value on turtles and trees, and a very small value on human life.

Elinor Ostrom, whose Nobel Prize in economics was awarded to her work on common pool resources, emphasised three ways to solve tragedies of the commons: clear boundaries (i.e. individual property rights); regular communal meetings such that members can voice opinions and amicably resolve conflicts; a stable population so that reputation matters and we can socially police deviant behaviour (p. 125).

The Darien Gap has none of those. Property rights are routinely ignored; the forest includes many different populations (indigenous tribes, farmers, ex-FARC fugitives, illegal immigrants); and those populations fluctuate a lot, meaning that most interactions are one-shot games where reputation becomes useless. End result: extensive, illegal, unsustainable logging mixed with armed strangers.

What I can’t quite wrap my head around is that almost all (market and non-market) interactions that all of us have daily are with strangers: the barista, the people we walk past on the street, the new client you just met or the customer support agent you just talked to. All of them are strangers. A large share of interactions with other humans in the last few centuries of human societies have been one-offs, yet very few of them have spiral into the lawlessness that Davies describes in Darien. Be it the Leviathan, secure property rights, the doux commerce thesis or some wider institutional or cultural reason, but the failure of Darien to establish well-functioning formal and informal markets of the kind we saw in the book’s first part are intriguing.

While a fascinating chapter, it might also be Davies’ worst chapter, factually speaking. He claims, mistakenly, that “globally, deforestation continues apace with 2016 the worst year on record for tree loss”. On the contrary, we’re approaching global zero net deforestation. More specifically, Davies claims that Colombia and Panama are particularly at risk here, with rates deforestation “increased sharply”. A quick look through UN’s Global Forest Resource Assessment report (latest figures from 2015), these two countries are indeed chopping down their forests – but by less than any other time period on record.  Moreover, the Colombian net deforestation rate of 0.05% per year is easily exceeded by a number of countries; not even Panama’s dismal 0.3%/year (worse than the Brazilian Amazon) is particularly high in a global or historical perspective.

To make matters worse, the figure on p. 158 titled “The World’s Disappearing Tropics” might win an award for the most misleading graph of the year: by making the bars cumulative and downplaying the annual deforestation, it suggests that the forests are rapidly disappearing. The only comparison to relevant numbers (remember, Rosling teaches us to Always Be Comparing Our Numbers) is the tired “football pitches”. That’s hugely misleading. A vast amount of football pitches cleared in the Amazon this year still only amounted to 0.2% of the Brazilian Amazon; in other words, Brazilians could keep chopping down trees for a few good decades without making much of a dent to that vast rainforest.

davies

Moreover, the only reference point we’re given is that over a period of almost twenty years, an area the size of France has been deforested – but that’s equivalent to no more than one-tenth of only the Amazon forest, and the tropics have many more forested areas than that. The graph aims to intimidate us with ever-rising bars signalling the loss of forests; with some proper numbers and further examination it doesn’t seem very bad at all. On the contrary, locals (and yes, international logging companies) use the assets that nature has endowed them with – what’s so wrong with that?

Finally, the “missing market” that Davies observes in the Gap involves countless of illegal immigrants from around the world that trek through the jungles in search of a better life in the U.S. We have cash-rich Indians, willing to pay people to guide them through unknown and dangerous terrain, and local tribes and farmers and ex-FARC members with such knowledge looking for income; setting up a trade between them ought to be elementary.

Instead, it’s not: “in this place of flux,” writes Davies, “reputation does not matter, interactions are one-offs” (p. 137). Overturning the market quip that “trading is cheaper than raiding”, in the Darien Gap raiding is cheaper than trading. One might of course object that the failures of rich countries to offer more liberal immigration rules for people willing to go this far to get there illegally is hardly a market failure – but a failure of government regulation and incompetent bureaucracies.

Kinshasa, Democratic Republic of the Congo (DRC)

A 12-million people city sprawled on the banks of the Congo river, so unknown to Westerners that most of us couldn’t place it on a map. Democratic Republic of the Congo, the country with more people in extreme poverty than any other, is frequently described as “rich”. Or, with Davies’ euphemism “unrivalled potential” (p. 143).

Congo, the argument goes, has “diamonds, tin and other rare metals, the world’s second-largest rainforest and a river whose flow is second only to the Amazon. [it] shares a time zone with Paris [and the] population is young and growing”. It is one of the poorest countries but “should be one of the richest” (p. 143).

No, no and no. Before any other consideration of the remarkable day-to-day trading and corruption that Davies’ interview subjects describe, this mistaken idea about wealth must be straightened out. Wealth isn’t what could be if this or that major obstacle wasn’t in the way (Am I secretly a great singer, if I could only overcome the pesky fact that I have a voice unsuited for singing and lack practice?). This is almost tautological; what we mean by a country being poor is that it cannot overcome obstacles to wealth.

All wealth has to be created; humanity’s default position is extreme poverty.

And natural resources do not equate to wealth – there is even more support suggesting the opposite – in which case Japan and Singapore ought to be poor and Venezuela and DRC rich. My own sassy musings are still largely correct:

As Mises taught us half a century ago – and Julian Simon more recently – wealth (or even ‘goods’ or ‘commodities’ or ‘services’) are not the physical existence of those objects somewhere in the ground, but the satisfaction and valuation derived by the human mind. The object itself is only a means to whatever end the actor has in mind. Therefore, a “resource” is not the physical oil in the ground or the tons of iron ore in the Australian outback, but the ability of Human Imagination and Ingenuity to use those for his or her goals. After all, before humans learned to harnish the beautiful power of oil into heat, combustion engines and industrial production, it was nothing but a slimy, goe-y liquid in the ground, annoying our farmers. Nothing about its physical appearance changed over the centuries, but the mental abilities and industrial knowledge of human beings to use it for our purposes did.

Still, “modern Kinshasa is a disaster everyone should know about” (p. 172). No country has done worse in terms of GDP/capita since the 1960s. And we don’t have to go far to figure out at least part of the reason: the first rule of Kinshasa, says one of Davies’ interviewees, is corruption (p. 145). Everyone “steals a little for themselves as the funds pass through their hands, and if you pay in at the bottom of the pyramid there are hundreds of low-level tax officials competing to claim your cash.” (p. 185). Mobutu, the country’s long-time dictator, apparently said “if you want to steal, steal a little in a nice way” (p. 159).

Whether small stallholders at gigantic market or supermarket-owning tycoons, workers or university professors, pop-up sellers or police officers, everyone in Kinshasa uses every opportunity they can to extract a little rent for themselves – out of desperation more than malice. And everyone hates it: “The Kinoise”, writes Davies, “understand that these things should not happen, but recognize that their city’s economy demands a more flexible moral code.” (p. 168).

Interestingly enough, DMC is not a country whose state capacity is insufficient; it’s not a “failed state”, an “absent or passive” government whose cities are filled with “decaying official buildings and unfilled civil-service positions.” (p. 148). On the contrary:

The government thrives, with boulevards lined with the offices of countless ministries thronged by thousands of functionaries at knocking-off time. The Congolese state is active but parasitic, a corruption superstructure that often works directly against the interests of its people.

Poorly-paid police officers set up arbitrary roadblocks and extract bribes. Teachers demand a little something before allowing their pupils to pass. Restaurant owners serve their best food to their civil service regulators, free of charge, to even stay in business. Consequently, despite an incredibly resilient and innovative populace, “these innovative strategies are ultimately economic distortion reflecting time spent inventing ways to avoid tax collectors, rather than driving passengers or selling to customers” (p. 162).

But, like the ingenious monetary system of Louisiana prisons, the most fascinating aspect of Kinshasa’s economy is its use of money. Arbitrage traders head across the river to Brazaville in neighbouring Republic of the Congo equipped with dollars which they swap for CFAthe currency of six central African countries, successfully pegged to the euro. With ‘cefa’ they buy goods at Brazaville prices, goods they bring back over the river and undercut exorbitant Kinshasa prices. Selling in volatile and unstable Congolese francs carries risk, so Kinshasa’s streets are littered with currency traders offering dollars – at bid-ask spreads of less than 2%, comparing favourably with well-established Western currency markets. Before most transactions, Kinoise stop by an exchange trader sitting outside restaurants or malls, to acquire some Congolese francs with which to pay. Almost, almost dollarisation.

In Kinshasa, people rely on illegal trading as a safety net when personal disaster strikes or the state’s required bribes become too extortionary. Davies’ point is a convincing one, that “a town, city or country can get stuck in a rut and stay there” (p. 174).

Judging from his venture into Kinshasa, it’s difficult to blame markets for that. I don’t believe I’m invoking a No True Scotsman fallacies by saying that a market whose participants spent half their time avoiding public officials and the other half bribing them to avoid arbitrarily made-up rules, is pretty far from a free market.

