Tag: economics

Economics as philosophy replacement

Posted by sam – May 13, 2010

I’ve found myself getting more and more interested in economics recently, and defending this interest somewhat sheepishly. Why is that? Up till recently I rather looked down on economics, mainly because it can’t really predict anything, and when it can its predictions seem very obvious (involving supply and demand curves of a maximum of two goods at once). And besides, it has to do with money, and everyone knows talking about money is boring and low status.

When I was young and even more stupid than now I was most of all interested in philosophy. The way I saw it, everything else came out of logic, which came out of philosophy, so I should certainly cover philosophy before getting to anything else. I did get a big kick out of some things, like the question of free will, utilitarianism, Mill’s concept of liberty, Kant’s ethics, Rawls’ justice, the recognition of some important fallacies and reasoning principles (no ought from is, no is from ought, Occam’s razor) and most of all, Wittgenstein’s linguistic solutions to philosophical problems (my term). And of course I’m still very interested in what you might call practical epistemology (thinking about the best way to get an accurate understanding of reality). Also, the craziness of what some people think about metaphysics has great entertainment value.

But none of those things have a great revelatory effect on most people, perhaps because they sound like opinions. They also don’t have much predictive power (except the reasoning guidelines, occasionally). Sounds like another discipline I know…

By the way, my interest in philosophy was finally quenched by being acquainted with contemporary writings in the field of environmental aesthetics (I believe the rest of philosophy is similar). Partly it’s a self-generating field: essays rebut other essays which claim that philosopher X believed Y, and once you’ve written enough, you can become philosopher Z whose opinions will be the topic of further “study”. Partly it’s a craft: an essay might consist of the careful application of someone’s theory to some practical issue or piece of art, some “surprising” result comes out and overall the essay is a pleasant thing to read, but it’s difficult to say what exactly has been discovered. There’s value in it, but there are seldom any actual discoveries. I don’t reject it, but I wanted (at that time in my life at least) something else.

So in short, I think I’m willing to give economics a break on the grounds that I gave one to philosophy. Economics deals with some difficult questions and comes up with numerous different but plausible solutions – and to be fair, some of it is already fairly well settled (which is not to say that politicians accept even the settled part, for some reason). I think it will be a lot of fun to learn.

The hidden systems

Posted by sam – May 11, 2010

What economic system do you live in? For readers of this blog, the answer is probably some blend of market capitalism, corporatism and socialism. It is defined by your interactions with the state: sometimes it gives you resources or subsidises your choices, sometimes it expropriates resources and taxes your choices, sometimes it does neither. All of the time it arranges things for the benefit of powerful institutions.

But that’s far from being the only economic counterparty you have (unless the state is completely socialist) – the state is only special because it has the violence monopoly, so in theory it can dictate anything it wants. In a free market system, you also have a counterparty in your employer, in the customers of your yard sale, in people who trade stocks with you (or your pension scheme) and so on. These are all market systems themselves, and free market theorists like to call the free market system “natural” because it seems to occur wherever there’s no coercion.

Margaret Thatcher famously said that there’s no such thing as “society”, but only individuals. That sounds like a rather pointless truism, but I suppose she had in mind something like the small-scale economic arrangements I listed in the previous paragraph, which are all free market and (supposedly) show by their existence that humans are inherently meant to operate in free markets. However, it seems to me that one of the most significant economic arrangements has been omitted here – that of families (ostensibly families are important to conservatives, but I think Thatcher may have been an exception). Families, it occurred to me, are instances of neither free markets nor coercion, typically operate under some some kind of socialist syndicalism. For many or most people they’re also more significant than any other economic arrangement in their lives.

Let me address some obvious criticisms of that idea. Firstly: are families really both free and non-market? Most libertarians I’ve talked to would probably say that they are free markets, because they’re arrangements people freely choose in their own best interests. And if they don’t freely choose them, well, then it’s a system of oppression. I’m not unsympathetic to that viewpoint, but it strikes me as a rather too coarse distinction.

If you’re a child in a family, the family supervises your life and determines your best interest for you, rather like an ideal communist state. But you probably don’t hold that against them (or you do when you’re a teenager, which is probably the brain’s way of saying that it wants to get out and control its own resources and make its own babies). Or if you’re married to someone, you may very well feel like a hostage, staying in an unpleasant situation for the kids, out of memories of love or because you don’t want to lose status or be poor. A libertarian might say that that’s still free choice, because you chose to get married and can choose to get divorced, but again, that doesn’t quite capture the entire situation. And even if only physical coercion counts, plenty of people in marriages still experience that or the threat of it.

If we accept for the sake of argument that families aren’t a form of coercion or instances of free markets, what are they? At first I thought that they were some form of socialism, but that’s not true for all families at least. Some families have a Soviet-style implementation where power is concentrated and one or both parents (or plausibly grandparents) decide for the benefit of all. Some have a more syndicalist system where everyone gets some kind of say in everything. Some hippie families have probably even tried anarcho-syndicalism. Some families live under despotism, where one person rules for his own benefit. In fact a market system family is one I haven’t really ever seen. Could it work? What other systems are there?

