A Decade as Bad as the Great Depression

Posted by: Michael Mandel on February 18

Over the past ten years, the S&P 500 is down 50% adjusted for inflation (February 17, 1999 to February 17, 2009). By my calculation, the stock market was down roughly 50%, adjusted for inflation, in the worst ten years of the Great Depression (September 1929 to September 1939).

When you add in the fact that real wages were stagnant over the past ten years and debt soared, I think we will look back at the last ten years as a decade of despair. As an optimist, I’m going to bet on the next ten years as being better. Any takers?

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Reader Comments

CompEng

February 18, 2009 12:56 AM

Our problems are structural, and there's still a huge force behind the status quo. There are a large number of intelligent people who would still argue vehemently against your characterization of the past 10 years (I am not among them), and argue that we ought to "go back to them". The policies and relationships that made this happen are still the dominant conservative paradigm in the US and abroad, and I'm not convinced the liberals, on average, understand the problem enough to contribute positively to a solution.

Paul Krugman's blog is pitching an interesting case that a real full-bore recovery will occur when pent-up demand returns because the goods glut you referred to has played itself out (http://krugman.blogs.nytimes.com/2009/02/17/slumps-and-spontaneous-remission-wonkish/). If that's true, we've got a long way to go. When does the developing world's demand reach the point where the U.S. does not have to be the consumption leader? That's when the economy will really recover: and global government policy is still a headwind and not a tailwind.

jcage

February 18, 2009 02:58 AM

If the last ten years was just an accumulation of massive debt and stagnating salary, then the next decade going to be hell on Earth!!

It depend in how the government face this economic crisis and it seem that the Fed plan to keep printing money like there is not tomorrow to bail out all the banks, car industries, credit card companies etc.. and it would lead to hyperinflation or at least double digit inflation. Also, the government want to re-inflate the real state bubble by not allowing the housing price to hit an affordable level and the government going to print more and more Dollar for this real state bail out!!
We are just starting of this big crisis and let's pray that it will hit hard and fast and end in one or two years before we start a recovery. The worst is a decade long recession, it is better a sharp and painful recession but short in duration.

Ajay

February 18, 2009 04:17 AM

What's held us back is tech, tech is the next logical step for this economy. The fact that the techies have been so abysmally stupid so as not to build a working micropayment system has held back all progress (content businesses like Businessweek could also have set up a micropayments system but content people are practically submental when it comes to tech and business issues). When micropayments happen, the economy takes off again. I just started working with a startup to make that happen so hopefully it'll happen soon. However, if we go under before we can release (we're currently looking for a round of funding), whether you win your bet or not will depend on whether someone does micropayments and how badly the government screws things up worse in the meantime on the downslide, as the governments of the late 20s and 30s did. It's all about timing, if and when these events happen has a lot to do with whether you win your bet. However, I believe micropayments will get done, as I'm trying to do it, so I'd bet on things going well.

Bob Sloma

February 18, 2009 09:09 AM

I can only hope that things will get better. As an engineer, prior business owner, and now financial advisor, it has been a struggle to make any significant progress in my family's net worth situation since 2002. Even with a college education and advanced degree in finance, the search for the right mix of meaningful work, increasing (or at least steady) income and family life has been disappointing at best.

I am happy to have had the MBA in finance in my back pocket to more easily facilitate the move from the tangible sector of the economy to the intangible. After over 20 years in the manufacturing industry, I had to throw in the towel and move to the service sector. I understand the importance of increasing productivity in the manufacturing world and indeed contributed to it. I feel it is a shame however that we as a country have not found other innovative ways to harness our ability to make things more efficiently than any other country in the world.

Viking

February 18, 2009 01:32 PM

I would argue that the last decade was one in which we tried to maintain a standard of living way beyond our means by massive borrowing and that the next decade will be the tough one because we are in the beginning stages of having to pay the piper.In the long run we will have to learn to live within our means,but the adjustment will be hard although any comparisons to the Great Depression is so far not warranted.In fact our current situation present an intersting paradox in that our standard of living is so high today,compared to the 1930-1940 period that so much of our consumption is discretionary today that we have a lot of room to cut back on consumption,before we reach the bare essentials.That however is also a great danger in that many millions of people worldwide are employed in discretionary industries and face losing their jobs.The fact is that we are so productive today that it takes relatively few people to produce the essentials,so what should the rest of us do in the future??

CompEng

February 18, 2009 02:25 PM

Viking, you are touching on the essential question of the postmodern economy: how do we create enough new consumption markets to keep everybody employed? Else why would economists ask the bizarre question of how to keep people consuming.

That feeds nicely into Ajay's suggestion of micropayments (sure I'd spend 3 cents a month to subscribe to businessweek online - how do you manage that?). But honestly, while it's a step in the right direction, I doubt the power of such a concept to revitalize an entire economy any time soon. It takes a while for new usage models to gain critical mass, and it still ignores that digital content consumption is going to remain modest as a portion of a consumer's income: and therefore as a slice of the economy as a whole.

The irony, as Barack Obama put it, is that that there are so many out of work when there is so very much to do. But that boils back to the very nature of capitalism, debt, and the monetary system: the people who have the money are good at creating or acquiring wealth, not spending it. The rest of us have not so much money as all this "worthless" individual talent.

LAO

February 18, 2009 03:46 PM

Viking, Interesting that someone else's thoughts also go to the uncomfortable conclusion that there is already simply not enough work for everyone. Here are my best pollyanna thoughts: Some productivity will be hard to sustain as resources get used up, so manual labor may eventually experience renewed demand. People still need to work on the contributions to inefficiency in a broader sense -- friction, wasted heat, fishery decline, crop nutrition decline, etc. People need to dramatically improve the recycling story and stop making stuff that has no further use. If workweeks and payscales shrink together, then there would be less discretionary shopping but more jobs and more time to do the things that save energy, resources, money, and relationships, plus more time for concerts, festivals, golf, dancing, teaching, being neighborly, ..., and more time to dream up innovative ideas. As I said, that is the pollyanna view.

Kartik

February 18, 2009 03:54 PM

If anything, the fact that the stock market's performance for the 20 years following 1939 were quite strong. That bodes well for the 20 years from this point. This is the cheapest market in 26 years.

HOWEVER, US real wages will NOT rise until China's per-capita GDP becomes about half the OECD average, which will be about 2017. I have said this for a long time, and this will happen. Only after this barrier is crossed will US wages rise again.

Furthermore, Americans who bought cars and houses so irresponsibly (there are idiots who owe $40,000 on a $25,000 car because they rolled in existing loan balances onto their next car) fully deserve a decade of hardship in terms of consumer spending.

Products that were heavily dependent on cheap loans (houses, cars, and college tuition) will suffer. Product that are usually not (technology) will do well.

Ajay,

You have a point about micro-payments. But someone will develop it. Paypal can already be used this way if both parties set up the conduit.

Kartik

February 18, 2009 04:01 PM

Michael,

Can you add charts of 1929-39 as well as 1998-2008, to illustrate your point?

Fixing the duration at 10 years may be misleading. Why not 8 years? 12 years? This would be more useful in plotting a worst-case scenario. 1938 was a big up year. 1930-37 was an 8-year period that captured the worst downward years. I don't think any modern 8-year period matches it.

Lord

February 18, 2009 05:10 PM

Ten years is a reasonably good time frame for a turnaround, but the next few may still get much worse.

Joe Cushing

February 18, 2009 06:50 PM

I don't see it as a decade of despair because the we had booms and busts in the last 10 years. Things were fine 2 years ago. We just saw massive loss this year. The question is, how long will it take to recover. If it takes 9 years to recover, that will be the decade of despair.

It won't take 10 years to recover. I think our economy is to clever to let big goverment get in the way of it. So even though the goverment keeps making bad moves to make us think they are helping, we will still be able to recover.

Mike Mandel

February 18, 2009 09:52 PM

Kartik,

I'll put the charts up tomorrow, when I am back in the office. And as for why 10 years? Why do we ever talk about decades, anyhow? I generally stick with round numbers because it reduces the temptation to cherrypick the data.

Mike Mandel

February 18, 2009 10:02 PM

CompEng, Viking,

I hate to be a broken record on this, but the question of "demand shortfalls" and running out of things to consume has come up repeatedly in the past. And always what has happened before is that new technologies created both new productive opportunities and the new demand. In 1945, there was enormous worry about what would happen to demand after the war spending stopped. But no one imagined that we would move into interstate highways, the suburbanization of America, and the massive translation of military technologies into civilian technologies.

So when I ask myself, what are people willing to pay for (in money or time)?They are willing to pay (in money or time) for better health, for better education, and for better information and entertainment. These should be the driving forces of the next cycle.


CompEng

February 18, 2009 11:08 PM

Mike, you're right that it's not a new problem, and history certainly supports your argument. There will be a bounce that will lead us into another growth cycle, although I'm not holding my breath for 2009.

But just because we've never had to truly solve the problem doesn't mean there isn't a problem (sort of an asset bubble in money itself), or that there isn't a solution. The engineer in me cries at the waste. This is one of the problems of the ages, and it would be sheer hubris to expect us to really solve the capitalist boom-bust cycle in any kind of reasonable time span. But I just don't see why we should be satisfied with our performance in economics: we can surely do better.

Ajay

February 19, 2009 01:03 AM

CompEng, our problems are NOT structural, they have been the micropayments bottleneck holding back tech and a savings glut causing a speculative bubble, a phenomenon as old as time. As for micropayments, they aren't just for digital content, they will be used for ALL technology spending, everything from office applications to wifi. Still, that's only the information economy, you might say. Well, the information economy is the meta-economy, this "information good" is used to make decisions on much more tangible goods, like jet engines or food. When the information economy takes off because of micropayments, it will drive change and innovation in the entire economy to an unprecedented rate.

Jcage, the Fed hasn't been printing money YET. Instead, Paulson and Bernanke came up with a clever scheme to print lots of treasuries, which might have consequences for govt debt, or might not.

Bob, you're better off in services and you're not guaranteed anything. You want a better life? Find something you do better than most and earn your increase in net worth.

Kartik, I agree that the current market is undervalued but I think the changes that are coming are so big that they could do away with our current stock markets altogether. As for implementing micropayments on top of an existing payment system, the fact that it would be so easy to implement highlights the great stupidity of the people who have not built it so far.

Mike, amen about demand shortfalls, couldn't have said it better myself. However, I disagree about health and education, the only reason they take up so much money now is that those markets are highly govt-subsidized and as a result grossly inefficient. The information revolution will destroy both markets and reduce them to tiny vestiges of their former size in dollars, while providing much more in goods. Technology, information and entertainment are the future.

empedos

February 19, 2009 03:39 AM

Private Debt may be reduced by either cutting spending (happening now) or by uplifting the average income (very difficult at the moment).
Unless part of the Private Debt is "transferred" to the Public Debt (step 1) provided that Public Debt is financed from those benefiting from high consumption (step 2) : they should realize that it is to their own interest to keep buying goverment bonds (instead of investing in bubbles) since they dislike higher taxes. Its a new financial order.
The foreclosures' plan announced yesterday is a first good sign. I am waiting for the next steps before I start being an optimist again.

Ransome

February 19, 2009 05:55 AM

I'd like to mention that we don't have much money to spend on consumption. I pay the SS and M&M flat tax of about 17%. State and local taxes, including sales tax takes another 15%. Then there is the Fed tax. That is around 45% total. Housing requires another 35%, either to rent or to own. Energy and transportation costs another 10% or more. Food is 15%. Health insurance 15% (including out-of-pocket costs). Communications, information and entertainment costs another 10%. There isn't a lot left to use as savings or consumption unless you bring home a large paycheck and many of the percentages become flat fees. Even then, much of the excess should go into a retirement account, up to 20% of your gross. Short term debt can smooth the cost of consumption, but it is very expensive when using credit cards. Don't expect me to drive the economy.

We may be at a point where privatization of many services is simply not sustainable. It may be necessary to look at an expanded socialized service model. The threat of $5 gas stopped everyone in their tracks.

MattYoung

February 19, 2009 06:29 AM

Technology has produced new bottle necks and economic planners can barely see the problems. As we spiral downward, the bottle necks become more obvious, the problem being spiraling downward to get at a point of clarity.

But, I think is a few years, as we start to understand the problem we will conclude that we have a last mile inefficiency problem in delivering freight (ordering a pizza!).


Mike Mandel

February 19, 2009 09:14 AM

Ajay,

Good points about the inefficiency of healthcare and education. In the short run, though, they are still crucial forces for demand.

CompEng

February 19, 2009 11:18 AM

Ajay,
I don't see what the age of a problem has to do with whether its a structural problem or something else. I call our global problem structural because it was deliberately encouraged by national policies throughout the world. The unwinding of the bubble and those policies will affect a lot of people and what they do for a living. That seems like a good enough definition of "structural" to me.

Calling the information economy the meta-economy is hubris. It can have a multiplier effect, much like computers themselves did, but it will not happen overnight, just like the effect of computers has not been overnight. Once you get payments right, there's a lot more tuning to go on before a technology can find its mature place in the market. You underestimate the difficulty of organizing people on a task, getting mindshare, etc.