Believing the opposite is also silly – that markets and mutual gains from trade can overcome any obstacles placed before them. Governments, culture or institutions have power to completely eradicate the beneficial outcomes of markets – Kinshasa’s extreme poverty attests to that.

Glasgow, the last part of ‘Failure’, is discussed in a separate post.

10 Best American novels of the past half century

Tyler Cowen recently flogged the state of American literature, and for good reason: American literature, like American society as a whole, has always been a bit provincial despite the fact that it’s a commercial republic. Ours is, as Tocqueville once observed, a “disagreeable and talkative patriotism,” and not fit for stories universal in scope. American literature is provincial despite the fact that the republic is the world’s hegemon, too. Again Tocqueville: “in democratic nations a writer can flatter himself that he may get a mediocre renown and a great fortune cheaply.” There is also the fact of the world having too many wonderful writers in it, dead or alive. If you want to enrich yourself, you simply must read as much foreign literature as possible.

Yet it’s hard to believe that American literature, despite its provincialism, is too American for readers around the world to enjoy. The commercial nature of our mores (“I do not know a country where the love of money holds a larger place in the hearts of man,” says Tocqueville of the United States), the sheer size of our republic (325 million people give or take a few million), and the extent to which our cultural grasp has rooted itself worldwide is sure to produce a cosmopolitanism of some scope.

So, I present to you the 10 best American novels produced over the last half century. I do this not out of a vulgar or even talkative patriotism, but out of a respect for the less-heralded cultural underpinnings of the republic, the ones that celebrate and encourage – quietly (almost humbly) – timeless and universal tales about humanity in all its facets.

Fifty years back takes us to 1969. The postwar boom has faded. The so-called Thirty Glorious Years are almost over. The Cold War against the Soviets will be fought for another 20 years. The buzzword of note, in the press and among the wonkish and literary elite, is “de-industrialization.” There are riots in the streets. A once-confident republic is less sure of itself than it has been since its founding era, and has even discovered, perhaps for the first time in its short history, a sense of self-loathing and despair. It is against this mainstream cultural backdrop that the following list comes from:

10. Ham on Rye (1982) by Charles Bukowski. At number 10, Bukowski, known more for his poetry than his novels, barely makes the cut. And Ham on Rye is, at first glance, not a particularly strong choice. It’s about being white trash, which is an essentially American identity (or it was up until ten or twenty years ago). A second glance reveals a more universal theme, though. Henry Chinaski’s mother is from another country. She married a foreign soldier, bore his child, and left her own country for what she thought could only be a better life in the occupying soldier’s homeland. Bukowski’s book is of global relevance.

9. Humboldt’s Gift (1975) by Saul Bellow. Every sentence in Bellow’s story is a breath of fresh air. Every character is memorable. Every theme to be found has universal appeal. This one should probably be ranked higher, to be honest. Bellow’s writing surely pushes the conservative reader of 2019 deeper into his despair over the decay of the republic. Philistines take note: read this one first.

8. Beloved (1987) by Toni Morrison. Yes, I know Morrison just died, but this book would still be on the list even if she was still among the living. Like the ghost in her novel, Morrison’s story will haunt you. Slave novels and haunted houses are as American as apple pie, you say, but what about a runaway slave’s dead baby ghost? Ghosts themselves play a prominent role in much of the world’s literature, as does slavery. Beloved is a world-class tale, though, not only for its subject matter but its themes as well: deep, sorrowful pain and love well-earned.

7. The Echo Maker (2006) by Richard Powers. The intelligence of Richard Powers is overwhelming. His stories are based on the experiences he’s had within America’s scientific and literary institutions. His voice is therefore too American, too literate, unless it’s used to tell a story about a man who seems to have gone insane. The definition of insanity varies across cultures and within the medical profession, but every society has crazy people in it, and Powers’ storytelling ability gives to this notion a new foundation.

6. The Namesake (2003) by Jhumpa Lahiri. This is a debut novel from a prize-winning author, and it’s been overlooked precisely for that reason. It, at first, seems far too American to make this list. There’s the bored housewife driven to philandering, of course, but also the son of immigrant parents who just can’t seem to please anybody. Yet the world now is filled with immigrants and most of them don’t seem to care much about the American Dream. They dawdle, they doodle, and they do their best to come to terms with their dual identities, much as Gogol does in this story. The Namesake is a deceptively great story.

5. Breakfast of Champions (1973) by Kurt Vonnegut. Vonnegut? Maybe, but Breakfast of Champions is too weird to be universal. Shouldn’t the novel that came before Breakfast of Champions get the nod here? Folks, the world is a strange, sometimes violent place, and Vonnegut’s seventh novel captures every essence of such a cold, hard fact. Much of this story screams “too American,” but if you assigned this book to high schoolers in any country of the world, they’d remember it well into old age.

4. The Birth of the People’s Republic of Antarctica (1983) by John Calvin Batchelor. The list’s dark horse, Batchelor’s novel is American literature’s best-kept secret. The story is a familiar one for people around the world. It’s about the unwanted, and it begins in a bar in Stockholm packed with American military deserters and draft dodgers. Throughout the novel, which is peppered with big words and leans heavily on Norse mythology, the United States is never reached, never touched. In fact, none of the story takes place in the United States at all. The protagonist instead floats from Sweden to Antarctica and is beset by a series of horrific events. Americans will think this book weird, but foreigners will understand it just fine.

3. Blood Meridian (1985) by Cormac McCarthy. A cowboy tale. The Wild West. Nothing says “too American” like a Western, you say, but frontier stories are surprisingly universal (think of Facundo, for example, or even War and Peace). Cormac McCarthy has produced several good works, including some that would give the 1990s a spot on this most prestigious of lists, but Blood Meridian is his best novel. At the risk of sounding provincial myself, I’d argue that it’s the best book on the frontier, ever.

2. Middlesex (2002) by Jeffrey Eugenides. There’s not much to add to the commentary on this one. It’s a masterpiece, and one that is obviously global in scope. There is little about this book that is too American, and much to be excited about for America’s future; despite the republic’s many failures it is still the world’s cultural powerhouse. Middlesex contributes to this tradition, and its impact will be felt around the world for decades to come.

1. The Known World (2003) by Edward P. Jones. As good as the other nine books are on this list, The Known World is easily the greatest American novel of the past half century. Surely two slave novels in a list of America’s 10 Best is one too many, and far too American for a list with such cosmopolitan aims. No. The Known World is a work about good, evil, and moral ambiguity. It is a blueprint for the future and an explanation of the present. It perfectly encapsulates the world we’ve always lived in. Jones accomplishes this task with aplomb, and he uses chattel slavery to do it. That’s rare. This novel is a gift to the world, from a people whose cosmopolitanism and morality is often overshadowed by the power of their military and the reach of their clandestine operations.

Further thoughts

Yes the 1990s were garbage, as is this decade, but who knew the aughts were such a great time? How much of an impact did 9-11 have on our literary class?

Yes I know there are a lot of good books written by Americans. If your favorite American novel from the past 50 years is not on this list, it’s because it’s too American (too provincial) or not quite up to the Christensen Snuff.

Yes I know there’s no science fiction or fantasy on this list, and that science fiction and fantasy are just as intellectually stimulating as traditional literature.

Now, back to Feyerabend!

Davies’ “Extreme Economies” – Part 1: Survival

Late to the party, I relied on the quality-control of the masses before I plunged into Richard Davies’ much-hyped book Extreme Economies: Survival, Failure and Future – Lessons from the World’s Limits (see reviews by Diane Coyle and Philip Aldrick). I first heard about it on some Summer Reading List – or perhaps Financial Times’ shortlist for best books of 2019. What really prompted me to read it, however, was an unlikely source: The Guardian’s long-read in late-August. Davies adopted his Louisiana Prison chapter and described the intricate ways prisoners and guards in maximum-security prison Louisiana State Penitentiary (“Angola”) exchange value using the top-up debit card Green Dot and single-use MoneyPak cards. I was hooked.

Davies’ captivating and personal writing in that 4000-word piece made me want to read the full thing. Once I got around to it, I couldn’t put it down – which is the best compliment an author can get. At little over 400 pages of easy non-jargon prose, it doesn’t take too long to get through – and the nine case-study chapters can easily be read on their own. Further attesting to the brilliance of the book are the many questions it raised with me, insights to investigate further.

The book’s structure is simple to follow: three themes ‘Survival’ (“The Economics of Resilience”), ‘Failure’ (“The Economics of Lost Potential”) and ‘Future’ (“The Economics of Tomorrow”), each containing three fascinating places, wrapped between an introductory and a concluding chapter.

