Nightcap

  1. Not In My Backyard and “Buy Local” hypocrites Farhad Manjoo, New York Times
  2. Why the American Left should not go socialist Joseph Stiglitz, Foreign Policy
  3. Who was Maxwell Taylor? (Cold War) Gregory Daddis, War on the Rocks
  4. The lure of Western Europe Anne Applebaum, New York Review of Books

The Nonsensical Meaning of Sustainability

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

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

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

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

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

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

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

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

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

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

Monetary Progression and the Bitcoiner’s History of Money

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

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

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

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

Virtually every step of this monetary account is mistaken.

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

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

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

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

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

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

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

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

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

Current disputes over bitcoin and central banking epitomize that completely.

Communism / socialism is rubbish – both in theory and in practice.

I’m getting tired of reading and listening to so-called libertarian or conservative people saying that “in theory socialism is beautiful.” No, it’s not. In theory, socialism can be summed up as “the end of private property.” This is how Karl Marx summed it up. The genius of Ludwig von Mises is precisely in the fact that he did not have to wait until 1989, when the Berlin Wall fell, to realize that this does not make sense. When the Soviet Union was still a young country sweeping intellectuals around the world, von Mises made the following remark: without private property, there is no supply and demand. Without supply and demand, there is no price formation. Without prices the economic calculation is impossible. And that is precisely what happened in the USSR and happens in countries that follow the path of socialism: without the compass of free market prices, governors can not make decisions about allocating resources. Socialism is the death of rationality in economics. Socialism is rubbish in practice because before that it’s rubbish in theory. Please stop talking nonsense. The free market, on the other hand, is beautiful in practice because first of all, it is beautiful in theory.

SMP: The Macro Bifurcation

One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.

Continue reading at the Sound Money Project.

A Little More on “Price Gouging”

In my previous post on this subject I argued that the critics of “anti price-gouging laws” are mistakenly assuming that is possible to satisfy demand at the pre-natural disaster price. That is, sadly of course, fiction. It it not our reality anymore and we are better accepting the new situation than blindly deny it. As many economists are explaining these days, to not let prices increase after a natural disaster does more harm than letting prices increase. This can easily be seen in a demand and supply graph.

Prige gouging

Consider first just the lines in black. Those lines represent the pre natural disaster situation. What is considered “normal prices”. At price p0, a quantity q0 of a good is traded in the market (i.e. bottles of water.)

Now there is a shock. A hurricane hits this region and demand increases (shifts to the right). This is the demand line in color red. The red dotted line that extends to the right shows the size of the shortage (q2 – q1) at the “normal and fair” price.

Price gouging is an emotional loaded word, but it doesn’t have any specific economic meaning. How does “price gouging” show up in this graph? It is the increase in price from p0 to p1. This is the increase in price required to satisfy the higher demand and provide the extra number of goods (q1 – q0). No… supply is not horizontal.

What happens if price increases are banned? Then at the pre-crisis quantity (q0), consumers are willing to pay p2, a price even higher than price gouging. This means two things. First, a number of people in need will be unable to acquire the goods (the empty shelf problem). Second, that the actual total cost (to those who acquire the quantity q0) is p2, not p0. The difference between the price in the store and total cost falls into waiting in long lines, visiting a long number of stores, bribing producers (yes… with natural disaster price controls also lead to black markets), calling favors., etc. Any principles of microeconomic textbook has plenty of more examples under the price ceiling discussion.

There are three scenarios being discussed here.

  1. Quantity q0 at price p0
  2. Quantity q1 at price p1
  3. Quantity q0 at price p2

The natural disaster makes scenario 1 impossible. And it is not clear that scenario 3 is better for those in need than scenario 2. Less goods are provided at a higher total cost than in scenario 2.

One final remark. Note that in this analysis the natural disaster only affected demand. Of course, it is quite likely that supply would also be affected. The point, however, is to show that prices are not pushed up only by produces. As we can see in this case, it is consumers who are increasing the price and producers reacting to the new behavior of consumers.

Price Gouging: Reality vs Fiction

In a previous post I comment on a too common economic fallacy, that a natural disaster is good for the economy because of its alleged impact on GDP. Economic fallacies are not the only misconceptions gaining momentum during a natural disaster, but a confusion between reality and fiction becomes also quite common. The issue of price gouging provides a good example of this situation.

After a natural disaster, the price of certain goods such as water or gas, increases significantly. This is seen as an immoral exploitation by merchants who are taking advantage of the people affected by the natural disaster. Even though in this post I want to comment on another issue, it is worth mentioning that the now limited resources should be allocated to those in most need (rather than, for instance, to whoever happens to be the first one in line.) And unless someone has a crystal ball, there is no way of knowing who is in most need without changes in relative prices.

The mention to reality versus fiction refers to the fact that the critics of price gouging seem to (implicitly) assume that the natural disaster did not occur. It is plausible to assume that an event like this would (1) shift the supply to the left [reduce supply of goods] and (2) shift the demand to the right [increase the demand of goods.] At the usual (or “normal”) price these goods are in serious shortage.

This means that in the event of a natural disaster the option is between (1) having goods at a higher price or (2) not having goods at the “normal” price. This is the new reality. The old and normal reality does not exist anymore. To limit price gouging results in a lower price in the store, but not goods on the shelf. This would not help those in need. The fiction consists in thinking that a larger supply can be secured without an increase in the price (why should we assume supply is horizontal when these goods usually have a low elasticity?) An efficient policy would secure the provision of goods rather than secure a low price without the goods. Reality, rather than fiction, should be the first driver of a policy designed to assist during a natural disaster. As Milton Friedman insisted, a policy is to be valuated by its results (or design), not by its intentions.

The first rule for an efficient policy should be to not get in the way of changes in relative prices. Otherwise help will become erratic and inefficient. It might be more efficient, for instance, to make use of firms specialized in logistics (i.e. firms such as Walmart) and subsidize the demand than start a price control policy. For instance, a tax credit or a check can be sent to those affected by the natural disaster allowing them to pay the now higher prices. Similarly, a subsidy can be given to those firms bringing goods to the damaged areas (who says the government has the monopoly of charity or that the only one who can do it efficiently?) A policy on these lines would be more efficient than interfering with relative prices.

However, some opponents of price gouging seem to be more interested in damaging merchants than in making sure resources will be efficiently allocated among the ones affected by the natural disaster. Those who do not oppose price gouging do so because they have the affected ones first in line. It is not about merchant’s revenue, it is about allocating goods efficiently. Damaging the merchants should not be more important than worsening the situation of those in need.