A final point on demand shortfalls. Why did not some new technology get us out of the depression in the 1930's? Because no one could pay for it: no cash, no credit, no fluidity. Why could technology save us in many other points in history? Because the huge government spending project called WWII along with a reasonable savings rate meant the technology and demand had fertile ground to grow.
Crucial question? Where is today's cash and credit? Is there enough? Maybe global stimulus is enough, along with today's R&D, to create that climate. That would be nice.

Nik Kondratieff

February 19, 2009 02:21 PM

Michael,

I somewhat perplexed by your conclusion. So, the fact that you're an optimist gives you hope for the next ten years because the last 10 were on par with the first Great Depression (as measured by S&P500 return and wage stagnation)? Hmmm...that seems to be some pretty twisted logic. Not to mention that you're ignoring the fundamental structural issues in our economy, namely $11 trillion debt, bankrupt financial system, 3.6 million new job losses in 18 months, $53 trillion in off-balance sheet liabilities of the USG, and massively deflating housing prices.

None of this has fully played out in the market yet.

Must be nice to be able to have blind faith and eternal optimism that the next 10 years will be better than the last.

I don't know what you're smoking but maybe you need to share.

Nik

PS, I have this bridge you might be interested in. Built in 1883 by this Roebling fellow who's an engineering genius. Maybe you'd like to take it off my hands, cheap?

Viking

February 19, 2009 02:24 PM

CompEng,Good point about demand shortfall and WWII,which also gets to Mike Mandel's point about 1945.WWII did get us out of the depression,because of the huge government expenditures required to fight the war.This spending,however did not address basic needs of people,it in fact destroyed basic needs of hundred of millions of people around the world.Therefore after the war,spending could easily be converted to spending for basic needs,as those needs were so great worldwide.This is not the case today and we are still left with the puzzle as to what will fill the gap of all the millions of people who have been employed in discretionary industries.One possibility is that the countries with large trade surpluses find ways to stimulate domestic consumption to mitigate the problem,but other that that I don't see how we are going to "invent" our way out of it.Especially since new inventions and technologies will bring further productivities to the economy,requiring still fewer workers.

empedos

February 19, 2009 03:44 PM

Answer to CompEng's last question : China is a good place to search for enough cash and credit.
Yesterday the chinese made a huge investment in Australian Rio-Tinto.
They still don't get it, they want to become owners but they' ll find themselves owners of businesses without enough consumers. All they have to do is to simply finance (using their vast reserves) the debt of the countries where their consumers reside. But they don't seem to be bold enough, they keep looking at the CDSs premiums like miserable accountants. They keep thinking as chinese and not as participants in a global game full of mutual dependencies. A change in their attitude is something I am waiting for to start betting in recovery.

Kartik

February 19, 2009 05:05 PM

Michael,

Understood about round numbers and cherrypicking. The problem is that in ther 10-year 1929-39 period already had the strong recovery of 1938 in it.

I suspect that a year from now, the March 2000 to March 2010 10-year return will be even worse, due to how high March 2000 was.

Also, the 1973-82 period was extremely bad in inflation-adjusted terms, probably rivaling the other two periods.

Don't forget to include dividends reinvested in your chart.

Ajay

February 19, 2009 05:13 PM

CompEng, it's not the age of the problem, it's the fact that savings glut-induced bubbles are a recurring, evanescent phenomenon that has happened many times before. While national policy played a part in the housing bubble this decade, it was not the main reason. The savings glut and stupid risk modeling were the main reasons and the govt could no more have stopped a bubble based on those two factors, if they even wanted to or tried. Ultimately, you seem to view the overbuilding of housing and the overgrowth of the financial sector as major structural problems. I view their overexpansion as middling problems while the overall structure of the economy is fine. I just wish we would let markets appropriately shrink those segments, rather than getting in a tizzy about it.

Just because the information meta-economy cannot change the world overnight doesn't mean it isn't very powerful. I claim that payments is all that's left, once we do that the information revolution takes off. The way I look at it, the PC was the firewood/kindling and the internet was the gasoline. Once we have the match of micropayments and start the fire, the fiery blaze of the information revolution sets off. As for your argument that demand shortfalls need to be paid for by the government cuz there's just not enough private credit, that's laughable on its face. Where does the govt get their money to invest, manufacture it magically out of thin air? The reason why growth languishes is because of uncertainty, nobody knows what the next step forward is. For example, very few in tech still think about micropayments, despite it being the original monetization idea that Ted Nelson came up with for his original hypertext system 40 years ago. The crucial question isn't where is the money, there's plenty of it, it's how do we spend it? Free marketers like myself want entrepreneurs to compete to figure out what the best way is. Statists want to appoint some god-like figure to govt (Obama) or a priesthood who they trust (left-leaning economists like Summers or Mrs. Romer) and pray that they figure it out. For all their railing against religion, the left has recreated their own secular religion in their worship of government. "Global stimulus" is merely the idiots in govt throwing money down the drain while things are going bad, sort of like how kings of the past butchered cows to the gods when they had bad harvests. It's a complete waste, but it does appease the idiot masses.

Ming

February 19, 2009 08:14 PM

With hundreds of thousands of families losing their homes, literally thrown out into the cold, America is undergoing some remarkable changes. Whatever one thinks of his specific policies, Obama does care. If we don't wish him well, we may find that America is changed forever, beyond recognition. Obama is a very intelligent and concerned person who is open to many different viewpoints. We'd better hope he succeeds.

Jim

February 19, 2009 10:59 PM

Micropayments is the way out of the recession/depression? Didn't we try this already? Anyone remember FirstVirtual or Cybercoin? How about Millicent, or Internet Dollar? Pay2See? Probably not and with good reason.

Micropayments have failed because they are inconvenient and they require the user to put a value on things they never valued individually before. There's a reason you pay once to get into Great Adventure and then can ride each ride for "free" as many times as possible vs paying each time you ride. You don't feel ripped off for whatever reason and it replaces the mental decision of trying to place a value on the more granular object. Introducing that overhead seems to add inefficiency to the system, not drain it.

The iTunes model doesn't apply because people have long felt ripped off by paying for a full CD of music and only enjoying 4 songs. All of a sudden you can get a CD quality replica for free online with little effort expended. This forces the record companies to now sell their music piecemeal because that was the only way to stem the crisis. This was a case ripe for micropayments and it's obviously worked per the volume Apple is doing. Do people feel the same about magazines or newspapers? What areas have that dynamic?

I personally believe and will invest accordingly, that the US is on the wrong side of the mountain. So Michael, sold to you.

CompEng

February 20, 2009 12:07 AM

Ajay,
With the caveat that I absolutely do get overly wound up about things, I think some extra curiosity is extremely valuable. You come across as pretty sharp, but I do think, that like a lot of conservatives, you think you already know the answer, you are relatively detached, and so you might miss the forest for the trees.

I can't take this from all the angles running through my head, so let's start here: you say the problem is a savings glut. That's valid, from a certain perspective, but whose savings? Why? It's not US personal savings mostly: our savings rate was at an all-time low, on average, before this blew up. Aside from our 401Ks, it's big corporations, foreign central banks, and foreign governments whose money had to make money. This is important: why didn't they invest in their own countries? There are a lot of reasons, but the first on the list is that they had to invest in dollars because that's what the dominant economic strategy of the past few decades, export-led-growth, provides in spades. America was the consumer of first and last resort, and the dollar was and is the trade, oil, and reserve currency. And the big government investors can't sell dollars for foreign currencies because: the world's consumers have dollars, And investors aren't really interested in building things: they just want the dollars. The US, as the world's largest economy and one of the world's most open (also with a very solid real and psychological safety net) was prepared to borrow at low interest rates to invest in rapidly appreciating assets (the determination of which was outsourced to big investment funds with a history of very solid returns). Every piece of law, every government directive from the US, the WTO, and the developing world was geared around export-led growth and the American consumer. And the severe relative weakness of labor in the developing world was crucial in this process. American debt and foreign savings didn't just happen: it was *the* plan of nearly anyone in a position to influence policy. Do you deny this or do you just think it's ok?

Yes, the information portion of the economy is very powerful, but your rhetoric is also uncharacteristically strong. There have been any number of economic game changers in history, but their hype has always exceeded them. It is absolutely characteristic of a good idea (like laptops, the internet, transistors) to suddenly erupt on the scene decades after the idea was fleshed out. Maybe micro-payments are one. We'll see.

Entrepreneurs in a free market are absolutely the most efficient way to find and build out an industry when there is a market to find: large numbers of customers with money and a need. Why hasn't enterprise targeting the developing world taken off (except in a few markets like cellphones)? Because the people in those countries are grossly underpaid and have no money! There's a pendulum of leverage between capital and labor and anyone paying attention can tell you that on the global scale, capital is way ahead. We have a bunch of market actors with capital that don't want to spend, and a bunch of people that would be happy to spend, but they don't have the capital. They'd happily work for it, and they actually do have skills for the most part (Atlas Shrugged was a crock), but the people who have money don't want goods or services, they want money. This actually doesn't really work very well, and technology doesn't change it (yet). What changes things is that debts and prices eventually reset to the availability of money and fluidity and confidence eventually return. Then the new round of entrepreneurs, goods, and technologies emerge: the stage is ready.

Government has about the same record of accomplishing anything with money as any start-up: that is, about an 80% fail rate at getting your money's worth, except that government programs are harder to kill. I'm about the last person to "worship" government, but for the protection of public goods a corporation will not do. The corporate decision model is the worst possible for that purpose, and the free market is well understood to be poor at it (and it's well understood why). Living in an environment where good people don't get left behind, having a safety net: these are public goods. Clean air, clean water, transportation networks, military protection: these are all public goods. I would submit that a proper balance between capital and labor is also something that is best done by a mediator, and the government is the best at hand.
A stimulus package, if it works (and I'm really skeptical too), isn't about money invested well for a reasonable rate of return. It's about providing confidence, and it's about fluidity. Banks and corporations have 0 interest in lending money or paying people unless they their money back and then some, and you can't get that from someone without money unless you're willing to take non-monetary compensation in return. They're not and they can't. So trade, the economy itself, slows.

The economy needs fluidity and redistribution, not because it's fair, but because money isn't really wealth: it's just the grease of trade, and a car won't run with all the oil in the bottom of the oilpan, no matter how much oil is in that pan.

Mike Mandel

February 20, 2009 08:59 AM

Nik, Jim,

If you posit a world without significant technological game changers (micropayments, biotech, or something else), the long-term rate of growth of the economy plunges, and *everything* goes bad. I'm prepared to bet that isn't going to happen.

P.S. Remember, the real problem with buying the Brooklyn Bridge was that it was being sold by someone who didn't own it(Madoff, Stanford).

Jim

February 20, 2009 11:37 AM

Mike,

A lot of those game changers you mention require huge levels of debt to finance. The reality is all of those investments require cheap capital that is not present at the moment with no clear path to payoff which means no one is willing to spend money to make money at this stage. It will take some time before that dynamic reverses.

You also need to factor in that you have a whole generation of people who are now very risk averse due to the past year's events. They don't understand finance and/or economics like you and I do and now see investing as no better than gambling on football, something they actually understand and don't feel is rigged. This is what's causing the broad sell off as there is more supply than demand for equities right now. That will remain the case for a few years by my estimation which further dampens the appetite to provide capital to the very game changers that need them.

The reality is our "growth" over the past 20 years has been fueled by leverage. That's going away now and probably not coming back anytime soon. Oh yeah, in that same period, we stopped making things. Until that paradigm changes, we've peaked.

Ajay

February 20, 2009 09:39 PM

Jim, Let me imagine what you'd have said if I'd told you about this up and coming search engine company called google in 1999, "Another search engine? Didn't we try this already? Anyone remember Altavista or Ask? How about Overture, or Excite? Inktomi? Probably not and with good reason. Search engines have failed because nobody wants random websites and you can't monetize searches. Portals, where all your online services are bundled together, are the future." Fast forward a decade later and everybody wants to be in search, because google built a great search engine and showed how to monetize it, and portals are all but dead. As for your familiar and braindead arguments against micropayments, people are willing to pay whatever content costs, while competition will drive prices down. Engadget charging 10 cents/post too much for you? Switch to Gizmodo, where it's only 5 cents/post. As for theme parks, I remember going to Disney World as a kid and having to wait in really long lines for the popular rides. I didn't know there was a solution for this at the time, but I now know that individually pricing the rides, with the more popular ones costing more, would have cleared up the crowd. Once they were making more money from the popular rides, they could have built more of the popular ones and alleviated the crowd that way. This is all basic economics, the fact that I have to explain it shows the economic illiteracy of the tech crowd. The fact that no working micropayments system has been deployed to this day shows the economic and technical idiocy of the tech crowd. I think the micropayments model will be used for everything in tech: digital content, web apps, desktop apps, wifi, everything. Let's see if I'm proven right.