The motivation for the book is a mixture of John Maynard Keynes and a Scottish 19th century civil engineer named David Kirkaldy. The latter’s big idea was studying “why materials buckled and bent under pressure” (p. 31); to fully grasp the potential for something, we need to examine why they fall apart. From Keynes Davies took the idea that the future is already partly here:

“We can get a glimpse of the future today, if we know where to look. The trick was to identify a sustained trend – a path most people are following – and look at the lives of those experiencing the extremes of that trend. […] to zoom forward in time, he said, we need to find those whose lives are like this already.” (p. 31)

Davies ventures to nine places of the world, all extreme in some aspect, and investigates the everyday economic challenges that people face and the ingenious ways in which they do – or do not – solve them. By carefully looking at the present, he posits to gauge something about the future.

In this first part – ‘Survival’ – I look at Davies’ three selections (Aceh, Indonesia; Zaatari, Jordan; and Louisiana, U.S.). The next part contains the case studies of ‘Failure’ (Darien, Panama; Kinshasa, DRC; Glasgow, Scotland) and the concluding part looks at ‘Future’ (Akita, Japan; Tallinn, Estonia; and Santiago, Chile). As I have personal experience of living in two of these places while knowing virtually nothing about many of the others, I reserve some complementary reflections on Glasgow and Santiago when appropriate.

Aceh, Indonesia

On Dec 26, 2004, an Indian Ocean earthquake created a tsunami that devastated coastlines from Thailand to Madagascar. Two-thirds of the 230,000 human lives lost were in Indonesia, mostly in the Aceh province on the northern tip of Sumatra, closest to the earthquake’s epicentre. Pictures taken before and after show how complete the destruction was; except for a few sturdy mosques, nothing was left standing.

A few years later, the busy streets and crowded beaches were pretty much back to normal. How?

Davies’ story does not emphasise aid flows or new investment by outsiders, but “informal systems of trade, exchange and even currency” (p. 49), an aspect that generally “goes unmeasured an unassessed” (p. 65). Aceh’s catastrophe is a story of human resilience and of intangibles.

The people Davies interviewed told him how the ancient Aceh practice of keeping savings in wearable and portable gold – necklace, rings, bangles – provided survivors who had lost everything with a source of funds to draw on. Importantly, a gold dealer told him, as the market price of gold is set internationally, the massive sell orders coming in simultaneously did not affect prices very much. Additionally, the dealer’s knowledge of market prices and contacts in Jakarta allowed him to quickly set up his business again. Buying Acehnese’s gold during those crucial months, way before foreign aid or government could effectively respond, provided people with funds to rebuild their lives. Traditional practices “insulated Aceh and provided its entrepreneurs with rapid access to cash” (p. 49).

Another insightful observation is the role played by intangibles – the knowledge of how and where and when that most of our economies depend on. Sanusi, 52-year-old coffee trader, lost everything: his shop, his equipment, his family. Amid his devastation he realized that one thing that the tsunami had not destroyed was his knowledge of the coffee business – where to source the best beans, how to make it, where and when to sell the coffee. He patched together some spare planks, used his business contacts to provide him with trade credit and had his rudimentary coffee business set-up in time for the arrival of coffee-drinking construction and aid-agency workers.

Davies also gives us a very balanced GDP discussion here, as the years after the December 2004 disaster saw huge GDP growth. Most economists would reflexively object and invoke Bastiat’s Broken Window Fallacy. Yes, Davies is well aware, but he’s getting at something more subtle:

“GDP aims to capture what a country’s residents are doing now, rather than what they have done previously. [It is] all about current human activities – spending, wages, income, producing goods – rather than the value embodied in physical assets such as building and factories. Far from being a mean or cold measure, economists’ favourite yardstick is a fundamentally human one.” (p. 53, 65)

To GDP, what you produced in the past is of no consequence. Clearly, when the tsunami devastated the coastline of Aceh, killing hundreds of thousands of people in the process and wiping away houses, factories and equipment, that made everyone poorer – their assets and savings and capital were literally washed away. Considering the massive construction boom that followed, only partly financed by outside aid and government money, it is not incorrect to say that GDP boomed; it is only incorrect to believe that people were made better off because of the disaster. Bastiat teaches us that they were not.

I think of this as the difference between your total savings (in cash, stocks, bank accounts, houses, jewelry) and your monthly income, a difference between “stock” and “flow”. If, like many Acehnese that Davies interviewed, your earnings-potential depend on your knowledge of your industry, your most valuable assets remain untouched even after a complete disaster. Your savings – your capital, your stuff – are completely eradicated, but the basis for your future income remains intact. With some minor equipment – a trade credit, some furniture, a shop patched together with flotsam – you can quickly approach the production and income you had before. GDP attempts to measure that income – not the current value of total assets.

“The people here,” Davies concludes, “lost every physical asset but the tsunami survivors retained skills and knowledge from before the disaster, and rebuilt quickly as a result.” (p. 66).

Zaatari, Jordan

Following the Syrian civil war and its exodus of refugees, camps were set up in many neighbouring countries. Often run by the UN, these camps ensure minimum survivability and life-support for refugees and are rather centrally-planned; the UNHCR hands out blankets, assigns tents and provides in-kind goods and services (food, medicine etc).

In April 2013, the Zaatari camp in the northern Jordan desert had grown to over 200,000 inhabitants, with daily inflows of up to 4,000 refugees. It was too much – and the UNHCR “ran out of manpower” (p. 70). They rationalised operations, focused on their core tasks – and left individuals alone to trade, construct and flourish on their own. It became a lesson in anarchic cooperation and of the essentiality of markets – and, like the Louisiana prison economy below, an ingenious monetary system.  It “did not happen by design, but by accident”, Davies writes, and constitutes “an economic puzzle worth unpicking” (p. 72) only if you doubt the beneficial consequences of markets and free people. If you don’t, the result is predictable.

Every month, the Zaatari camp administrators load up payment cards for the refugees with 20 dinars (£23) per person, spendable only in the two camp supermarkets. Designed to be a cashless economy, the money flowed directly from donors to the supermarkets: “refugees cannot transfer cash between wallets, so aid money designated for food cannot be spent on clothes, and the winter clothing allowance cannot be spent on food” (p. 79).

This extreme and artificial economy teaches us something universal about markets; imposed orders, out of touch with market participants’ demands, malfunctions and create huge wastes. Complete monetary control by outsiders, Davies writes, “fails the basic test of any well-functioning market – to be a place where demand meets supply” (pp. 80-81). Supermarkets lacked the things refugees wanted, and they stocked up on things that reflected kickbacks to donor countries (Italian spaghetti or Brazilian coffee), entirely out of sync with Syrian cuisine and preferences. And the unorganic, artificially-set prices were entirely detached from the outside world.

Yet, the refugee city of Zaatari is a flourishing economy where people build, make and trade all kinds of things. How did this happen? Innovative Syrians found a way around their monetary restrictions: the economy of Zaatari “rests on the conversion of homes to business and flipping aid credit, via smuggling, into hard cash” (p. 88). Informal and free markets, at their best.

Along most of the camp’s boundaries, there are no fences, only roads – and the huge number of children playing ball games on the concrete roads or running in and out of the camp, makes identifying who’s a refugee and who’s a teenage smuggler next to impossible. What the refugees did was:

  • buy some item in the supermarket using the e-card credits provided by UNHCR
  • sell it to smugglers for less than their outside market value and obtain hard cash in return
  • smugglers slip out of the camp and sell the goods to Jordanians and other driving past, taking a cut for themselves.

Bottom line: refugees turned 20 dinars of illiquid and restricted e-credit into hard cash, spendable on anything anywhere in the camp. The productive powers of 200,000 refugees was unleashed. In Zaatari, the presence of smugglers allowed large-scale interactions with the outside world – and so the artificially-created closed-loop payment system did not remain closed. Instead, it was connected to the outside Jordanian economy through smuggling!

The take-away point is to cherish market activities, even informal ones, since they “matter to everyone and are fundamentally human” (p. 102). Governments plan and creates problems; markets solve them.

Louisiana State Prison

Analogous to the Zaatari refugees, prisoners in Louisiana’s maximum-security prison (“Angola”) find themselves in a similar economic squeeze: unsatisfied demand and large shortage of goods, artificial constraints on what prisoners can and cannot own. Prisons are places where official prices don’t work: paltry “incomes” through mandatory work stand in no relation to the officially-mandated prices of goods that prisoners can buy at commissary. Accusations of modern slavery comes to mind. The “official price system,” Davies writes, “has been intentionally broken” (p. 119).

To escape their formal and restricted economy, prisoners have long relied on smuggling. Radford’s famous article about cigarettes becoming money in a WWII Prisoners-of-War camp applied – until Angola officials decided to ban tobacco from the premises. Cash too risky to hold; age-old money banned. What now? Fintech to the rescue!