The big country

Posted by sam – December 11, 2007

I have received feedback that my entry about the state of finance in the US was a bit inaccessible. I thought at the time that there’s a lot there to write about but that nobody would want to read it – but what the hell. It’s my blog, right? Don’t like it, go to Russia.

1) US financial sector profits as a percentage of total corporate profits in 1947: about 10%. In 2007: about 50%.

The financial sector is supposed to provide two things: distribution of opportunity and distribution of risk. Where there’s an opportunity for financial activity, capital is needed to exploit it. Banks distribute the opportunity to a number of people who have money to lend for the venture (ie. people who make deposits). Interest and dividends earned represent the fruit of this distributed opportunity. And because economic activity (and life) always involves risks of catastrophic failure, it’s sensible to have insurance companies to distribute the risk among risk-takers.

So the statistic I quoted says that these activities, essentially peripheral to creating actual value, generated 10% of all profit sixty years ago in America. To me that actually sounds like rather a lot. But due to the fractional reserve system and other clever tricks (I’ll write about that some other time), modern banking is essentially a money-making machine. So people who own the banks get a cut from lubricating the wheels of the economy, ok. But over 60 years their slice of the profit pie has quintupled. To me this represents an increasing artificiality that happens to any developed economy; properties become super-valued and huge numbers of people get rich by moving property around. The financial sector “leech” has become very much larger.

2) Debt intensity of US GDP growth in 1965-1975: under 2. In 2006: over 4.

This certainly could have used more explaining. What is debt intensity of GDP growth? It’s the ratio of increased debt to increased economic activity per year. This takes into account both public and private debt without reference to holders of the debt, so it’s a pretty rough number. Essentially, it answers the question “How many dollars does the US economy need to borrow to produce one dollar of value?” It is normal for this number to be over one (creating more debt than value), but it’s less normal that this number has more than doubled in 40 years.

Why has it doubled? Well, as economies become increasingly developed their markets become increasingly competitive and easy opportunities get exhausted, so new economic activity becomes more and more capital intensive. That explains a part of it. But an arguably larger and certainly more worrying part of it is that Americans as private citizens have been living beyond their means for a while now (this becomes really noticeable around 1984-1985, the time of my birth), the government has been living far beyond its means since Bush took over and everyone’s been caught up in an property bubble for the last five years or so. What is the property bubble? It’s what Alan Greenspan said would keep the economy going when the dotcom bubble was bursting. Keep interest rates low, encourage people to remortgage, buy or build new houses and spend spend spend. A ludicrous number of people decided that borrowing money to buy houses and watch their value go up was a reasonable way to make a living.

What does this mean? I think it means that a big chunk of the growth the US economy has experienced over the last five years is a fiction. I think the US is in for a shock when private consumption finally drops off (the cheap money party is over for the lower classes) and everyone’s stuck with falling property prices and mountains of debt. I think this ties in with the finance sector, that ever-growing leech at America’s neck. A lot of people have become fabulously rich by slicing, dicing and re-packaging bogus loans and a lot of people are going to feel the pain.

3) After-tax corporate profits as a percentage of GDP (in the US) just before GWB took office: about 5%. Now: about 10%.

This was the political commentary part. Quite simply I think it’s a good index of the way the Bush administration’s response to all this has been to ramp up the plundering. In an economy where genuine productivity becomes harder and harder to achieve and financial perils abound, the government squeezes the patient to pump blood into the leech. That, and spends about 5e12 dollars (and counting) dollars on warfare in Iraq. The great American public is being had, and we’re all going to be sorry.

You can’t just change the rules, unless you really want to

Posted by sam – December 7, 2007

When banks lend irresponsibly to inflate profits, they usually end up in trouble. When lots of banks do this (and they do, time and time again) and end up in trouble, politicians get worried and bail the banks out with the people’s money. Lots and lots of it. Moral: if you fail really big, you will be bailed out. Capitalism without failure is like socialism for the rich.

Another thing that happens when banks lend irresponsibly is that people are given loans they can’t service. Then they end up in trouble, and typically default on the debt and lose everything. This is also considered to be a bad thing, but not bad enough for bailouts. Except now: rather surprisingly the US is mandating that there is to be a five-year rate freeze on currently existing subprime loans, many of which are scheduled to become more expensive in the next couple of years and to generate a lot of defaults. This is an instance of the US government rewriting existing private contracts, pretty much unheard of in that bastion of free marketeering. Moral: if you’re really irresponsible, hope that you’re not the only one and that there’s an election on the way.

What is the bottom line here? Redistributing wealth to the poor is out; redistributing it to the rich and the financially irresponsible is in. In the US it’s now more important to be able to live beyond your means than to get a university education or health insurance. Coming soon to a society near you.

We just waiting for the hammer to fall

Posted by sam – December 6, 2007

Three crucial facts about the past, present and future of world finance:

1) US financial sector profits as a percentage of total corporate profits in 1947: about 10%. In 2007: about 50%. (link)

2) Debt intensity of US GDP growth in 1965-1975: under 2. In 2006: over 4. (link)

3) After-tax corporate profits as a percentage of GDP (in the US) just before GWB took office: about 5%. Now: about 10%. (link)

Interesting times.