Micropayments cost almost nothing to build out so cheap capital is not the issue, the issue is the brains to know to do it. As for a clear path to a payoff, if that's what you want, you're not a real investor. I understand that most don't want to take seed-stage risk, that's fine: there are always a few who do and who will reap the rewards. As for the idiot masses running away from the markets, that's fine too. What matters are the few investors who buy low and sell high, the trampling herd around them consists of idiots who can mostly be ignored. While the great rise in finance over the last 20 years has helped fuel growth with increased leverage, it's hardly the most important factor or even one of the most relevant. Rather, it has been technology, globalization, and entrepreneurship. If you think lower leverage means all the entrepreneurs go home, feel free to invest that way: I have no doubt you'll be proven wrong. As for making things, China and Germany make plenty of things: how great is that working out for them? It's not about making things, it's about making profits from services that others value and with one of the highest GDP per capita numbers in the world, the US is clearly doing that. It sounds to me like you've decided on a negative investment thesis and you're trying to rationalize it. I suggest you do your analysis first before coming to a decision.

CompEng, the savings glut is international, that's well known. It consisted of Chinese and Middle East savings being put into the US, the govts and central banks that you mention were small fry by comparison. You keep harping on the policy decisions that were made, while I point out that policy couldn't have stopped this trend if they wanted to. Capital flew freely around the globe this decade, govt policy could not have stopped this if they wanted to. The fact that they chose to go with the flow is largely irrelevant, why do you keep harping on these national policies?

I make strong statements about micropayments and the information revolution because I believe they will deliver unprecedented results. Let's see if I'm proven right, events will tell. Corporations selling consumer durables (P&G, Unilever) have done remarkably well in the third world, you don't sell iPhones to the lower class. If they have no money, where did all the international savings come from? It's not that investors of capital currently don't want to spend, it's that they don't know where, as I pointed out before. When all the banks are going under and some of the corporate growth of the last decade has been shown to be a mirage, where do they invest? Smart investors like Warren Buffet are buying, it's a great time for them right now. The fact that the hordes of idiot investors don't know what to do is neither here nor there, they were similarly indiscriminate in buying on the upswing and got burnt as a result. You keep saying that investors only want money, not to build things or fund goods and services, and that may be true at face value, but when the only way for them to make money is to build things, your argument is irrelevant. Investors have no problem building things, they just don't know what to build right now. The government makes things worse by making all kinds of contradictory statements in the middle of these downturns, further freezing investors.

As for the govt, not only is their fail rate far worse but there ain't no googles or ciscos coming out of govt. ;) The record of the last century is clear, socialism has been a giant failure and free markets have resoundingly won. Yes, public goods require some govt protection, but the real question is what is a public good? Are living "in an environment where good people don't get left behind, having a safety net," and "a proper balance between capital and labor" considered public goods by enough in the US? I don't think so and many would agree with me. If other countries want to make that decision, that's fine with me: they'll pay the price for their stupidity, just as we are paying the price for socialized education and medicine now. The fact that there exist a few public goods does not provide you an excuse to redefine all goods as public goods, we've already seen the dismal failure of this approach in medicine and education. As for stimulus, we've given money to the banks, has it worked? No, because the govt cannot magically change the world. The fact is that banks can no longer repackage their debt and sell it off in secondary markets, because the buyers are no longer there. No amount of govt hocus pocus changes that. Your money as oil analogy perfectly examplifies the current conventional wisdom, though thankfully not fully embraced by Bernanke yet. Markets down? Pump more money/oil into the markets is the flawed solution commonly suggested. Rather, money IS one form of wealth, in that it's a store of our work/value. There are plenty of people willing to work to earn someone else's money/work in return: the question in down times like these is "what is the best work for them to do?" Where do we employ all those capable investment bankers, now that we don't need as much finance? Most don't know the answer, so it's up to entrepreneurs to figure it out. I've offered my solution, micropayments, and I'm working to make it happen. The govt merely robs the rich to ostensibly pay the poor in the meantime, but really to shit it away on more socialized medicine and education or to line the pockets of their backers.

Bikash Chandra

February 21, 2009 12:57 AM

I would like to start by congratulating you, all of you, for I’ve never read a more intelligent post. But since the discussion is centered around Ajay- let me ask him a simple question. Government is a necessary evil. Now, he can rail against its evil but does he or not recognize its necessity?

CompEng

February 21, 2009 10:53 AM

Ajay,

"I suggest you do your analysis first before coming to a decision." I consider this part of the analysis process. I don't wish to lose the forest in the trees. I'll risk the pitfalls of walking the hypothetical walk: it's far better than being stuck in market faith-based reactionary mode. I don't think I'm doing less analysis than you are: I'm just in less charted territory, so the roads aren't as paved.

I'm not knocking the entrepreneur, they are invaluable. Yes, the 90's and late 80's wouldn't have happened without technology and globalization. Easy capital definitely made it happen faster. What's more, finance is how Americans retained their standards of living as they produced less (relative to their trade partners, not in absolute terms). So far, no argument. But there are some problems
entrepreneurs aren't good at solving. If you want to hear someone grasping at straws, listen to Bill Gates talk about "Creative Capitalism". Entrepreneurs can't solve the problem of how to sell sufficiently to people whose work is undervalued.

China and Germany were mostly doing ok, thank you, as long as there was someone to buy their stuff. Their problem, like Japan, is they pursued a trade surplus rather than a trade balance. Making that happen fundamentally meant producers were earning less than market on their goods. That dependency did make them vulnerable since they couldn't grow consumption, at least not fast enough.

"The fact that they chose to go with the flow is largely irrelevant, why do you keep harping on these national policies?" It's not irrelevant. With a different set of national policies there would have been more places to invest.


"You keep saying that investors only want money, not to build things or fund goods and services, and that may be true at face value, but when the only way for them to make money is to build things, your argument is irrelevant."

No! This is the core of the argument. Money is not wealth, it is the accounting of wealth! The core of capitalism, the rationale for greed being good, is based on the fact that when you create wealth, you trade it for something of relatively equal value. This means you cannot get money without having created its value. When this assumption fails, capitalism doesn't completely work. And it's not academic: half of competition is based on bargaining power. The developing world's producers are paid from from nothing for their work: but they are still paid an order of magnitude less than we are, and this makes all the difference in divorcing labor and consumptive power.

This brings us back to where the money went. Whose Chinese and international saving? Individual savings partially but government and corporate savings. Again, why didn't they invest (more) in their own country? Not enough consumption power and the the money they had was in dollars, and they wanted to keep the dollar high.

You keep talking about analytical rigor. Why do you keep stopping at face value?

"Investors have no problem building things, they just don't know what to build right now."
Because they need to justify their investment by being able to sell someone else. They are not endpoint consumers. When endpoint consumers falter, these guys can't and won't pick up the slack.

"Are living "in an environment where good people don't get left behind, having a safety net," and "a proper balance between capital and labor" considered public goods by enough in the US?"
It's in our interest. The anarchists and Red Emmas of the early 20th century can perform the same function if you like, but I'd rather not have them around, thank you. By the way, I'm not talking about welfare, I'm talking about bargaining power. Some socialists believe in a welfare state, but I think most people that believe the government has something to offer don't. Why do I think labor's bargaining power is low? Because in places like China and India it is. Among other concerns, in countries where big money is payed to prop up the dollar and lower local currency, that's essentially a tax on labor. And capitalism means the labor price anywhere is eventually the labor price anywhere. What to do about that? Not sure.

"As for the govt, not only is their fail rate far worse but there ain't no googles or ciscos coming out of govt. ;)"
True, it's not the business of government to get into private enterprise. But many of the ideas of the technical revolution started in government labs or research labs subsidized by the government. The internet, Unix, I believe the laser, most of the telecom technologies, etc. came from there. Of course, now the Bell Labs of the world are all closed because we've moved the research to other government funded labs: places like MIT. On the other side of the spectrum, of course, there's the conventional think thanks, paid to convince us that those in power have it under control, nothing to see here.

No, I think an 80% inefficiency rate is a pretty fair characterization of government. Again, the main differences are government failures are much harder to kill and that monetary benefit of their successes are always reaped by someone else. Government plays a much different role than free enterprise.

Look, I don't want the government involved in most things. But be dispassionate about your analysis.

And I'm generally abhorred by the government taking my money and spitting out of a fire hose at the first target available, as it is wont to do. I'm trying to reconcile that distaste with the realization of how many problems the free market can't solve. In the meantime, I don't see anything wrong with hoping that the money people are throwing at the problem now might have some positive effect. After all, the downside is already guaranteed.


When the dust settles and the climate is right, the entrepreneurs will all look like heroes again. In the mean time, I don't think the economics on how these things work is very mature. I think conventional free-markets is dismissive of some things as external effects that can actually be understood and directed. And no, I'm not enough of an economist to figure those things out in a reasonable time, but I'm smart enough to be able to finger some of the areas of opportunity, which is what I keep being compelled to do.

It's funny to hear you knocking my analysis. Honestly, I don't think the "we don't need to solve these problems" orthodox deflections really add much to the understanding of anything. Are you afraid someone is going to rush out and give all your money to some government organization to try and fail to figure these things out? Well, people like Obama might, but they wouldn't if conventional economists had better answers.

Mike Reardon

February 21, 2009 07:01 PM

According to the Fed, household wealth, fell from $64 trillion in the 3Q 2007 to $56 trillion in 3Q of 2008. Over the last 10 years the efficiencies of the markets have also destroyed $7 trillion in equity value while at the same time inflated any bubble that could be re-inflated to fill the loss. (dot-com corporation failures, recovery from the 9/11 crash effects with unregulated energy values, supply side tax relief and a housing bubble and an unregulated asset creation derivatives market, and now asset distress and bank failures)

So the picture of distressed assets in that efficient market only gaining 14 to 15 cents on the dollar as the fare value, is driving that $7 trillion loss in equity value to a bottom loss for the decade much deeper $9 trillion lost into this year.

Working out of a real restrictive bottom with that 15 cents on the dollar as some true value to build off of, has to reflect its forward value in the market place. Try forming bond values to support future investments with 15 cents as your base value on the assets you hold. If this economy only goes lower with every new push downward supporting creative destruction, it can only reach up so high when it finds its last distress value. Good luck.

An artificial level that reflects a forward value not a distressed value is to be preferred.

I forgot above the continuing transfer of production from domestic markets without a policy that supported national reinvestments. And government direction and regulation is the only thing with that power in this market.

CompEng

February 22, 2009 10:23 AM

Ajay,
I apologize. I really needed to proof my post a bit more.... there's a greater than usual amount of slop in grammar, presentation, and even key content.

For instance, the diversion of money from wealth does not necessarily follow from underpayment for services, and it doesn't "break" capitalism. The beauty of capitalism is it's so simple and so capable of including things wholesale that it's very hard to "break". Although it's not that hard to get undesirable results.

Anyway, my apologies.

Ajay

February 22, 2009 08:07 PM

Bikash, we do not need government. Everything that govt does can be done much better by private markets. Take the FDA, we would be much better off if we had many more competing testing/certification agencies that consumers could choose from. As for national defense, it becomes a self-fulfilling prophecy as one country's "defense" forces can be used to attack another country, forcing them to pay for a defense force themselves. Govt armies can be replaced by non-aggression pacts and private police forces, that can be turned into defense forces if necessary. Take the patent system: I argue that if you added up all the monetary benefits from its few successes, like the xerox copier patents, to the monetary losses from constraining people from using ideas, the losses over the entire centuries-long run of the patent system would outweigh the gains by at least a 3:2 ratio, likely more. And yet we keep this horrible system around, solely because it's a govt system and is difficult to kill (with private rent-seeking interests playing a role too). I argue that the information age will see a great decrease in govt power, as many functions will be taken over by private markets, sort of like how email and FedEx have been killing the USPS. The legal system will become largely private, as it's an information system that is badly run by the govt right now. Rather than child labor laws, people can just report child labor on the internet and consumers can instantly boycott those products. We will see a great reverse of the silent govt cancer that has grown over the last century, once the populace is made aware of its great waste through the internet. This combination of the efficient spreading of information and new technology will demolish the role of govt in our lives in the coming century. I've taken pains here to butcher some of the sacred cows of those who believe otherwise, feel free to trot out some of your own: I'll slaughter them all. ;)

CompEng, the base of any analytic process is reading the data carefully. You keep railing about my imagined jibe at your analysis, when that comment was aimed at Jim. Let me quote myself so you don't miss it again, "I suggest you do your analysis first before coming to a decision. CompEng, the savings glut is international..." That means that everything before your name was aimed at somebody else, Jim, as I started my first paragraph with his name. So while I wasn't talking about your analysis before, I do think your process is questionable when you make such a mistake. As for "forest in the trees" or "walking the hypothetical walk," more vague statements that mean nothing to an outsider: we don't live in your head so we don't know what you're talking about with these elliptic statements. As for being in less charted territory, I claim that it's well-charted and that you're just ignoring the charts, so that when your suggestions inevitably run us into a lake, you can say "What? It was uncharted territory!"

Finance was maybe a 5-15% factor in the higher standard of living over the last few decades, far less than technology or globalization. The fact that you elevate it to THE most important factor is where you go wrong in my opinion. Bill Gates may be no good at redefining capitalism but he certainly seems to be doing a good job at redefining charity, if Buffet giving all his money to his charity is any indication. Why would entrepreneurs want to sell to those whose work is undervalued? The money's here so they sell here. I like how you evade the China and Germany issue by talking about how they "were" doing well, which wasn't the issue at all. They're doing badly NOW and the fact that they also chose stupid trade surplus and currency policies on top of their idiotic, mercantilist manufacturing policies hardly helps your case that they know what they're doing. As for national policies changing where people invest, the fact is that national policies, like supporting Freddie and Fannie's jaunt into subprime, actually worsened the bubble, so your credulous belief that govts might have done otherwise has no historical support.