Louisiana prisons “have a remarkable new currency innovation, something far better than tobacco or cans of mackerel”. Physical dollar bills are not handled, bank accounts that leave digital traces are not linked to individuals: “people pay each other with dots”, says an ex-convict that Davies interviewed (p. 132).

Contrary to the belief that smuggling into prisons happen through corrupt prison guards only, prisoners have some power; they can stage riots or make guards’ everyday-life very hard by misbehaving in every imaginable way. That power gives prisoners and guards alike incentives to trade with another – but prisoners don’t have anything to offer, apart from occasional or indivisible services like car repairs or (like Andy Dufresne in the movie Shawshank Redemption) accounting services. And paying guards in commissary products is not gonna cut it.

Here’s how Angola prisoners solved their monetary constraints, obtaining means of payment to smuggle in items their economy’s participants demanded:

  • set up an account with Green Dot, providing a pre-paid debit card without requirements of ID or proof of address.
  • buy a second card, a single-use scratch card called MoneyPak, used to load the first card with anywhere between $20 and $500. These cards are usable anywhere that accepts VISA and Mastercards, and easily bought/cashed out at Walmarts or pharmacies.
  • Scratch away MoneyPak’s 14-digit number (“the dots”), and transfer those digits to somebody else, be it another prisoner or guard.
  • that person goes online, logs into their Green Dot account, enters the combination and credit is added to their debit card.

The dots, Davies describes, “are a currency close to cash: an instant, simple and safe transfer of value over long distance” (p. 134). Even prison economies, argues Davies, “show that the human urge to trade and exchange information is impossible to repress” (p. 136).

The Economics of Resilience

The power of informal economies are great – and essential to people cut off from regular economic processes. Through natural disasters, in refugee camps or in prisons, innovative people find ways around their imposed-upon constraints and “establish a trading system if theirs is damaged, destroyed or limited in some way”. (p. 135)

Aceh, Zaatari and the Angola prison show “three places where markets, currencies, trade and exchange exist despite all odds.” (p. 139).

Hyperinflation and trust in Ancient Rome

Since it hit 1,000,000% in 2018, Venezuelan hyperinflation has actually been not only continuing but accelerating. Recently, Venezuela’s annual inflation hit 10 million percent, as predicted by the IMF; the inflation jumped so quickly that the Venezuelan government actually struggled to print its constantly-inflated money fast enough. This may seem unbelievable, but peak rates of monthly inflation were actually higher than this in Zimbabwe (80 billion percent/month) in 2008, Yugoslavia (313 million percent/month) in 1994, and in Hungary, where inflation reached an astonishing 41.9 quadrillion percent per month in 1946.

The continued struggles to reverse hyperinflation in Venezuela are following a trend that has been played out dozens of times, mostly in the 20th century, including trying to “reset” the currency with fewer zeroes, return to barter, and turning to other countries’ currencies for transactions and storing value. Hyperinflation’s consistent characteristics, including its roots in discretionary/fiat money, large fiscal deficits, and imminent solvency crises are outlined in an excellent in-depth book covering 30 episodes of hyperinflation by Peter Bernholz. I recommend the book (and the Wikipedia page on hyperinflations) to anyone interested in this recurrent phenomenon.

However, I want to focus on one particular inflationary episode that I think receives too little attention as a case study in how value can be robbed from a currency: the 3rd Century AD Roman debasement and inflation. This involved an iterative experiment by Roman emperors in reducing the valuable metal content in their coins, largely driven by the financial needs of the army and countless usurpers, and has some very interesting lessons for leaders facing uncontrollable inflation.

The Ancient Roman Currency

The Romans encountered a system with many currencies, largely based on Greek precedents in weights and measures, and iteratively increased imperial power over hundreds of years by taking over municipal mints and having them create the gold (aureus) and silver (denarius) coins of the emperor (copper/bronze coins were also circulated but had negligible value and less centralization of minting). Minting was intimately related to army leadership, as mints tended to follow armies to the front and the major method of distributing new currency was through payment of the Roman army. Under Nero, the aureus was 99% gold and the denarius was 97% silver, matching the low debasement of eastern/Greek currencies and holding a commodity value roughly commensurate with its value as a currency.

The Crisis of the Third Century

However, a major plague in 160 AD followed by auctions of the imperial seat, major military setbacks, usurpations, loss of gold from mines in Dacia and silver from conquest, and high bread-dole costs drove emperors from 160-274 AD to iterative debase their coinage (by reducing the size and purity of gold coins and by reducing the silver content of coins from 97% to <2%). A major bullion shortage (of both gold and silver) and the demands of the army and imperial maintenance created a situation where a major government with fiscal deficits, huge costs of appeasing the army and urban populace, and diminishing faith in leaders’ abilities drove the governing body to vastly increase the monetary volume. This not only reflects Bernholz’ theories of the causes of hyperinflations but also parallels the high deficits and diminishing public credit of the Maduro regime.

Inflation and debasementFigure 1 for Fiat paper

Unlike modern economies, the Romans did not have paper money, and that meant that to “print” money they had to debase their coins. The question of whether the emperor or his subjects understood the way that coins represented value went beyond the commodity value of the coins has been hotly debated in academic circles, and the debasement of the 3rd century may be the best “test” of whether they understood value as commodity-based or as a representation of social trust in the issuing body and other users of the currency.

Figure 2 for Fiat paper

Given that the silver content of coins decreased by over 95% (gold content decreased slower, at an exchange-adjusted rate shown in Figure 1) from 160-274 AD but inflation over this period was only slightly over 100% (see Figure 2, which shows the prices of wine, wheat, and donkeys in Roman Egypt over that period as attested by papyri). If inflation had followed the commodity value of the coins, it would have been roughly 2,000%, as the coins in 274 had 1/20th of the commodity value of coins in 160 AD. This is a major gap that can only be filled in by some other method of maintaining currency value, namely fiat.

Effectively, a gradual debasement was not followed by insipid ignorance of the reduced silver content (Gresham’s Law continued to influence hoards into the early 3rd Century), but the inflation of prices also did not match the change in commodity value, and in fact lagged behind it for over a century. This shows the influence of market forces (as monetary volume increased, so did prices), but soundly punctures the idea that coins at the time were simply a convenient way to store silver–the value of the coins was in the trust of the emperor and of the community recognition of value in imperial currency. Especially as non-imperial silver and gold currencies disappeared, the emperor no longer had to maintain an equivalence with eastern currencies, and despite enormous military and prestige-related setbacks (including an emperor being captured by the Persians and a single year in which 6 emperors were recognized, sometimes for less than a month), trade within the empire continued without major price shocks following any specific event. This shows that trust in the solvency and currency management by emperors, and trust in merchants and other members of the market to recognize coin values during exchanges, was maintained throughout the Crisis of the Third Century.

Imperial communication through coinage

This idea that fiat and social trust maintained higher-than-commodity-values of coins is bolstered by the fact that coins were a major method of communicating imperial will, trust, and power to subjects. Even as Roman coins began to be rejected in trade with outsiders, legal records from Egypt show that the official values of coins was accepted within the army and bureaucracy (including a 1:25 ratio of aureus-to-denarius value) so long as they depicted an emperor who was not considered a usurper. Amazingly, even after two major portions of the empire split off–the Gallic Empire and the Palmyrene Empire–continued to represent their affiliation with the Roman emperor, including leaders minting coins with their face on one side and the Roman emperor (their foe but the trusted face behind Roman currency) on the other and imitating the symbols and imperial language of Roman coins, through their coins. Despite this, and despite the fact that the Roman coins were more debased (lower commodity value) compared to Gallic ones, the Roman coins tended to be accepted in Gaul but the reverse was not always true.

Interestingly, the aureus, which was used primarily by upper social strata and to pay soldiers, saw far less debasement than the more “common” silver coins (which were so heavily debased that the denarius was replaced with the antoninianus, a coin with barely more silver but that was supposed to be twice as valuable, to maintain the nominal 1:25 gold-to-silver rate). This may show that the army and upper social strata were either suspicious enough of emperors or powerful enough to appease with more “commodity backing.” This differential bimetallist debasing is possibly a singular event in history in the magnitude of difference in nominal vs. commodity value between two interchangeable coins, and it may show that trust in imperial fiat was incomplete and may even have been different across social hierarchies.

Collapse following Reform

In 274 AD, after reconquering both the Gallic and Palmyrene Empire, with an excellent reputation across the empire and in the fourth year of his reign (which was long by 3rd Century standards), the emperor Aurelian recognized that the debasement of his currency was against imperial interests. He decided to double the amount of silver in a new coin to replace the antoninianus, and bumped up the gold content of the aureus. Also, because of the demands of ever-larger bread doles to the urban poor and alongside this reform, Aurelian took far more taxes in kind and far fewer in money. Given that this represented an imperial reform to increase the value of the currency (at least concerning its silver/gold content), shouldn’t it logically lead to a deflation or at least cease the measured inflation over the previous century?