As for money equaling wealth, we're getting into semantics here but money is wealth as long as it can be traded for wealth: money is any store of value that is commonly accepted in return for wealth. The reason that economists raised this distinction is to point out that you couldn't increase wealth simply by printing more money, which then led the inflationist idiots to the counter-argument that if money isn't wealth, surely there's no harm in printing more. The real argument here is that money is the store of value/work and you monkey with that accounting, by printing money or other govt policies, at your peril. You're making a lot of unsupported statements: who says that "you cannot get money without having created its value" has proven to be false? As for bargaining power, a maid can do the same work in Los Angeles or her native Guatemala and get paid 5X more in LA, after PPP-adjusting. That's because there is no intrinsic value to work, it all depends on the wealth of the buyers and how much they're willing to pay. One of the great benefits of globalization is that we're now turning all these isolated markets into a much larger global market, which raises the wages of the international poor while lowering US wages for the same jobs, as Kartik repeatedly points out.

Chinese individual savings far outweighed govt or corporate savings, dunno why you'd highlight the latter two, and individual savers could care less about the dollar's value. They and their banks simply wanted a safe haven for their savings, which long experience had taught that their countries weren't, and thought the US was that place. When they provided no oversight for how their savings were spent, they proved themselves wrong on that point. I claim that you're the one that keeps stopping at face value by raising rhetorical questions that you don't answer or vague assertions that you don't explore. Why should investors "pick up the slack?" If consumers won't buy, investors are not going to waste their money building things. However, a few entrepreneurs will figure out how to sell something to consumers, likely something new, and we will open new avenues that way. As for anarchists and Red Emmas, that debate is long over. When the lower-middle and middle classes are some of the most enthusiastic supporters of market policies, causing idiotic and anguished whines from the leftists about how voters are not acting in their "best interests" by using the govt to steal money from others, the debate is largely over. All that's left to do is dismantle the artifacts of our quasi-socialist past, like Medicare, SS, and socialized education. As for third world bargaining power, more vague assertions and descriptions from you with no real statement. Yes, bargaining power is low in the third world but the price of an Indian engineer has risen from a tenth to a third or more of a US engineer's price (and for many other professions in a trickle effect), that increase doesn't stop.

Bell Labs weren't govt labs, they were private labs funded by a company that had a government-provided monopoly. It's interesting to note that both the successful labs funded by patent/govt monopolies, Xerox PARC and Bell Labs, were horrible at commercializing their research, which was only done elsewhere. One can see some of the results of govt-funded stasis in these results, hardly an argument for more govt labs. It's interesting that you give govt research the credit for the internet, even though TCP/IP was a trivial conception and most of the credit for the internet goes to the hardware scaling of private corporations. It shows that you either do not understand these technologies or are willing to misrepresent their genesis anyway. I would say that govt has a 99% inefficiency rate and that its few successes are far outshined by the great successes of the market system. This argues for getting the govt out of practically everything it does today.

No downside is guaranteed, what you don't realize is that the regulatory uncertainty and money wasted by govt today makes the downside much worse, as Hoover and Roosevelt proved in the 20s and 30s. You keep saying economics is not mature on these issues, whereas anyone with any knowledge of economics knows that it is. This stuff has already been reasoned about many times over and empirically shown to be true, you just say that it isn't so that you can make dumb statements and claim that they're new. This evidence is why even left-leaning economists like Romer or Summers are often constrained in what they can do, even if they now sometimes choose to ignore that evidence to do their political bidding. It's funny that you view somebody who wants the markets to figure out our problems as someone who doesn't want to solve these problems, as you're so blindered by govt action as the only "action" that you can't recognize anything else. Yes, I'm afraid of exactly what you state and it's precisely because economists are the wrong people to ask for answers. Economists merely analyze the past and tell you what doesn't work, only entrepreneurs competing in a free market can tell you what will.

Mike Reardon, most of that wealth loss is in equity markets, that Kartik and I have pointed out are now undervalued (I think I have some credibility on this issue as I've been pointing out that they were overvalued for the last couple years). As for your other statements, it might help if you actually formed sentences and then logically connected them, if you actually want people to understand your comment.

LAO

February 23, 2009 01:04 PM

Ajay, How can I be an efficient participant in the market if my vital energies are sapped by personally negotiating everything and watching my backside for every surprise that the overly free market can deliver?

What private mechanism should the "good" peanut processors and producers have used to prevent the destruction of their market by one "bad" guy coupled with ineffectual government watchdogs? The thing about government, when it's functioning as I believe it should, is that it is independent. If it is incompetent, I can vote for people who will make it competent. If it is dismantled, how can anyone have any hope of keeping the "bad" guys in check? Both the consumers and the competitors were damaged by this failure, and if together we redesigned the system to prevent this, I think it would still be called government, except that I suspect it would cost more with the perennial profit and growth required by private enterprise.

CompEng

February 23, 2009 03:07 PM

LAO,
not much time to write at work, but one potential solution is not-for-profit private companies. I suspect guilds would arise and the "Consumer Reports" of the world would do a lot better. On the other side, the "private security companies" of the world would be genuinely terrifying.

But here's a function that even the most die-hard libertarian must support: the enforcement of contract (including property rights) and the keeping of the peace. And how could you seek recompense from someone who had damaged you or your property?
Without a government for that, your free market wouldn't last two minutes in a recognizable form. Whatever despotic entities that formed in that vacuum would be unrecognizable from government, at least in the positive sense.

empedos

February 23, 2009 05:12 PM

Last week has been full of good news. Foreclosures' plan (subsidies to lenders), Obama's intention to reduce deficit (high taxes for those with over 250.000 annual income, getting rid of useless state programs, etc.), Clinton urging the Chinese to continue buying US debt and much more. A new deal is taking shape both internally and externally.
No more talks about bailouts, bad banks and so on. Back to basics.
I am certainly more confident now that things may be moving to the right direction.

Ajay

February 23, 2009 05:53 PM

CompEng, I already posted my critique of your post before your apology from yesterday was published today. I'm sure you'll push back on whatever you disagree with. As for your argument that a govt legal system is necessary for contract enforcement, I already said that the govt legal system will be replaced by competing private ones. Why is it that when you go to France, outside the legal system of the United States, you aren't just robbed and dismembered by pirates? It's because competing govt legal systems have agreements to avoid this, so will private ones.

LAO, according to your concern, any trip to the supermarket would be a nightmare of negotiating and surprises that would exhaust you every time. Rather, it's exactly the opposite, you pop in, pick up a bunch of goods with clearly labeled prices, pay for them, and leave. However, any economic analysis will tell you that this often disallows the supermarket from price discriminating: they cannot charge the person who would pay $5 for his peanut butter that much because most won't pay more than $3. This actually might hurt the low-end buyers, because ideally being able to charge the high-end customer $5 for the same good might allow the seller to charge less to the low-end buyers. The supermarket was willing to give up this advantage because it wasn't worth the greatly increased cost of hiring a bunch of negotiators to haggle with you; they contented themselves with changing the posted prices every so often and letting you shop quickly. However, this changes with new computer technology: the supermarket's computer can now haggle with your cell phone and figure out the optimal price for every good. You can set simple rules that determine how much you're willing to pay, including tying it to what prices your friends were able to get previously. Pricing can get much more complex and optimized while not bogging the consumer down in that complexity, by providing simple touch points and UIs.

Similarly, peanut processors can document their safety procedures and put them online. Independent private food safety certification agencies can certify these processes and tell you what's safest. Your computer will keep track of it all and if there's a failure, like we're seeing today, it can immediately be factored into the track record of that peanut processor and the agencies that certified them. I maintain that all this could have been implemented decades ago, sort of like how consumer reports worked, but merely at a lower level of complexity than we can today, because of the weaker tech of those times. The only reason it wasn't done at all was stupidity. I don't see how government is independent, particularly with lobbyists pouring money in to the overseeing politicians' pockets, but private certification agencies that are only paid by consumers wouldn't be independent. I wouldn't call ANY certification system "government" as you seem to, if they're paid for by consumer fees and not taxes. The delusion of appointing government watchdogs is that simply by making these agencies part of the government, all the oversight issues simply disappear. The essential insight of those who want competing private agencies is that the consumer always has to have a role in oversight and that competing agencies will have incentives that no monopoly has. It is interesting that you note the ineffectual govt watchdogs but stop there, rather than continuing to reason about why they sucked, and simply ask for different govt overseers. In their rush to install agencies as government monopolies, the left immediately destroys the incentives of any agency they create. After a century of socialism, this lesson has been reinforced from hard experience. I intend to make sure that my life is not similarly worsened by the idiocy of these policies and those who support them.

CompEng

February 23, 2009 11:34 PM

Ajay,

from the most recent post, I'm a little curious how you think "private" governments would be better or different than public ones. In my original argument, I actually noted they would pop up, but you wouldn't like them: much like the Home Ownership Associations. When I lived in Arizona you had to look awful hard to avoid the darn things, and they were pretty tyrannical. That's why I'd argue that governments are market actors: they are not "outside" capitalism any more than corporations.

My "walking the hypothetical walk" bit was just a lazy defense of hypothetical rather than empirical analysis.

The uncharted territory comment: if we're in charted territory, the charts pretty well suck. In my mind, a model is only as good as its predictive value. I bookmarked a CNN article on the horrible predictive record of economic experts, but it's on my laptop. I'll try to find it tomorrow. The fact that there have been a lot of eras in history that mirror this only highlights how poor our economic models are because leading economists didn't properly predict what many fools on the street were saying clearly: the housing bubble would burst and a lot of money would disappear. The American consumer would be hit, and responding to increasing dept/asset levels, spend less. This would rather strongly affect the world economy. I don't find it satisfactory how few economists predicted it or how few can still tell the story coherently as something other than banks poorly valuing debt (true, but in my mind incomplete). I don't find it satisfactory how much debate there is over something like the stimulus bill or Keynesian economics. I can understand the liberal vs conservative debate: it comes down to differing values. But economics claims to be more scientific, and the two camps on the stimulus bill argue for wildly different results.

"Finance was maybe a 5-15% factor in the higher standard of living over the last few decades, far less than technology or globalization. The fact that you elevate it to THE most important factor is where you go wrong in my opinion".
-- I don't. I never said I did. Between finance and revolutionary technology, the game changing technology is rarer and therefore more valuable. But if you don't have a good financial climate, you'll amazingly find those ideas don't take off very quickly.

"like how you evade the China and Germany issue by talking about how they "were" doing well, which wasn't the issue at all. They're doing badly NOW and the fact that they also chose stupid trade surplus and currency policies on top of their idiotic, mercantilist manufacturing policies hardly helps your case that they know what they're doing."
I believe I've said mercantilism in order to generate a trade surplus hurts you and your neighbors. Germany, Japan, China, and Korea pursued a trade surplus with a debtor nation: that didn't work out, and that's consistent with what I've said too. I think a trade balance is what a country ought to aim for. I think Chinese mercantilism caused them to grow significantly faster, but it was an unstable growth. Chinese leadership was smart enough to know it couldn't last, but the results were too sweet for them to kick the habit. So now they get a big hangover. But as painful as this is to the Chinese economy, do you really think they won't be back on their feet before too long? Or even Germany for that matter?

There's nothing in the money/wealth paragraph I disagree with except the part about a service not having intrinsic worth. It's kind of a semantic argument, but markets are just a system of arbitration. The fact that we use markets to define a service's economic value does not mean that it has none outside out of the market. The arbitration system can get it wrong if the arbitrators get it wrong. And evaluating worth in terms of money only really makes sense if you have a competitive amount of money.

"Chinese individual savings far outweighed govt or corporate savings, dunno why you'd highlight the latter two".
Because that contradicts what I've read. Of course, that doesn't mean my sources are correct. But I sort of assume Chinese put their savings in a bank, and the bank is Chinese and its policy is directly dictated by the government. That's close to the same thing. I agree with you and Kartik with the caveat that once whole industries move to the third world, what will matter most are labor laws, unions, etc (actually in most cases just the threat of these things, which has been immensely useful in keeping wages up in the US). We're driving up global wages now. Hopefully policy will continue to allow that globally.

"However, a few entrepreneurs will figure out how to sell something to consumers, likely something new, and we will open new avenues that way". I fail to understand then why you won't admit that the wages of labor, the bargaining power of labor, to a significant extent drives the economy.


"As for anarchists and Red Emmas, that debate is long over."
--- They're not needed right now. The US has the highest wages in the world and even companies in many third world countries are pressured to offer improving working conditions. There are strikes and riots even in China, but as long as conditions are improving there won't be that kind of fire. But that's because even the Chinese government is making some effort to protect its poor, and in fact carefully gauges the mood of the people constantly. But show me a country where that isn't true except in some African countries where there's a total meltdown.
Unions are weaker in America than they've ever been, largely because globalization makes them so much easier to bust. Welfare is *not* dead, and corporate welfare is more prevalent than ever. It's in the interest of everyone to try to make sure that opportunities are there for the poor. It's against everyone's interest to have an entitlement class. I haven't quite worked out the path there. Less government welfare and more private and church charity is possibly a reasonable solution.


I didn't say Bell Labs were government labs, actually. They were in the "government subsidized" category of my argument. NASA probably had something that would count as a government lab. My network background is weak relative to the rest of my computing background: the only network class I ever took involved an old Darpanet guy that would rather tell stories than teach. But your characterization of TCP/IP as trivial (I'll grant it wasn't exactly genius) while building switches as revolutionary (seems like a natural evolution of processor-ish technology and Moore's law) does strike me as a bit off.

And Ajay, by "downside guaranteed" I meant the downside of the stimulus package. That is, a whole lot of taxpayer money turned into taxpayer debt. There I think I'll have no argument at all ;)

I actually think lending and debt are one of those areas where money and wealth can naturally be divorced: all debt is speculative on the idea of being paid back. And so the "money creation" that banks do is also in a sense speculative. I was just hoping all the government lending going on would be in a similar category. I'm not holding my breath, though.

LAO

February 24, 2009 11:15 AM

Ajay,

Your vision for food industry oversight is a quite nice application of micropayments, but getting there is the hard part. Starving the agencies of funds and talent and mandate, as has been the approach in recent years, while allowing lobbyists to introduce the ideas and sway the issuance of contracts, naturally leaves the public suspicious of anything that originates in Washington. Unfortunately, the belated actions of the agencies also have the effect of making the public suspicious of the profit motive.

If you are saying that it is not government but rather private sector companies and individuals who should pull together this new scheme and pursuade purchasers that they should pay for it, then go for it. You'll never know if you don't try, and there may never be a better opportunity due to highly publicized system failures (lead contamination of toys, e. coli and melamine in food products, and of course salmonella). You surely can't expect the last vestiges of the "government monopoly" to be dissolved simply to give you a chance to prove that you have a better way. If your way is better, then the old way will die a natural death.

While you're at it, why don't you work on risk management for the public? A lot of people could have used some flashing yellow to avoid the likes of Madoff or Lehman Brothers or indirect doomed mortgage exposure.

I think I see a convergence in what looks like a proper functioning of a society or an economy to both of us -- openness. Whether it is a public corporation or a private purveyor of food or a government, the public deserves better than a landscape that is designed to take arbitrary advantage of them while they are too busy just earning a living. If you are onto a way to bring us the new 21st century open economy, then I will welcome it.

econguy

February 24, 2009 01:53 PM

M. Mandel, Viking,
Extending the argument of unsustainable growth after a decade of borrowing I would add that tax rates and service program additions are now so inflated alongside the wealth bubble and borrowing bubble that households are locked into a future of unsustainable govt mandates and govt finance needs. Assuming either the Bush tax cuts expire or the AMT is not patched, we are looking at a world of reduced risk taking and rewards. A reversal to cost minimization is upon us by many households. Unlike the 1940s we cannot afford grand govt projects because our plate is loaded with other unfunded programs and duplicated service costs. The patchwork of programs and schemes to tack on more benefits worked as long as the basic engine of wealth kept humming. I would argue that the leverage bubble was the last gasp of the wealth bubble. Rather than acknowledging the unsustainable condition we have the left wing forging ahead with no recognition and a quick strike mode. Do we really have the same debt capacity we had in the early 1940s or 50s (interstate program), or 1960s (social accounts surplus raid)?

Viking

February 25, 2009 10:21 PM

Econguy,I couldn't agree with you more.Instead of trying to support current consumption with government bailouts and spending sprees,we should try to figure out how we can throttle the economy down to a more sustainable level without going into freefall.Who is to say that the current banking crisis is caused by lack of lending or by a lack of desire by consumers to borrow?Perhaps some americans are starting to wonder if spending 2 to 4 hours a day commuting to and from a job is wise,or perhaps it would be better to live closer to home,on a smaller salary,but with more time for family and friends.We should all be aware of the so-called experts who tell us what we must do to get back to pre-crises spending and consumption levels,when in fact many of us see another more sustainable way forward.

Ajay

February 28, 2009 11:57 PM

CompEng, I already said how private agencies would be better, "The essential insight of those who want competing private agencies is that the consumer always has to have a role in oversight and that competing agencies will have incentives that no monopoly has." Avoiding tyrannical private HOAs is as simple as moving down the street, avoiding the power-mad federal govt is not as easy. Of course govts are trivially market actors, in that they take part in the market also, the difference is that because they're given the enormous power to change the rules of the game, they often corrupt the game. It's not that the charts suck, it's that the charts tell you you're headed into bad terrain and rather than accepting that fact, your response is to blame the charts and throw them away. I've never argued in favor of the predictive record of economics experts, so I'm not sure what you're trying to prove with your CNN article. However, many economists did predict the housing bust, my early knowledge of the bubble was not based on any research of my own but on the excellent analyses of The Economist, published before the housing peak in 2005. The fact that these bubbles have recurred many times has little to do with economists, it has everything to do with the delusions and madness of crowds. The only way to curtail such frenzies is to have the instigators pay the price in the ensuing busts, so that the resulting pain is burnt into their minds. I agree that many economists got the story wrong but then many economists are Marxists/Keynesians. The historical record is clear and the free market economists have won. The other camp only argues from political considerations, not economics, "How bad would people revolt if they actually had to pay for the price of their mistakes?" When you said that "finance is how Americans retained their standards of living as they produced less," you certainly seemed to think it was the most important factor. Instead, I say that finance is a minor but important catalyst for the other, more important forces.

I see, so mercantilism is okay as long you pursue a trade balance? Nonsense, all aspects of those govt policies were idiotic and I suspect that mercantilist support of manufacturing was by far the worst. Yes, China and Germany are screwed- you don't shed excess manufacturing capacity and socialist programs easily- but only as long as the US languishes. If our economy perks up, they can still sell into our markets, but they're almost completely dependent on us, not a beneficial result of their idiotic policies. Actually, a service has no economic value outside a market. What you ignore, and this is why you keep making weird statements about arbitrators getting prices wrong, is that while objective factors like supply and demand play a role in prices, the most important factor in pricing is the subjective value people place on their labor and goods, whether they'd rather flip burgers than clean toilets and whether they prefer a Prius to an Accord. Market prices are simply a way to add up all these subjective values, while taking objective factors like scarcity into account also: the goods have no intrinsic "value" outside this largely subjective human arbitration process. A CEO might take 30% of his company's income, with labor taking the rest, or he might be replaced by a CEO who takes 25% and gives 5% more to the employees, there is no "correct" percentage for a CEO. It's ultimately a negotiation between all the parties involved and the CEO is worth whatever they think he's worth. Maybe the higher-paid CEO was smarter and got more done, maybe he wasn't. All the pricing system is is a way of coming to a final price, there is no "right" price. As for having a "competitive amount of money," I have no idea what that means.

Of course, the Chinese put their money into banks, but I doubt that all Chinese banks' investments are directed by the govt. Labor laws and policy are dumb, inflexible ways of effecting change, while unions can be helpful but may not be necessary. Consumption has driven the US economy, but I don't subscribe to your antiquated notions of the "bargaining power of labor." As I've said repeatedly, there's plenty of money to be invested and spent. Who is the entitlement class? I see only one right now: the govt bureaucrats who you enable with your calls for more govt spending, real estate prices are rising in the already overpriced DC area. Govt subsidy usually refers to explicit govt grants, not to indirect subsidy by govt or patent monopolies given to private companies. You don't need a deep networking background to know that TCP/IP is a trivial conception or that the real innovation is in the hardware scaling and queuing algorithms of the hardware, and nobody called any of the internet's technical innovation revolutionary: it's merely an accumulation of small to medium innovations that will have revolutionary results in society. I don't understand your new point about guaranteed downside. You said, "I don't see anything wrong with hoping that the money people are throwing at the problem now might have some positive effect. After all, the downside is already guaranteed." To me that meant, "We're already fucked, might as well throw some govt money at the problem." I responded that the govt waste makes the problem worse. Just because banks were also speculating, in some sense, doesn't mean that the govt will have anywhere near the same record of success. In fact, history has clearly shown that, whatever problems the banks have had, their speculative record is far better than the govt.

LAO, while I do think micropayments will be used to monetize almost all online activity, I didn't mention them anywhere in my description of better food industry oversight. In fact, I said that all this could have been implemented decades earlier, at a lower level of complexity, if not for the sheer stupidity of those involved. I don't see how the belated actions of govt agencies makes people suspicious of the profit motive. Yes, I'm saying that the govt can be ignored and private companies will put all this together without needing govt permission. The problem is the govt participants then cheat, like how the USPS doesn't allow other delivery companies to put their stuff in your post box so that the USPS can then maintain a monopoly on junk mail (note how they also don't allow you to block this junk mail, govt bureaucracy and graft at its worst). As for risk management, there were plenty who pointed out the suspicious consistency of Madoff's profits and the problems with the housing bubble. Somebody who works for an investment firm told me that they tried to get their firm to hedge against the Lehman collapse the Friday before they went bankrupt. His firm of investment professionals, all with much more experience than him as he was by far the youngest, assumed the govt would step in and did not hedge their bets: they lost far more than they were unwilling to hedge in the ensuing month. I think we can come up with much better institutions than we've had but ultimately you cannot risk-proof the world for idiots. As for people being taken advantage of, the way the world works is that the smart monkeys eat the lunch of the dumb monkeys and human ambition is a powerful force. The only way to build proper institutions to channel these human instincts is to accept these facts first and then build market institutions along these principles. Appointing some govt overseer and hoping that, like some religious prophet, they will solve all your problems only invites worse problems.

CompEng

March 1, 2009 01:56 PM

Ajay,

Competition is the most powerful argument for privatization of any service where the customer has money and there is no free rider problem. I could argue that in the Phoenix area in 2002 there were almost 0 new-build houses without HOAs: they weren't a competitive differentiator: they were standard practice, so you have an effective monopoly. They were like EULAs from a monopoly: if you want to play, you sign away your freedom and move on with your life. My point is only that private market actors don't necessarily behave better than governments, nor are they always easier to escape. But the specific point of contention was government as arbitrator and enforcer of contract: the closest historical non-government analogues are tribes and gangs. Go ahead and give me one better example. :)

The charts do suck from my perspective. What do you want from economics? If it's just validation that free market capitalism is an effective model, then great! You win. My contention is that many of the busts that you attribute to human stupidity are predictable and preventable, and that economics (a field of applied game theory) can tell market actors enough about the potential consequences of their actions that we can coordinate to achieve better results than greed-based individual actions based on today's limited information. The consistent predictive capacity of economics tells us how well we're doing against that measure, and my take is that we've got a long way to go. The "delusions and madness of crowds" are a projection for your derision of people. The poor decision records of crowds have a lot more to do with ignorance than stupidity. I'm pretty sure we can do better.

'The other camp only argues from political considerations, not economics, "How bad would people revolt if they actually had to pay for the price of their mistakes?"'
The world isn't all that fair. It doesn't bother me that you think it's not government's place to make the world fair: it's probably not the best actor for the job. But if you're saying that all the poor and suffering in the world deserve their fate and we shouldn't on an individual level try to do something about it, that's kind of sad.

"Labor laws and policy are dumb, inflexible ways of effecting change, while unions can be helpful but may not be necessary."
In the general case I agreem with the caveat that I suspect unions will be more necessary in the east in the medium term. However, history says without government support labors leaders get shot (or start shooting). That's still true in many places in the world. Government's very important role is to see that doesn't happen.

"I see, so mercantilism is okay as long you pursue a trade balance? Nonsense, all aspects of those govt policies were idiotic and I suspect that mercantilist support of manufacturing was by far the worst."
Wrong, perhaps, but I'll argue against idiotic. I suspect there's a bit more upside and a bit less downside than you admit. Some mercantilistic practices effectively just lower the barriers to entry in a market and create more opportunity, more competition. If you ignore the negative moral aspect of taking one person's money to fund another person's success, you could argue a lot of things they did are similar to the way Microsoft made a market for the Xbox. The right choice? I'm not sure yet. But I have a hard time arguing stupid.

What I'm arguing is that supply and demand are not completely objective, but are both influenced by the perception of individuals. What you can do with a hammer is matter of fact. How much you're willing to pay for it is subject to influence and persuasion.

"As I've said repeatedly, there's plenty of money to be invested and spent."
Think global on the spending side of that equation. Half the population of the world is quite capable but doesn't have a lot of money to spend on anything. That matters.

"You don't need a deep networking background to know that TCP/IP is a trivial conception or that the real innovation is in the hardware scaling and queuing algorithms of the hardware"
I call BS. First, there's more that was done in the Arapanet than TCP/IP. Second, after hearing some stories about the types of problems that those guys had to solve and the other potential solution, I think TCP/IP and the surrounding set of technologies they worked on were actually a reasonable example of good engineering. I've never worked on a network switch but I'm intimately familiar with Intel's Quickpath (aka CSI) and the microarchitecture of all the various associated pieces of buffering and routing on every Quickpath enabled processor built. The problems are not radically different in complexity.
But my original point was only that working for the government doesn't automatically lower your IQ by 20 points. The fact that we sent people to the moon with 1969 technology is pretty good evidence of that.