In fact, the opposite occurred. It appears that between 274 AD and 275 AD, under a stable emperor who had brought unity and peace and who had restored some commodity value to the imperial coinage, with a collapse in purchasing power of the currency of over 90% (equivalent to 1,000% inflation) in several months. After a century in which inflation was roughly 3% per year despite debasement (a rate that was unprecedentedly high at the time), the currency simply collapsed in value. How could a currency reform that restricted the monetary volume have such a paradoxical reaction?

Explanation: Social trust and feedback loops

In a paper I published earlier this summer, I argue that this paradoxical collapse is because Aurelian’s reform was a blaring signal from the emperor that he did not trust the fiat value of his own currency. Though he was promising to increase the commodity value of coins, he was also implicitly stating (and explicitly stating by not accepting taxes in coin) that the fiat value that had been maintained throughout the 3rd Century by his predecessors would not be recognized going forward by the imperial bureaucracy in its transactions, thus signalling that for all army payment and other transactions, the social trust in the emperor and in other market members that had undergirded the value of money would now be ignored by the issuing body itself. Once the issuer (and a major market actor) abandoned fiat currency and stated that newly minted coins would have better commodity value than previous coins, the market–rationally–answered by moving quickly toward commodity value of the coins and abandoned the idea of fiat.

Furthermore, not only were taxes taken in kind rather than coin, but there was widespread return to barter as those transacting tried to avoid holding coins as a store of value. This pushed up the velocity of money (as people abandoned it as a store of value and paid higher and higher amounts for commodities to get rid of their currency). The demonetization/return to barter reduced the market size that was transacted in currency, meaning that there were even more coins (mostly aureliani, the new coin, and antoniniani) chasing fewer goods. The high velocity of money, under Quantity Theory of Money, would also contribute to inflation, and the unholy feedback loop of decreasing value causing distrust, which caused demonetization and higher velocity, which led to decreasing value and more distrust in coins as stores of value kept this cycle going until all fiat value was driven out of Roman coinage.

Aftermath

This was followed by Aurelian’s assassination, and there were several monetary collapses from 275 AD forward as successive emperors attempted to recreate the debased/fiat system of their predecessors without success. This continued through the reign of Diocletian, whose major reforms got rid of the previous coinage and included the famous (and famously failed) Edict on Maximum Prices. Inflation continued to be a problem through 312 AD, when Constantine re-instituted commodity-based currencies, largely by seizing the assets of rich competitors and liquidating them to fund his army and public donations. The impact of that sort of private seizure is a topic for another time, but the major lesson of the aftermath is that fiat, once abandoned, is difficult to restore because the very trust on which it was based has been undermined. While later 4th Century emperors managed to again debase without major inflationary consequences, and Byzantine emperors did the same to some extent, the Roman currency was never again divorced from its commodity value and fiat currency would have to wait centuries before the next major experiment.

Lessons for Today?

While this all makes for interesting history, is it relevant to today’s monetary systems? The sophistication of modern markets and communication render some of the signalling discussed above rather archaic and quaint, but the core principles stand:

  1. Fiat currencies are based on social trust in other market actors, but also on the solvency and rule-based systems of the issuing body.
  2. Expansions in monetary volume can lead to inflation, but slow transitions away from commodity value are possible even for a distressed government.
  3. Undermining a currency can have different impacts across social strata and certainly across national borders.
  4. Central abandonment of past promises by an issuer can cause inflationary collapse of their currency through demonetization, increased velocity, and distrust, regardless of intention.
  5. Once rapid inflation begins, it has feedback loops that increase inflation that are hard to stop.

The situation in Venezuela continues to give more lessons to issuing bodies about how to manage hyperinflations, but the major lesson is that those sorts of cycles should be avoided at all costs because of the difficulty in reversing them. Modern governments and independent currency issuers (cryptocurrencies, stablecoins, etc.) should take lessons from the early stages of previous currency trends toward trust and recognition of value, and then how these can be destroyed in a single action against the promised and perceived value of a currency.

“Return to the Bronze Age… national nudism”

It seems that the alt-right (have we normalized it past the point of quotation marks?) is seriously studied almost exclusively by the political left, and demsoc journalists of the Vice variety, who will study anything edgy. This is a shame, because the alt-right was a point on the political axes chart that has grown to a blob, with its own online mythos, layered culture, and, recently, mass shooters.

The alt-right is an interesting group to study. I’m as interested in them as the Posadists, and agree with them about as much. They are no friends of liberty, so, given the 2016-and-on talk of toxic forces latching onto libertarian institutions, it seems appropriate that the libertarian mind analyze more thoroughly just what the deal is – rather than having the left stoke a pipeline theory ad infinitum.

I’m reading a recent work that is very popular among the alt-right (and other groups), and, in fairness, I do not know whether or not it is “deplorably” alt-right yet. Bronze Age Mindset came out last year and caught mainstream media attention this year, written by an irreverent anonymous author who, like any modern philosopher, has highly public blue thumbs. It’s about some sort of modern scourge, a return to greatness (a familiar theme by this point), and sex politics, I think.

It feels peculiar pausing my ongoing reading – Feyerabend, Land and Krafft-Ebing – for a piece that seems like a 200-page version of Real Social Dynamics, but the alt-right is here, it is, I still think, growing, and I don’t yet think we’ve seen the worst it will do, unfortunately.

If Bronze Age Pervert is one of the in-house philosophers of the alternative right, we should treat his work with the same critical stewardship. I’ll post a review when I’m finished with it.

Look what just arrived in my hands

Trent MacDonald is an economist in Australia. You can order the book here. Or you might have better luck hollering at him on Twitter. Thanks Trent!

Thoughts on ‘For Method’

Our project hasn’t seen much public-facing action, but it’s still happening. For my part, I have (so far) read Lakatos’s lectures that were meant to form the basis for his joint project with Feyerabend.

Before I jump into it, let me start with my favorite quote:

The social sciences are on a par with astrology, it is no use beating about the bush. (Funny that I should be teaching at the London School of Economics!)

Imre Lakatos, p. 107 For and Against Method

These lectures were an entertaining evisceration of some old (and still prevalent) superstitions about the functioning of science, plus Lakatos’s own view on how science actually works. I think his picture (which I’ll describe below) is a pretty good one, but doesn’t actually solve the demarcation problem.

The Big Question (TBQ) is this: how do we separate good science from bad? Lakatos presents three main schools of thought (besides his own):

  1. Demarcationism — a set of schools of thought that share a belief in something like an objective answer to TBQ.
  2. Authoritarianism — the belief that there are some people who can identify good science, but can’t necessarily enunciate their positions.
  3. Anarchism — which argues (according to Lakatos) that there is no good or bad science.

He quickly rejects the various flavors of Demarcationism. These schools of thought are either logically impossible (e.g. inductivism), inconsistent with the history of science, and/or too subjective. They’re popular caricatures of science–cartoons with heroic scientists battling ignorance, limited only by funding. But they aren’t true.

For example, Falsificationism (which is alive and well, half a century later, in the minds of many practicing scientists) tells us that scientists are only swayed by disconfirmatory evidence. But in practice scientists tend to ignore anamolies (i.e. disconfirmatory evidence) with the hope that they’ll be explained away later–and they tend to be swayed by confirmatory evidence in spite of Falsificationist priors.

All told, Demarcationists run into the problem of not being able to come up with a theory that doesn’t make significant errors such as classifying Newton as bad science.

On the far side of the spectrum are anarchists. Far from believing in any formula, criteria, or line in the sand, they say TBQ misses the point entirely. There isn’t such thing as “good” science or “bad” except from the perspective of whatever the current orthodoxy says. For the objective-truth-seeking philosopher, science ultimately boils down to “anything goes!”

For Lakatos, the anarchists have basically surrendered in the face of the demarcation problem. But it’s not clear to me that Lakatos hasn’t joined them. He’s got his progression criterion (more on that later), but can we really pin that down in any objective way? Motterlini seems to think Feyerabend thought Lakatos was really an anarchist after all, and I’m inclined to agree based on what (little) I’ve seen. Lakatos offers heuristics, but makes no guarantees that any formula will work reliably.

Let me come back to Authoritarianism after describing Lakatos’s theory of research programs.

A research program is (if I’m understanding this correctly) basically a mix of scientific framework and community. Austrian Economics is a research program comprised of a common theoretical view (with some disagreements), a network of citations, and a social network across space and backwards through time. Austrian Econ contains smaller programs within it: entrepreneurship, political economy, history of thought, capital theory, etc.