'To me that meant, "We're already fucked, might as well throw some govt money at the problem."'
Rather, "The government threw our money at the problem, I hope we get something back."

"In fact, history has clearly shown that, whatever problems the banks have had, their speculative record is far better than the govt."
As a whole, I'll readily grant. On an individual basis, I suspect the record is similar. Why? Because working for the government doesn't magically lower your IQ, or limit your tools. The incentives *are* screwed up on a gorpu level, but that doesn't always matter as much as you claim, because the individual making the decision is typically just working for their paycheck either way.

Ajay

March 1, 2009 07:44 PM

CompEng, Did every HOA have the exact same rules? Of course not, you could shop around for one that matched your preferences, there was no monopoly. Your argument is similar to saying that since every software company has some EULA, there is a "software monopoly." Private market actors don't necessarily behave better but they almost always do, precisely because they're easier to escape. As for enforcing contracts, the default enforcer is now government but much more is settled by private arbitration. There's no reason contracts can't designate particular private courts as the enforcer, with heavy penalties for parties who then back out of even the enforcement clause of the contract. This enforcement can be done by society-wide shunning too: as a consumer or supplier, I can stop buying or supplying their products if a company in a contract dispute takes the egregious step of refusing to even abide by the private arbitrator they previously designated. After all, if they won't even abide by that clause, how trustworthy are they? The question isn't what I want from economics, it's what do you want? I've pointed out that many economists saw the housing bubble coming, you seem to want them to have been unanimous. Unfortunately, economics like all other professions is filled with charlatans, they're called Marxists/Keynesians. If they couldn't get it right, I don't much care. Many stupid actions of humans are predictable but very difficult to prevent without great cost. Does economics "tell market actors enough about the potential consequences of their actions that we can coordinate to achieve better results" or does it have "a long way to go?" Make up your mind. Economics is simply a way of thinking about the world, it's not some magic crystal ball that'll give you simple yes or no answers to every question. The delusion and madness of crowds is a documented fact: if you don't believe it, you're not observing the world around you. One can always blame ignorance but at some point it crosses over into stupidity: if you're 40 years old and getting an option ARM on your house and can't be bothered to spend a couple hours figuring out what the contract actually means, you've crossed the line. As for doing better than our current financial institutions, I've always said that we can do much better and that we need to rebuild better private financial institutions on the smoking ashes of the old one. However, since you provide no indication of how things could be better, I'll just take that as another one of your vague assertions and won't bother with delving into that.

Of course, the world isn't fair and nobody's arguing against doing something on an individual level. However, the problem is that idiots are currently arguing for doing something on a collective level, holding a govt gun to the head of the well-off and taking their money to give to the poor. This type of action is not doing something on an "individual level." Governments can avoid violence between corporations and unions without enacting idiotic labor laws or policies. How do mercantile practices ever lower the barrier to entry? The whole point is to raise the barriers. It is interesting that you would make an analogy to the Xbox because that's well-known to be an enormously stupid move on Microsoft's part, that has lost them billions of dollars to this day and only recently broke even on a quarterly basis. It's great for consumers that this stupid company is losing money on this product, just as it's great for us when Korea "dumps" memory chips here, but it's a horrible decision for the seller. If price "is subject to influence and persuasion," why do you keep yammering about how some people got screwed on their pricing? Obviously if they accepted the price, it was right for them: that's my whole point. If the Chinese are willing to lose money because of their govt's idiotic currency decisions, that's their problem. If the money isn't in their hands, it's in somebody else's hands here. It's not like the money disappears, somebody has it and will spend it.

TCP/IP and the associated darpa tech was a decent engineering solution but not that big a deal. Apple's AppleTalk actually followed the OSI 7-layer model and there were other networking protocols like NetWare and DECnet. The main reasons TCP/IP won out was that it was free, open, and simple. My point is that TCP/IP wasn't as big a deal as having cheap hardware that could run it. Perhaps the biggest innovation in networking was figuring out how to use fiber-optic cables, rather than the waveguides they were planning on using, and was developed by private companies like STC, Corning, and GE. The fact that idiots point to the internet as a govt success despite all this just shows their ignorance. Working for the govt doesn't lower your IQ, it makes you complacent and lazy: that's human nature. No corporation would have been so stupid as to waste money sending people to the moon in 1969. The downside of govt throwing money at the problem is only guaranteed if we keep letting them do it: we can obviously vote for them to stop. Your distinction of banks on an individual basis as opposed to a whole makes no sense. The reason the govt does worse is because their incentives are screwed up. The individual salaryman in the private sector is much more likely to lose his job and associated paycheck if he screws up, that's the difference and it's a big one.

CompEng

March 2, 2009 03:52 AM

Ajay,

"CompEng, Did every HOA have the exact same rules? "
Nope, there were a wide variety of prices and services, so as long as I was willing to pay at least $20 a month, keep my garage door closed if I worked on a car, got HOA permission before putting in a shed or a tree, and was willing to get a nasty note about my grass every time I went on a two week vacation, I could get whatever I wanted. Of course, I got laid off and moved before I ended up buying. A friend of mine stayed, bought, doubled his money in 3 years, and then moved.
Monopoly is certainly the wrong word to describe the situation, but "competition" and "choice" don't seem to completely capture it either.
I thought you might bring up arbitration. Arbitration actually works pretty well as long as it's backed by government. Shaming and reputation-based methods also have some power, but they don't scale to the general case very well. The Puritans and Quakers tried, but we still have prisons in this country for a reason, and it's not generally so people can think about how guilty they are and repent.
You're doing an admirable job with defense, but I don't think your argument for no government at all is really tenable, and I think you know that. My guess is that you're arguing for the sake of it. Which is fine, I guess. ;)

What do I want from economics? Continuing improvement towards the goal I stated: cataloging and predicting market phenomena well enough to help us as a society avoid the cyclic mistakes we've made before. And hopefully make progress on new problems as well. I don't think I have to have the answers to point the out existence of problems.

Yes, crowds do sometimes behave badly, and at least sometimes, pure stupidity is to blame. And of course there's got to be a line where your stupidity is your own responsibility. We should start with the assumption that people are responsible for their actions and go from there. Or in most cases, just stay there.

"Governments can avoid violence between corporations and unions without enacting idiotic labor laws or policies"
Yes, that's true.

"How do mercantile practices ever lower the barrier to entry?"
It depends on your point of view. If you want to enter a market that's hard to enter, and you get government to back you, you might think you're lowering barriers.

"It's great for consumers that this stupid company is losing money on this product, just as it's great for us when Korea "dumps" memory chips here, but it's a horrible decision for the seller.
Milton Friedman said in a "Free to Choose" series panel that protectionism like this would hurt Korea and their trading partners as well. I think that's right. He said the best response is to gave no trade barriers in response. I'm still struggling with that as the right solution for every case. You may be right about the Xbox. I assumed there was some strategic value to the decision.

I'll agree that once you have a working network technology, scaling is the big issue, and hardware becomes the bottleneck. So the incremental impact of the hardware scaling is much greater. And obviously fiber optics and the related switching technologies were a huge deal.

"Your distinction of banks on an individual basis as opposed to a whole makes no sense"
My point was only that the private market also makes a lot more bets than government, so some of them are bound to pay off. You don't tend to hear about the failures. But your assertion that governments will invest less wisely is still generally true. I keep trying to word things in ways that feel clever instead of being clear: I'm starting to realize what a bad habit that is.


I've probably done more than enough sniping at points for this conversation. I think in 100 years the narrative about how the world got in this type of recession, how it could have been avoided, and the best way out will be as clear as daylight. I think Mike and others are making good progress on the first, and I hope the others follow reasonably soon. I know that you can't avoid every cut and scrape in life, but I can't help but feel driven to know more and not be satisfied until we can do more about such things. It's probably pointless, but such is the mind of an engineer: if it ain't broke, you're not looking hard enough.

LAO

March 2, 2009 09:20 PM

Ajay,

I know that you didn't mention micropayments in the context of food industry oversight; I just wanted you to know that I was paying attention and sort of catching your vision/excitement. Quality openness and tracing product through the supply chain could have been accomplished a long time ago, but participants would have fought it on the basis of the cost. Now, maybe they could be made to see a significant benefit to their own industry and individual reputations to let it happen.

As for the belated actions of the agencies causing suspicion of the profit motive, they seem to have adopted a practice of sitting back until things are blowing up (like people dying from salmonella in peanut butter or e.coli in school hamburgers, children with lead poisoning, Madoff's bombshell). Then everything gets so much more attention that people can't help but notice. It seems to me that I am hearing much more moaning lately about greedy management caring about nothing but money; the banks and mortgage companies didn't help, either. Consider how long the gov't waited before pulling polycarbonate baby bottles because when warmed they leach a chemical that modifies brain chemistry. I know parents who feel betrayed, wondering if this could turn out to be related to the increase in autism. It's teaching them to not trust business or government, and that's bad for business. You said it yourself -- "the way the world works is that the smart monkeys eat the lunch of the dumb monkeys and human ambition is a powerful force" -- so you have to expect people to try to keep from being treated that way and better hope that their response is not just dropping out of the marketplace. Our predessors put the agencies in place for that purpose. I agree that they are doing a bad job, but I am of the opinion that they were given a mandate to back off, and the result may not have been what was expected.

Your comment, "The only way to build proper institutions to channel these human instincts is to accept these facts first and then build market institutions along these principles", is something that I can agree with in concept but not in reality. On the one hand, I want me and mine to have access to whoever tries to define and build these institutions; on the other hand, if such institutions will spring to life as soon as the need is clear, then what is stopping anyone and what's all the complaining about? Though nearly everyone seems to think a lot of things are broken or disfunctional, I am not convinced that the structure of this democracy is inadequate to self-correct. It is messy, and too slow, and it is often confused with the capitalist system itself, but as a way of paving a way forward, I think it can work at least as well as any other system. It is odd that you think it is a religious-like overseer that some people foolishly want, because it is the frighteningly religious-like zealotry on the other side regarding the way things ought to work that scares me.

I have to say that the dialogue here, especially between you and CompEng and an occasional other, feels like progress. Thanks to both.

Ajay

March 2, 2009 09:56 PM

CompEng, you had choices in Phoenix and it was because of competition. If nobody else wanted those particular rules broken, you could always have tried to pay more to be exempted or just lived in an apartment. Just because you want to be able to leave your lawn unkempt when you go on vacation doesn't mean your neighbors do. Arbitration has worked fine throughout history and has always been the first choice, the only reason govt courts became the fallback was that people didn't realize what they were giving up by doing so. As for prisons, we'll probably keep our existing system initially but there's no reason they can't be privatized eventually. I am arguing for no govt because I believe that to be the best solution and because I think new technology will help make it happen soon, nothing else. Economics is a way of thinking and generalizing our past observations about the world, just like science. However, just as science can't stop stupid people from burning themselves on scientifically-designed stoves, economics can't stop idiots from investing with Madoff. This is made harder by the fact that at least half the economics profession is infected with charlatans, the marxists/keynesians. As for mercantilism "lowering" barriers, it's only doing so for the companies it helps by raising barriers against everybody else. This does not help competition, lowering barriers to entry usually refers to lowering them for the entire market. Of course Milton Friedman was right, you can almost never go wrong by listening to perhaps the greatest economist of the 20th century. :)

The Xbox was created to get a beachhead in the living room, an excellent strategic move if they hadn't decided to club it together with gaming. If they'd just focused on cheap settop box software, it might have been worthwhile. Microsoft perfectly exhibits what happens when a private corporation grows into a large, lazy bureaucracy: stupid decisions like the Xbox are made. Now imagine a corporation 20-30 times bigger, that's the federal govt. It's not just that you need a working network technology, it's that of all the components that made the internet, networking protocols and TCP/IP, which was thought up by a private consulting firm for the govt, were a trivial piece. Most of the sizable pieces came from private industry, yet idiots seize on TCP/IP as evidence that the govt is responsible for the internet. Private markets may make a lot more bets but as a whole their rate of return is much higher than govt, this gap is huge. Don't be so sure about what we'll know about this current recession in 100 years, people still argue about the Great Depression, though much of the debate is idiotic and politically motivated. We're pretty sure the problem then was govt interference that made a market problem much worse, unfortunately there are idiots to this day who argue otherwise. We should definitely improve things and there's a lot that can be done. However, the first step is to figure out what hasn't worked in the past and govt is on top of that list. Look at the recent news about the whistle-blower Markopolos and how he found that the SEC was stuffed with lawyers who had no financial expertise. Crooks like Madoff WANT govt-appointed, incompetent agencies like these so that they can more effectively steal from investors, not competing private agencies that will ask tough questions.

CompEng

March 3, 2009 11:05 PM

Ajay,

"CompEng, you had choices in Phoenix and it was because of competition."
And you have your choice of governments, but that doesn't mean you don't criticize yours. I don't want to leave my house a dump, but I'd like the responsibility to stop with me, thank you very much. There's a whole range of choices worldwide, and some places barely have any government to speak of. Interested in moving? There's a difference in scale, but otherwise the situations are relatively equivalent, which is what I was trying to illustrate. The level of competition didn't make them particularly pleasant to deal with, even when the public good they were trying to regulate was modest in scale.
Prisons can be privatized just fine, but the decision on who goes is a dicier proposition. Still, the US Constitution is based on checks and balances. An even more distributed (and competitive) set of government functions, along with performance metrics and strict accountability is a very interesting idea. Privatization of many of the functions of government would be progress, but I still think some things like the criminal code and decisions of war and peace must finally be accountable to a political process, not a market process. Some decisions must absolutely be made on the basis of whose lives they affect, not whose money.

"Arbitration has worked fine throughout history and has always been the first choice, the only reason govt courts became the fallback was that people didn't realize what they were giving up by doing so".
It's fine as long you trust the arbiter, have a well-understood and agreed-to code of conduct (law) to work from, and have some means of enforcement if people or organizations aren't willing to be bound by the process. How you'd like to be part of the arbitration process to tell the Mob they've broken the rules of conduct in the import business? (Mickey, you've exceeded your assault rifle quota: please pay a fine). When you reach that point, I start calling it government. Governments without muscle tend to get eaten by their neighbors (especially pre-Pax Americana).


"However, just as science can't stop stupid people from burning themselves on scientifically-designed stoves, economics can't stop idiots from investing with Madoff."
Madoff was an old-fashioned con-man. Economics hardly comes into it. But I agree with your basic point that Economics is an analytical tool, not a crystal ball.

"This does not help competition, lowering barriers to entry usually refers to lowering them for the entire market."
From a consumer standpoint, a big interest-free loan might provide one new good or service provider but doesn't guarantee them success. It sure looks a lot like increased competition unless you're the competitor. But of course you're right about the effects on producers. This goes on every day, and contributes significantly to our trade deficit, but it's very hard to prove. I really feel for people like my uncle who owns a machine shop. He might do really well until China decides to get behind a bunch of machine shops for strategic reasons one year, and then suddenly everything is gone (this didn't actually happen, but similar things do). How do you feel about thing like that? Should we take any action at all?


"Now imagine a corporation 20-30 times bigger, that's the federal govt."
Yes, that's it exactly! If you say a government is poor at investment decisions because it's choices are politically rather than pragmatically motivated, that's a precise and directed criticism.
If you say the government has no business taking your money and investing it for the gain of third parties, that a precise criticism.
Saying the governments tend to be large and large organizations have poor track records at building a goods or services capacity from scratch (because of organizational problems or too little experience in a field to pick people with the right combination of skills) is criticism rooted in reason and empirical evidence. It helps explain when governments will make bad decisions, why, and even roughly how bad those decisions will be.
Most of your criticisms of government have sounded too much like "Governments suXor. They can't do anything right and never could". That flies in the face of reason and experience.
I have no interest in defending the assertion that the government created the internet, but I wanted to defend the real accomplishments of government, even where the attempt was misguided, because it's a defense of basic human capability.
I don't want the government in most endeavors. With a basic understanding of what government will do when tasked with a problem: throw too many of the wrong people on a politically organized team with a mandate that is likely to be too broad, narrow, unclear, or just wrong, there are still a few problems that private market actors simply won't address any better. That's the criteria: is there a public good that needs protecting badly enough that even a government effort is better than a private one? National security is one. I would trust anyone to tackle that problem that wasn't completely subject to public opinion.

"Crooks like Madoff WANT govt-appointed, incompetent agencies like these so that they can more effectively steal from investors, not competing private agencies that will ask tough questions."
Yeah, the responsibilities of the SEC are probably among those I would not trust government with.

I haven't seen any more coherent analysis of the Great Depression than Milton Friedman's, but most people agree with what he said about its primary cause (government destroying the money supply). I think there are secondary causes he didn't go into, but I won't argue the primary one.

CompEng

March 3, 2009 11:07 PM

LAO,

I didn't know anyone was paying attention. Debating these things helps me get my thoughts together (and I learn a few things here and there), but honestly I would be surprised if much else came out of it. ;)

kevin

March 4, 2009 05:32 PM

Its Right also the last great depression with a ressesion

Ajay

March 10, 2009 03:38 AM

LAO, Good to see you understand the application of micropayments to such an example, I just wanted to emphasize that they weren't necessary. I never talked about tracing products through the supply chain, certification of the end product by competing ratings agencies like Consumer Reports would have sufficed. I still don't see what formerly complacent govt agencies that go into a frenzy after a scandal has to do with the profit motive. I think it's great if consumers learn not to blindly trust any business or govt, though autism is a horrible price to pay. Whatever the recent failures of govt agencies, they were to be expected. When Markopolos first reported his Madoff findings in 2000, that was before Bush took over and the SEC had been presided over by Clinton for 8 years. Morons want monopolies for efficiency reasons, like the universal health care crowd, because they don't realize that in the medium to long run the greatest efficiencies actually come from competition and innovation in a free market. How do you not have access to market institutions? You choose who succeeds by voting with your dollars. I never said such private agencies would simply spring to life, as the last century has clearly proven, any movement takes time and effort. I do think that our current computer/internet technology makes this much cheaper and easier to implement however. Representative democracy may be the best form of govt but my point is that we don't need govt at all. Which side more closely resembles religion, the leftists who put blind faith in a prophet like Obama and his left-leaning economist acolytes or free marketers who doubt that anybody has the complete solution and would like to see it evolve from competition in a free market? I'm glad you're enjoying this dialogue, I take part in it because I hope that some other readers might benefit.

CompEng, I have my choice of govts, but it's much easier to move from one city block of Phoenix to another than to move to another city or state. As for your house being your responsibility, obviously the people of Phoenix disagree for the extrinsic items that you mentioned. Yes, there are some countries with limited govt, they're also often poor and ignorant. There is scope to build the opposite with limited govt, I'd like to do it here but if it happens elsewhere, I'll go there. If HOAs were so bad at a smaller scale, what is it you're trying to argue? Obviously, govt will be MUCH worse on a larger scale. The market process IS a political process and if you think money doesn't already play a big role in the democratic process today, you're not paying attention. As for the mob, how's the govt doing against them today? There's no reason your private police force won't protect you much better from their shakedowns than govt does today. Govt has a very specific definition, not whatever you want to call it. If you contract with one of many competing, private police forces, you can't just redefine them as govt. Govts without muscle may have problems, who cares? I'm talking about private actors with privately-funded muscle. Of course, economics comes into the Madoff scam, the whistleblower Markopolos figured out it was a scam after four hours of analysis of Bernie's returns. The fact that none of the Madoff investors figured that out was because they were credulous investors who weren't interested in economic or financial analysis.

Belaboring the point that govt intervention helps the company that they're subsidizing is silly when you and I both know it damages competition. However, the way that it does so is by benefiting consumers with cheaper, govt-subsidized products. It's best to let that happen until the govt-subsidized company grows fat and lazy, then threaten them with some competition. As for taking "action," none is necessary from the govt, such intervention only damages the country that does it. What is the difference if China gets into machine shops or GE does? Should we then take anti-dumping action against GE if they subsidize their machine shops with their jet engine profits? Your uncle has no guarantees in a free market, he has to save for such mishaps and move to another business if some competitor starts to dominate his market, even if that competitor was artificially propped up by govt intervention. My past arguments against govt intervention have been empirical and theoretical, not unjustified as you claim. On the other hand, your defenses of govt or criticisms of markets are usually very vague. I too could "defend the real accomplishments" of communist Russia, defeating the Nazis for example, "because it's a defense of basic human capability" but that would just be obtuse. National security is an artificial construct used to justify govt. What do you care if Florida was attacked by Haiti? As mentioned before, private police forces can do a much better job of both local and national security and the market is much more responsive to the public than govt. Friedman's diagnosis of money supply destruction may have been one of the main initial causes but it certainly wasn't the reason for the prolonged decades-long depression. That was caused by govt interference from Hoover and Roosevelt, which Obama is unfortunately trying to reprise today.

CompEng

March 10, 2009 11:55 AM

Ajay,
My original point with HOAs was that there are always public goods people want to safeguard, but they don't tend to do it any better. Being private doesn't necessarily make them better at it or even less pervasive, but it does make them feel slightly less beholden to popular opinion because of the expectation that people can opt out if they really want to: the bylaws were as invasive as any local statute I've ever heard of. And competition didn't change them much, because there wasn't enough variance in the products for Darwinistic effects to take hold.
But as you noted, people put up with this because the HOAs fulfilled a need. In Phoenix, I had heard that 75% of the population had moved there from elsewhere in the past 15 years, and the rate of build-out supported that. People were willing to give up quite a bit to safeguard the skyrocketing value of their homes, partially because they figured they'd be moving again. The result: effectively a cartel of large builders set the standard for an HOA in the same way those same builders did in similarly growing planned communities throughout the country: the examples I've seen come mostly from Arizona, California, and Oregon. And the builders retained a large share of HOA ownership in each development in order to keep the developments from diverging.
But in the end you're right that there were other options. In Oregon I bought a 40-yr old house instead of a new one with a $100/mo. HOA, and I'm so glad I did even though it took me longer to sell in late 2007.

"The market process IS a political process and if you think money doesn't already play a big role in the democratic process today, you're not paying attention."
In a market, the voting rights are pretty unequal. Money plays a huge role in politics, but at least it has to use some level of indirection. In the real of government, people with a lot of money still do get smacked down if they sufficiently abuse it.

"Govt has a very specific definition, not whatever you want to call it. "
Merriam-Webster's definition (http://www.merriam-webster.com) is not particularly good. I call government the establishment of any organization or process through explicit or implicit contract that has the power to make collective decisions for contract participants and bind them to that choice, through coercion if necessary. In practice, government typically refers to organizations that that have authority relating to control of contract, property, peace-keeping, military functions, or the establishment and protection of human rights.
But for the purposes of a single conversation, you and I could agree on any definition we want and it would be valid for that purpose.

"Govts without muscle may have problems, who cares? I'm talking about private actors with privately-funded muscle."
As I said, I'm fine with enforcement being private, but I don't want that muscle used however and whenever they want to use it. I want the broadest possible agreement on when and how that force can be used, and I want someone on call to spank the abusers.
The government doesn't have to be able to eliminate the mob to be useful: certainly no private agency is likely to do that. But there was a time in US history when in certain big cities the mob *was* your government, and they were a particularly nasty one. Because of the government, the mob is operating in the shadows today.

"As for taking "action," none is necessary from the govt, such intervention only damages the country that does it".
This gets into "Am I responsible for his death because I let him drown" category. Foreign government dumping wipes out swathes of lives, infrastructure, and institutional knowledge that may have taken decades or centuries to build and fundamentally affects future comparative advantage. And it does so with a similar level of predictability and damage as a bomb drop (assuming no one was home when it fell). Private dumping has similar potential. In general, government intervention hurts the whole more than it helps because our understanding is insufficient, and so we leave the problem to individual responsibility. I suspect there's a better answer, but we don't currently have one, so we go with the best available choice and let things be. If the level of foreign intervention is, hypothetically, sufficient to wipe out the whole manufacturing industry, is the answer the same? I'm not sure.


". My past arguments against govt intervention have been empirical and theoretical, not unjustified as you claim."
Most of your arguments are precise and well-supported. But you do take a lot of cheap and unsupported potshots at government effectiveness, or criticisms of the form "government is way worse at X" when common sense ought to bound the comparison.
You strike me as a very intelligent and rational person, which is why I am often confused that your attitude towards governments does not appear rational and proportionate compared to the rest of your positions.
I am afraid I am often vague when setting up an argument. It can take me a while to close in.

"I too could "defend the real accomplishments" of communist Russia, defeating the Nazis for example, "because it's a defense of basic human capability" but that would just be obtuse."
But if you were going to impart a real understanding of who and what Russia was, that understanding would be skewed, flawed, and incomplete without giving those accomplishments their due. That's how history is rightly recorded.

"National security is an artificial construct used to justify govt. What do you care if Florida was attacked by Haiti?"
In fact, I would very much care, enough to participate in its defense.

"As mentioned before, private police forces can do a much better job of both local and national security and the market is much more responsive to the public than govt."
I cannot wrap my head around the ignorance implied in this statement. Have you ever talked with anyone that knew anything about the military, military strategy, or military history?

Ajay

March 13, 2009 05:47 AM

CompEng, If all the HOAs have the same rules, maybe it's because they express the common preferences of the people who live there? At least with pervasive HOA rules there are other options, with govt laws you'd have had almost no choice. Actually, the rich have much more influence in politics because they can give slush funds, lobbying firms, or PACs as much as they want, whereas in the market you're only buying one product or a handful at a time to make your vote heard. I suppose you could buy a warehouse of products in the market to have disproportionate influence but that's just silly, nobody'd do that. I agree that the definition of govt can get slippery once we start spinning off traditional govt functions, but your definition involving contracts and coercion could equally well apply to any corporation. However, the reason I brought this definition issue up is because you seemed to view any private spinoffs of traditionally public functions as govt also, which was far too broad a definition. What makes you think there won't be broad agreement on when force can be used or that there won't be repercussions for abusers with private police forces? Competing police forces will have certain principles in common and you can always punish their abuses by buying your protection elsewhere, something you can't do now. There are those who'd argue the mob still IS the govt- Blagojevich anyone?- they've just hidden in the shadows more. As for dumping, it's not a problem at all: you mean some country wants to lose money by subsidizing lower prices for me? Great! When their companies get fat and lazy after a couple years of govt injections, unsubsidized companies will sweep in and clean up. In the meantime, I got a great deal as a consumer, no problem at all. As for manufacturing being wiped out, despite all the whining the US is still no. 1 in revenues, it's just that we do it with 30% fewer jobs (http://mjperry.blogspot.com/2009/02/made-in-usa-alive-and-well.html). I'd have no problem with all of it going abroad as it's not as profitable as information work, like what you do.