Any given research program (RP) may look relatively “good”(ish) or “bad” at any given time, but the future is always uncertain. I wouldn’t bet money on it, but how am I to prove that astrology won’t turn out to be true at some point? It’s the Grue problem writ large.

What we can evaluate is whether an RP is “progressing” or “degenerating.” In the former case it’s gaining predictive power. In the latter case it’s turning into an ad hoc mess in the face of evidence.

It’s up to individual scientists to make the entrepreneurial [my word, not his] decision to invest some effort in whichever program they think is promising. The natural move would be to join a progressing RP. But there might be an opportunity to save a degenerating RP.

In other words, Lakatos wants to describe what science is doing, but he wants to avoid making value judgements about unknown futures. Rather than draw a demarcation line he instead offers a way to ask if a RP is going in the right direction (right now or retrospectively).

Let’s digress a minute and consider objective reality. Putting aside Cartesian skepticism, it seems reasonable to take the existence of an objective universe as a basic axiom. But just as surely, that objective universe has far more complications than humanity will ever be able to fully account for. The universe has more dimensions than us; what did you expect? In considering science’s ability to grasp objective reality, we have to understand that there’s always going to be some degree of (radical) uncertainty, even at the best of times.

“Good” science is that science that gets us closer to capital-T Truth. But we’ll never be in the omniscient position necessary to conclusively judge a bit of science as actually being good or not.

I think Lakatos and I share a sense that there is this objective reality that we can move towards. I think we also share an understanding that this objective reality is fundamentally inaccessible. I also share his position that the demarcationists are wrong. But I’m not ready to give up on the anarchists or the authoritarians.

Authoritarians basically argue that although there is good and bad science and that they can identify them even if they can’t explain how. Lakatos deals mostly with the uglier side of this school of thought, but misses a nicer side. That nicer version, ironically, includes him telling us things like astronomy is more valid than astronomy. To be fair, he hedges by acknowledging that the future is always uncertain… maybe in 1000 years astrology switches from a degenerating body of knowledge to a progressive one.

Hayek’s notion of tacit knowledge applies to scientific knowledge. The tacit knowledge of scientists allows them to tell future scientists things like “don’t even bother with alchemy.”

Still, just because you know something, doesn’t mean it’s right. We all “know” that Roman soldiers spoke with English accents because that’s how they’ve always been portrayed in movies. Try imagining Gladiator with Italian accents; it doesn’t work!

Sometimes authorities give us useful advice like distinguishing between astronomy and astrology. But sometimes they turn out to be wrong (after encouraging us to pursue eugenics in the meantime).

Authority is a useful guidepost, and represents the (current) structure of knowledge. I am not willing to give up my own authority because when it comes to economics, I know it’s not a matter of “anything goes!”

Reading Lakatos, I can’t quite settle on a camp between the anarchists and authoritarians. The anarchists are literally correct, but the authoritarians are able to actually make bets on a reality I think exists.

We’re all in the position of the blind men and the elephant. When someone tells me an elephant is like a tree, I think it behooves me to a) accept that as evidence about what the world is like, and b) take it with a grain of salt. The bumper sticker version of my stance might be “the Truth is out there… and its bigger than you think.”

So what about Lakatos? It’s all a bit rusty at this point so please push back in the comments. But here’s my tl;dr:

  • Don’t trust anyone who tells you they’ve got the formula for “good science.”
  • The way science actually works (as opposed to the mythology we’re taught in high school science) is that RP’s build up complex bodies of knowledge around a few core postulates. Normal science is concerned with attacking the knowledge that isn’t in that core.
  • Scientific progress (e.g. the shift from Newtonian to Einsteinian physics) isn’t an Occam process… we’re not eliminating anomalies, but changing the set of anomalies we deal with.
  • The mark of bad science is adding ad hoc theory that hand-waves away anomalies but doesn’t generalize to describing novel facts (if Nasim Taleb were in the audience, he’d be shouting via negativa! right now)

Good books on The Troubles

In the discussions on Brexit the situation along the Irish-Northern Irish border is pivotal. Nobody wants a return to a ‘hard’ border, even though that is the obvious consequence of the UK leaving the Common Market and Ireland staying in it.

For those unfamiliar with the reason why this is troublesome there are a loads of good reads on what the British called ‘The Troubles’, but what by all standards was a cruel civil war, with 3500 deaths and many more injured. The two recent books I would like to bring to the attention of the readers are different.

Milkman is a novel that won the Man Booker Prize. It is a story about a young woman growing up in Troubled times, and what is particular gripping is the sense you get of the intensity of life in those days. Everything in daily life was somehow drawn into the conflict, you had to think about your moves all the time and everybody lived in fear. Not only for the enemy, but at least as much for the paramilitary group that happened to control your area. They did not just wage their war, but literally wanted to control everybody in their neighborhood.

Say Nothing is narrative non-fiction, well-researched and with hundreds of pages of notes. It is written in very attractive prose, not like any regular history book. The focus is on some of the key-players on the IRA-side, the bombs, and the attacks. Central is the disappearance and subsequent murder of a mother of ten by one of the main people in the story. The book also pays a lot of attention to Gerry Adams’ denial to have played any role in the violent side of the civil war. One of its strengths is also that half of the book tells what happened after the Good Friday agreement, which formally made an end to the Troubles. If only it did…

These are great books to learn more about one of the bloodiest conflicts in Europe in recent times. They also help to understand current debates about Brexit. Hopefully, they will just keep saying something about the past…

Elite Anxiety: Paul Collier’s “Future of Capitalism”

Paul Collier, the controversial Oxford professor famous for his development work and his acclaimed books Exodus and The Bottom Billion, is back. But the author of Exodus and The Bottom Billion is long gone. The compelling writing and carefully reasoned world that made Bottom Billion impossible to put down has somehow disappeared. In The Future of Capitalism, Collier is tired. He is bitter. And he is sometimes quite mad – so mad that his disdain for this or that group of thinkers or actors in society consumes his otherwise brilliant analytical mind.

Instead of having his editors moderate those of his worst impulses, he doubles down on his polemic conviction. Indeed, he takes pride in offending people in all political camps, believing that it supports the book’s main intellectual point: ideologues of every persuasion are dangerous, one-size-fits-all too constricted for a modern society and we should rather turn to a communitarian social democratic version of pragmatism – by which he means some confused mixture of ideas that seem to advocate “what works” on a case-by-case basis.

Yes, it’s about as nutty as it sounds. And he is all over the place, dabbling in all kinds of topics for which he is uniquely unqualified to offer advice: ethics, finance, education, family, social policy and on and on and on.

One reason The Future of Capitalism went awry might have been the remarkable scope: capturing all the West’s so-called ‘Anxieties’ – and their solutions – in little over 200 pages of non-academic prose. Given the topic, a very unfitting sort of hubris.

Apart from the feeble attempt at portraying a modern society that has “come apart at the seams,” there’s no visible story, no connection between the contents of one paragraph and the next and hardly any connection between one chapter and another. Rather, it’s a bedlam of foregone conclusions, appeals to pragmatism, dire stings to ideological ‘extremists’ on either side and a hubris unfitting for someone like Collier. I guess this is a risk that established academics run at the end of their careers, desperately trying to assemble all their work into One Grand Theory.

The most charitable thing I can say about Collier’s attempt is that it offers a lot of policy prescriptions – tax unearned land rents, tax-and-redistribute productivity increases, expand housing supply through local governments, have governments direct the Silicon Valley-clusters of tomorrow, cap mortgage finance, benefits for families, expand ethical responsibilities of firms, encourage marriage, create a new G6 (EU, US, Russia, India, Japan, China) that could overcome the global collective action problem (good luck with that!), expand Germanic vocational training and workers’ representation on company boards, embrace patriotism but never nationalism, detach ownership from control and place control with stakeholders (workers, suppliers, local homeowners).

The common denominator seems to be an imperative to do all these things that seem to have worked well in some time or place or utopia, conveniently ignore institutional or cultural reasons, while espousing all ideological positioning and political capture.

Just voicing the suggestions ought to spark at least some fruitful conversations.

Chapter 8, ostensibly concerned with the Class Divide, is an illuminating case study. It takes Collier about 36 pages (out of 37) to mention ‘class’ (not that I blame him: the concept is way too nebulous and politically infected to be meaningfully dealt with in such short space). Instead, Collier discusses all kinds of topics whose relevance to class is quite unclear: public policy for single mothers, German vocational training, lawyers and the rule of law, a Yorkshire project to encourage reading in school kids – not to mention a ten-page digression into the institution of marriage for stable families.

When his polemics, dry writing, unsupported analysis or incomprehensive treatment of a topic hasn’t put me off (I gave up on the book at least four times during the last couple of months), some of the picture Collier paints does resonate with me. There is a social and geographical divide in Britain: the economically flourishing South-East, dominated by the well-educated English and the cosmopolitan accents of almost every language on the planet, is posited against the collapsing towns of the backward Midlands or the North. If this divide is real – in support of which Collier offers next-to-no evidence – it is not clear to me that it wasn’t already captured in, say, David Goodhart’s The Road to Somewhere or Branko Milanovic’s Global Inequality, or for that matter the countless of magazine articles trying to outline the fractures that Brexit unearthed about British society. Considering the effort those authors put into mapping their divides, Collier’s attempt seems frivolous.

He can do better. Much better.
___
My fellow Notewriter Rick is organising a summer reading group around Feyerabend’s Against Method. The equivalent Collier reading group could be aptly named Against Ideology.

For and/or Against Method, initial miscellany

The past couple weeks I’ve been accumulating material related to our fledgling summer reading group. First I got For and Against Method, realized it was more for than against so I ordered the third edition of Against Method and also found the (apparently much shorter) first edition online.

I’m currently dipping my toes into For and Against, reading Lakatos’s lectures at LSE on the scientific method. I was expecting to be more interested in Feyerabend’s perspective, but so far I’m pleasantly surprised. Lakatos is an interesting guy, and the conversational tone of the (transcribed) lectures is delightful.

I’m not sure how we plan to do this reading group, so, anarchist that I am, I’m going to randomly lash out until something sticks! Here are some initial thoughts from Lakatos’s first two lectures:

  • Around pp. 24-25 he lays out the demarcation problem: we want a (set of) method(s) to separate good and bad science. Presumably, our method should stand up to its own scrutiny. If our method is L(t), taking theory t and returning “good” or “bad”, then L(L) should return “good”. To me, this looks Gödelian.
  • p. 26: “I remember when back in my Popperian days I used to put this question to Marxists and Freudians: ‘Tell me, what specific historical or social events would have to occur tin order for you to give up your Marxism?’ I remember that this was usually accompanied by either stunned silence or confusion. But I was very pleased with the effect.

    “Much later I put the same question to a prominent scientist, who could not give any answer because, he said, ‘of course anomalies always spring up, but somehow sooner or later we always solve them.’ This is why, according to Feyerabend, who follows in Popper’s footsteps, all these criteria for intellectual honesty have one and the same function: they are empty rhetoric to frighten school children.” [emphasis my own]
    • Anyone here know something about rhetoric and the Greeks? Personally, I’m drawn to the notion that it’s all basically rhetoric. The term I prefer, though, is bullshit. Don’t get me wrong, by BS I don’t mean “wrong” or “bad” (per se). And for that matter, I don’t quite mean rhetoric either. It’s something like the sort of communication that goes on during a poker game.
      • You might be able to see that I’m going to be naturally sympathetic to Feyerabend who, apparently, preferred to think of himself as an entertainer than an academic philosopher. That’s part of the reason I’m reading Lakatos first. But I’m happy to see that a) Lakatos has a sense of humor, and b) He’s got a character endorsement from Feyerabend.
    • There’s good BS and bad BS. Bad BS leads to things like advertising campaigns and college accreditation schemes. Good BS leads to open minded learning. Good BS is what happens between grad students in a good program after midnight.
    • Good BS isn’t arbitrary, but it isn’t too tightly bound to reality either. You can’t send an astronaut to space on good BS, but you probably need good BS to come up with the idea in the first place.
    • I’m a materialist at the end of the day, and I believe in an objective external universe (though I can’t reject a Cartesian evil genius). But my map of that universe is highly impressionistic. I think anyone who’s map is more precise is either fooling themselves, or highly specific (i.e. they’re missing out on something).
    • Currently, I’m thinking rhetoric is for strangers and BS is for friends.
  • Lakatos talks about three basic groups: Militant positivists, anarchists, and elitist authoritarianism.
    • The positivists would be right if they were omniscient. In principle we could come up with theories that perfectly aligned with reality. And we could come up with a theory of theories that neatly separated the good from the bad. But the universe is more complex than our finite minds can handle.
      • Did you hear the one about the economist who was told about the latest brilliant new business? His response: “sure it works in practice, but does it work in theory?”
    • Lakatos’s view of the anarchists is that different theories are essentially all at the same level, but some get more support and others get less.
    • According to the elitists “there is a demarcation, but there are no demarcation criteria.”
    • I’m basically an elitist-anarchist with a heavy dose (I hope) of humility. There are better and worse theories (it’s not quite “anything goes”), and often (but not always) the elite are in the right position to pass (fallible) judgement. If a professional economist (ahem) says “Theory X is stupid”, then odds are good they’re correct. But it’s not guaranteed. Not even if all economists agree.
  • There’s no easy way out. Some science is good and some is bad, and there’s no algorithmic way to distinguish them.
    • It’s like the historians’ joke: “What was the outcome of WWII? Too soon to say.” We can extend the metaphor all the way back. It’s too soon to declare any specific outcome to the Big Bang. It’s surely the case that there will be some outcome (according to my materialist, even LaPlacian, priors), but predicting that outcome would require a computer bigger and more powerful than the universe.
  • Fundamentally, distinguishing good and bad science requires going out on a limb, taking a risk, making a judgment. All theories will ultimately be tested against objective reality, but nature isn’t always great about sharing her data and our methods (especially our language, which places the ultimate constraints on our ability to share and accumulate knowledge) prevent us from getting to 100%.

My understanding is that Lakatos will be building up to some notion of a more-or-less objective way to demarcate good and bad science. I believe there is good and bad science, but I’m skeptical of humanity’s ability to draw any sort of hard line separating the two. I think the evaluation of science is more like the evaluation of art than the evaluation of competing answers to a well defined mathematical question.

Sometimes science is more art than science…

Tying this in to my wheelhouse: science (as LaVoie has repeatedly told us) is in a similar position to market enterpreneurship (and also ants, which are amazing) and the Austrian insights apply: this is the sort of stuff that fundamentally only works in a decentralized, anarchic fashion. The ant queen is not actually a central planner. Entrepreneurship is decentralized social learning that central planning is no substitute for. And science is not so comprehensible that we’ll ever find some way to automate approval of grant proposals.

Learning is hard because we’re finite beings staring into an infinite abyss.

The nonexistent moral decay of the west

Humankind’s struggle with moral is of course nothing new, it rather inherent to our nature to revolt against the meaningless world and the manmade system of reason. Furthermore, moral values vary over a specific period of time swinging from rather high moral standards to very low ones. Regarding morality as an abstract compass guiding our thought, goals and behaviour, Economist, in general, are not known for dealing in depth with the metaphysical reason behind our behaviour yet they explore and explain human actions through our surrounding incentives, which also structure and direct our action. Economist such as Daron Acemoglu & James Robinson or William J. Baumol have explored these changes in human behaviour through changing incentive structures thoroughgoingly.

However, folks mourning the moral decline of today’s west often fail to provide concrete evidence for their argument. They either cherry-pick events or legislatures to infer a macro trend inductively or they lose themselves in difficult language trying to somehow save their argument by making it incomprehensible. I cannot help feeling that mourning the moral decay of the west has somehow become a shibboleth for eloquently expressing the “Things used to be way better back then” narrative. However, I admit that there were probably a couple of sociological papers who have covered this issue very well which I am unaware of. Contrary, the public debate was dominated by a few grumpy intellectuals holding the above-named attitude. I was recently provided with a very concrete set of indicators to measure moral decline while digging through Samuel P. Huntington’s infamous classic “The clash of civilization” from 1996. He states that there are five main criteria which indicate the ongoing decline of moral values in the West. [1]

After being provided with a concrete framework to quantify the moral decline of the west, I was keen to see how the moral decline of the west has developed in the 20 years since the book has first been published in 1996. Although I also take issue with some of these indicators to measure moral decline, I avoid any normative judgement in the first part and just look at their development over time. Furthermore, since Samuelson himself mostly takes data from the USA representing the West, I might as well do so too for the sake of simplicity. So, let’s see what happened to moral values in the West in the last years by checking each of Huntington’s indicator one by one.

1. Increasing antisocial behaviour such as acts of crime, drug use and general violence

Apart from the global long-term trend of declining homicides, we can also observe a recent downward trend in the reported violent crime rate since 1990 in the USA. Scholars agree that the crime rate is in an extreme decline. Expanding the realm towards Europe, you will see similar results (see here).

1Source: Statista

Despite these trends, the public (as well as some intellectuals as well I assume) vastly still holds a distorted perception of the crime rate. The sharp decline in actual crimes strongly contradicts the fact that a majority of the people still uphold the myth of increasing crime rates.

2

Source: Pew Research Center

Regarding drug use in the USA, it is important to mention that the absolute amount of illicit drugs consumed has slightly gone up since 1990. This development is mostly driven by an increasing  consumption of marijuana: Use of most drugs other than marijuana has stabilized over the past decade or has declined., states the National Institute on drug abuse in 2015.

Contrary, the number of deadly injections are increasing. However, the share of the population with drug use disorders has remained on the same level of 5.3% over the last 20 years.

2. Decay of the family resulting in increasing divorce rates, teenage motherhood and single parents

It is hard to measure the “Decay of the family” itself. Luckily, Huntington further concretizes his claim by naming some of the measurable effects. There is nothing much to do to refute these statement except for looking at the following graphs.

a) Firstly, the divorce rate is sharply declining.

3

Source: Statista

b) Second, teenage pregnancy rates are also dropping since 1990.

4Source: National Vita Statistics Report

c) Third, the number of Americans living in single parenthood is not increasing drastically since 1990.

5Source: Statista

I often take issue when (especially conservative) scholars mourn the declining importance of family. Even if there are certain indicators which would back up Huntington’s claims, he does not name them himself. While it is indeed true that “family” as an institution is undergoing changes, there is no evidence (at least named by Huntington) to back up the claim of a decline of its importance.

3. Declining “social capital” and voluntarism leading to less trust.

It is indeed true, that the adult volunteering rate declined from early 2000 to 2016 from 27.4% to 24.9%. Interestingly, it recently bounced back to a new high in 2018, hitting the 30% target. Really the only point where one must agree to Huntington’s claim is the decrease of interpersonal trust as well as trust in public institutions. This trend is indeed very worrisome considering that trust is a major factor for flourishing societies.

4. The decline in work ethic

The research here is a little bit tricky and points in both directions. Although there has been wide academic coverage of the millennial work ethic scholars could not find a consensus on this issue. Its is especially difficult to extract the generational influence from other key determinants of work ethic, such as position or age. Academics warn to mistake the ever-ongoing conflict between young vs. old with the Boomer vs. Millenial conflict. I haven’t settled my opinion on this one. These Articles from Harvard Business Review and Psychology Today provide a good overview of both sides of the medal.

5. Less general interest in Education

This indicator is particularly interesting for me because as a member of the 90’ generation, I have experienced quite the opposite in Germany. But let’s have a look at the data.

Despite ranking only in the middle in a global country comparison, the US students still made a huge leap in terms of maths and reading proficiency, which only slowed down in 2015:

6

Source: Pew Research Center

Furthermore, the overall educational level of the USA continues to rise, resulting in the fact that  “the percentage of the American population age 25 and older that completed high school or higher levels of education reached 90% [for the first time ] in 2017.” Contrary, there are still major differences when one looks at features like race or parent household (See here), but the overall trajectory of the educational level is sloping upwards.

What do these criteria measure?

As you can see, there is little to no evidence to empirically back up the claim of western moral decay. Furthermore, while many case studies have shown that lack of interpersonal trust, lack of education or a declining work ethic can pose a great threat to society, I refuse to see a connection (a no known to me study disproves me here) between (recreational) drugs consumption, alternative family models, increasing hedonism and moral decline. Thus I believe that many advocates of the moral decay theory regard it as an opportunity to despise developments they personally do not like. I do not imply that everyone arguing for the moral decline of the west is unaware of the global macro-trends which heavily improved our life, but I highly doubt their assumption, that we are currently in a short-to-medium term “moral recession”. Even when one upholds the very conservative statements such as drug consumption adding to moral decline, is hard to argue that we are currently witnessing a moral decay of the west. Contrary, It may be true that Huntington has observed something different in the period before publishing “The clash of civilization” in 1996. Of course, I myself witness the ongoing battle against norms on the increasing hostility towards the intellectual enemy in the west, but one should always keep in mind the bigger picture. Our world is getting better – in the long- and in the short-run; There is no such thing as a moral decline of the West.


[1] Huntington, Samuel P. (2011): Kampf der Kulturen. Die Neugestaltung der Weltpolitik im 21. Jahrhundert. Vollst. Taschenbuchausg., 8. Aufl. München: Goldmann (Goldmann, 15190). P. 500

Three Lessons on Institutions and Incentives (Part 1): Introduction

There are books that are aimed at a spectrum of readers that are counted within the “well-informed public.” They are not books confined to academic circles, they are not for mass consumption, but they do concern problems that involve entire countries and are written in a register that involves certain intellectual training. In this genre, there are three works that have much to say about the relationship between institutions and incentives. The first of them dates from 1990 and was published by a Nobel Prize winner in Economics, Douglass C. North: Institutions, Institutional Change and Economic Performance, which elaborates the distinction between formal and informal institutions and incremental and disruptive institutional change, ending with a historical analysis that seeks to explain the differences in economic performance between the United States and Latin America. It is an academic book that can be approached by the said well-informed public.

Eleven years later, in 2001, William Easterly published The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. It is proposed as a political essay in which an economist interprets his own professional experience as a member of international teams for the development of Third World countries. To do this, drawing on the theoretical notions of other leading economists, such as Paul Romer (who later, in 2018, received the Nobel Prize in Economics), he makes an assessment on the development plans for the Third World that were implemented since the end of World War II. The central thesis of Easterly stresses that, in order to have an empirical relevance, every theory of development -or of the absence of it- must carry the following behavioral postulate: “people respond to incentives.” If this reality is not taken into account, there is no public policy that can be successful. The main lessons that can be drawn come from the theoretical instruments deployed to explain the political dynamics of most of these countries, particularly in regard to the phenomenon of polarized societies.

The third book to consider is also the more recent publication. Why Nations Fail, by Daron Acemoglu & James A. Robinson, was published in 2012 and reached the global debate on the realm of the well-informed public. The proportions achieved by the population of academics and professionals, in addition to the extension of the internet, allowed the aforementioned book to generate varied opinions along both traditional and digital media throughout the world. Acemoglu & Robinson dedicate their pages to those countries that were successful, as well as those that were not, but also here, in the case of this book, the most juicy lessons truly comes from the conceptual structure that articulates the whole book. Among such notions, we find those of inclusive and extractive institutions, which in turn are divided into political and economic institutions. The worst of the institutions are preferable to the total lack of institutions. Thus, a country organized around a closed political and economic system will be preferable to a failed state. However, once a certain degree of centralization and institutionality has been achieved, it is preferable to move towards a pluralist democracy and a competitive economy. The challenge is how to accomplish such transitions.

Since there are still four years left until the year 2023 – following the periodicity of the selected works – we are still in time to make a brief synthesis of the ideas that can be applied to the analysis of the impact of the institutions on economic and political incentives.

[Editor’s note: this is the first part of a rich series on institutions and incentives. You can find the full, Longform Essay here.]

Persecution & Toleration

I’m glad to announce that my new book, Persecution & Toleration (with my colleague Noel Johnson) is now available in the UK.  I’m hoping to receive copies next week. The book is available at CUP, although Amazon still has a US release date of April (you can preorder it).

The blurb is below:

Religious freedom has become an emblematic value in the West. Embedded in constitutions and championed by politicians and thinkers across the political spectrum, it is to many an absolute value, something beyond question. Yet how it emerged, and why, remains widely misunderstood. Tracing the history of religious persecution from the Fall of Rome to the present-day, Noel D. Johnson and Mark Koyama provide a novel explanation of the birth of religious liberty. This book treats the subject in an integrative way by combining economic reasoning with historical evidence from medieval and early modern Europe. The authors elucidate the economic and political incentives that shaped the actions of political leaders during periods of state building and economic growth.

‘A profound new argument about the relationship between political power and religion in the making of the modern world. If you want to know where the liberty you currently enjoy, for now, came from, this is the book to read.’ James Robinson, Richard L. Pearson Professor of Global Conflict, University of Chicago

‘Johnson and Koyama investigate the fascinating intersection of the state and religion in late medieval and early modern Europe. Rather than enduring patterns of religious toleration or persecution, of liberty or tyranny, they tell a rich history of change and variation in rules, institutions, and societies. This is an important and persuasive book.’ John Joseph Wallis, Mancur Olson Professor of Economics, University of Maryland, College Park

‘Lucidly written, incisively argued, this book shows how religious toleration emerged not only from ideas, but also from institutions which motivated people – especially the powerful – to accept and act on those ideas. A brilliant account of early modern Europe’s transition from identity-based privileges to open markets and impartial governance.’ Sheilagh Ogilvie, University of Cambridge

‘This analysis of the historical process underlying the modern state formation is a fantastic scholarly accomplishment. The implications for the present, in terms of the risks associated to the loss of the core liberal values of modern western states, will not be lost to the careful reader.’ Alberto Bisin, New York University