When I take govt potshots that aren't backed up with examples, it's because I consider the long history of govt failure on those issues to be ample evidence. Conformism is proportionate, reasoned discourse isn't and the latter is what I'm aiming for. As for the accomplishments of communist Russia, we're not writing a history but arguing the merits of govt. For you to focus on the faint possibility of govt success in the face of ample evidence of scant success is willfully obtuse. So you would fly down to Florida and participate in its defense if we didn't have govt? If so, would you do the same if it were Yucatan being attacked instead? Even if you did care that much, most Americans probably wouldn't care enough to pay for Florida's defense. If FL had private forces, nothing would stop you from contributing your time or money and those who don't want to wouldn't be taxed and forced to contribute. Obviously I know something about military history since I am the only one to make any historical reference so far, with my statement that it was Russia that defeated the Nazis. Throughout most of history, most armies had a majority of private forces, until the last century when power-mad fascists made up the concept of nationalism and national armies to make giant power grabs that killed tens of millions and ultimately went nowhere. Since, as always, you have no actual argument to make, perhaps you're the one who's ignorant?

CompEng

March 13, 2009 03:53 PM

Ajay,

"CompEng, If all the HOAs have the same rules, maybe it's because they express the common preferences of the people who live there?"
I believe they express the preferences of the majority. "The tyranny of the majority" is a typical complaint of libertarians against government that I believed you would share, because it's consistent with your other positions. But if you don't care about that argument or if you only apply it to governments, then it is not worth pursuing.

"I suppose you could buy a warehouse of products in the market to have disproportionate influence but that's just silly, nobody'd do that."
You wouldn't buy a whole warehouse full of Pampers to put Luvs out of business, but that's not what I'm talking about. If you have sufficient money to commission a new product (say a custom house design, or a new USB standard) you have options someone without money doesn't. If you have a lot of money and other people in the area don't, you have the strong negotiating position and will effectively set price. I'm not really arguing that is bad: it's just that bidding and voting systems are different forms of arbitration and often have different outcomes.

"I agree that the definition of govt can get slippery once we start spinning off traditional govt functions, but your definition involving contracts and coercion could equally well apply to any corporation."
And yet it's actually a pretty good definition. and thank you for finally agreeing to at least one point of mine, that there are similarities in the two organizational types.

"What makes you think there won't be broad agreement on when force can be used or that there won't be repercussions for abusers with private police forces?"
Because we have a hard time getting agreement on those issues now. The bill of Rights was written because these are difficult issues. I view the contract as the fundamental building block of society from which law and ethics derive. For issues which affect people deeply, you need a solid, well-written, and broadly accepted contract. Government is not theoretically the only way to get that, but it's what government is actually good at.

"However, the reason I brought this definition issue up is because you seemed to view any private spinoffs of traditionally public functions as govt also, which was far too broad a definition."
I don't. The only think I called government was an arbitration board with a widely accepted code of conduct and enforcement capability. For the rest, I only drew comparisons.


"There are those who'd argue the mob still IS the govt- Blagojevich anyone?- they've just hidden in the shadows more."
They would be exaggerating the truth.

"As for dumping, it's not a problem at all: you mean some country wants to lose money by subsidizing lower prices for me? Great! When their companies get fat and lazy after a couple years of govt injections, unsubsidized companies will sweep in and clean up."
No one's going to wipe away Toyota, Sony, or Samsung any time soon, or Boeing, for that matter. This is a truism that does not always hold.


"In the meantime, I got a great deal as a consumer, no problem at all."
Industry serves the primary purpose of reliably providing a good or service, but also provides jobs and competitive advantage in current and future related endeavors. Except in unusual circumstances, outsourcing does not endanger supply very much. It can endanger jobs (especially in the short term), but you've indicated you don't care about that. There are some profitable industries with very high start-up costs (like high-end silicon manufacturing) where, once you've given up a competitive advantage, you really won't ever get it back. So I can certainly see why you wouldn't support any action against dumping.

Oh, thanks for the link. I won't argue with facts. I suspect there's an interesting story that graph doesn't illustrate, but I may have to do some more research to see if my ideas have root in reality.

"When I take govt potshots that aren't backed up with examples, it's because I consider the long history of govt failure on those issues to be ample evidence."
As long as there's no unexamined bias lurking there.

"Conformism is proportionate, reasoned discourse isn't and the latter is what I'm aiming for."
Actually, conformism is proportionate to other people's opinions, while reasoned discourse is proportional to truth.

"As for the accomplishments of communist Russia, we're not writing a history but arguing the merits of govt."
Yes, so you list the good and the bad, measure them, and compare them both against what you want and what the people involved were trying to achieve, according to category. Communism did not provide prosperity, and the dictatorial aspect of Soviet Communism allowed the government to get away with murder. On the other hand, it allowed great investment and measurable success in a few things. Communism is a failure, but hypothetical there could be somethings the Soviet people did right that might be worthy of emulation. I'm not taking that position, but a fair-minded analysis admits possibility until the analysis is complete.

"If so, would you do the same if it were Yucatan being attacked instead?"
I'd probably send them a little check. :)

"last century when power-mad fascists made up the concept of nationalism"
Seriously? Don't you mean they rediscovered something every generation has discovered since the Minoans, the Egyptians, the Israelites, and the Babylonians? Give me a break.

"Since, as always, you have no actual argument to make, perhaps you're the one who's ignorant?"
I should not have resorted to name-calling, but it's tiring to mount a defense of what I consider a basic concept. Are you really saying I have never had an argument to make or successfully put one forth? If so, please let me know. I'm really trying to discover what principles we have in common and use them to at least establish respect, if not agreement, for my positions. But if you seriously think I haven't illustrated a point yet, do me the courtesy of confirming that wasn't just a clever quip, and I'll stop wasting your time.

The Nazis, and any standing army built and coordinated as a unit, have historically eaten locally built and coordinated defense forces for breakfast since before Roman times. The Russians beat them because they had the flexibility to retreat as nation and let the winter do most of the work, rather than defend cities as the Nazis showed up. And they still probably would have lost if the Germans didn't have us to worry about, and of course local defense forces are historically not really capable of projecting force.

Basic military strategy: have more guys in a specific confrontation than the other guys, in an area of your choosing, with superior technology, with better trained troops, with better communication, without leaving vital targets open to the other side who is trying to do the same thing to you.
Having more guys in the fight requires the strategic flexibility of the coordination of a larger force. A centrally responsible mobile force has much more capability to defend 10 cities in an area than 10 local defense forces built and trained locally. When you build and train those without larger area coordination in mind, history shows they don't coordinate very well. And you can't choose your ground if you don't have this flexibility.
Military technology is another area where you need a coordinated buy-in, and you have to trust the other people you're buying in with. Nations and alliances like NATO do that much better than local forces. Same argument is made with military training: we don't train with other NATO forces for a reason (multiple reasons, actually).
Also, history shows that local defense forces tend to be inadequate because people are cheap. There is no demonstrable ROI on defense unless you're attacked. One day, defense is a total waste of money, and the next it's life-and-death. The market typically doesn't respond unless the threat is so evident that the response is way too late.

"Throughout most of history, most armies had a majority of private forces"
It's true that throughout history most countries couldn't afford standing armies, and relied on using a small warrior class to quickly train, arm, and lead conscripts in the event of a war. Mercenaries were a good solution for defense while preparing the conscripts. You couldn't completely trust them, but they performed as advertised in most situations where they had numerical superiority and you could provide cash up front. This arrangement wasn't ideal from the standpoint of maximizing military effectiveness, but it did have the virtue of being somewhat effective and relatively cost-efficient. And, of course, since public defense was a public good, only the government was willing to pay for it in sufficient quantity to be effective until the day an army showed up to kill them along with all their family and friends.

Either mercenaries or local forces were typically demolished in any encounter with an actual empire or barbarian horde, which typically did have a standing army and a tradition of military success.

So, no, national defense is not an arbitrary concept or something "the market does better". It's the number one reason for the existence of central government, and it's survived well because the societies that rejected it haven't.

Ajay

March 14, 2009 02:37 AM

CompEng, My whole point was that HOAs, even if they were surprisingly undifferentiated as you claim, can be played off against each other and always leave the option of buying elsewhere. If you're just going to take my first statement, where I noted that perhaps their common rules embodied common preferences, and leave out my next statement that you still had outlets that you wouldn't have had with govt, you lose any credibility that you have. Yes, it's true that businesses with more money have more say but that's also true of politicians: billionaire politicos can far outspend their rivals. The difference is that you can only vote for the politican once, while you can vote on Pampers or Luvs weekly by choosing which one to buy. As for rich investors having more influence on the production end, I have no problem with that. Warren Buffett has earned his position by being an extremely savvy investor, I'd much rather he had immensely more sway than the average businessman and we can vote on that every day by choosing whether or not to buy his companies' products. Actually my point about your contract/coercion definition was that it was a bad one as it was too broad, which was exacerbated by the fact that we were talking about spinning off govt functions into the private sector. As for agreeing that govts and corps are similar, that's like saying I agreed that frogs and dogs are similar because I agreed that they're both animals: it's only because your classification was too broad. Really? We have a hard time getting agreement on issues of police violence? The Bill of Rights doesn't say much on these issues, not sure why you think it does, it mostly has to do with legal principles that come after police force. I maintain that private police forces would contract to some basic principles that are broadly agreed upon and that these competing forces would produce much better results than govt today. The reason the definition of govt came up is that you seemed to be saying that even privately competing arbitration boards should be called govt, which is what I disagreed with.

Is the govt=mob crowd exaggerating when a mob boss's son is elected President and then offed in a gangland-style killing? There is much truth to that claim. Nobody's wiping away Toyota, Sony, etc. only as long as they keep going back to the govt teat for more cash infusions, as they're doing now. However, I note that you didn't include GM, Chrysler, or Ford in your list because that is the inevitable endgame, companies that become so riddled with incompetence that they eventually have to be put out to pasture even by their govt cronies. TSMC certainly had no problem getting into fabs late. Even if your argument is true for a few fields because of idiotic IP laws, the solution is to fix those laws- for example, invalidate patents on products that are being dumped because of govt subsidy- not to start subsidizing the vast majority of markets where that IP argument doesn't even apply. As for bias, I've made it clear that I'm a libertarian, you're the one that makes unsupported statements that show bias. Being proportionate usually refers to other people's opinions, which are fairly well known and therefore can be compared to, not the truth, which we don't know and are trying to get at. Listing the pros and cons of communism and extracting whatever we can learn is all well and good, but all you had said was that you were defending govt because it demonstrated basic human capability. Govt theoretically producing a few positives, unnamed by you as the internet didn't hold up as one, because of basic human capability is not much of a defense. My point about the Yucatan was that it should presumably be as remote to you as Florida, why isn't it? The Egyptians and other tribes you mention may have first exhibited collectivism, but they certainly didn't take it to the extremes the 20th-century fascists took the new concept of nationalism.

I exaggerated your lack of arguments when I said "as always," but it's not far off when you don't have one 80% of the time, as demonstrated by your arguments in your last comment. The Nazis fought a co-ordinated group of national forces in the Allies, German centralization certainly didn't help them win. In fact, they probably lost because German central command insisted on dictating so much, rather than allowing local generals on the ground more discretion as the Allies did. There is no reason private defense forces cannot band together when necessary, as the Allies did. Your military training argument seems to contradict your overall centralization argument. If people are cheap, govt doesn't magically solve that problem, as Chamberlain's appeasement policy in the '30s or our recent unreadiness for 9/11 demonstrated. Enough people hire private security today to demonstrate that they understand the need for it, and I maintain that private forces would do the job much better because they'd have better incentives. My point was that most of the forces of antiquity were private, including the army of an actual empire or a barbarian horde. How is a barbarian horde a standing army? If anything, a horde demonstrates my conception of private forces that band together when necessary. National defense is a false concept, not arbitrary, and security can be much better accomplished by competing, private forces. National forces have survived this century, despite their great waste and failure, because of mass stupidity, just like socialized medicine or education. That will change.

CompEng

March 14, 2009 11:13 AM

Ajay,

"you're just going to take my first statement, where I noted that perhaps their common rules embodied common preferences, and leave out my next statement that you still had outlets that you wouldn't have had with govt, you lose any credibility that you have."
Unless I was going to drop the argument. The obvious counterpoint is that federal governments don't regulate those kinds of behaviors, they know better. Some state governments do, but in most cases avoiding ridiculous statutes that aren't going to be enforced anyway is as simple as moving out of the appropriate city limits.

"Actually my point about your contract/coercion definition was that it was a bad one as it was too broad,"
I thought my definition got the essentials without all the fluff: there's quite an array of different kinds of governments. If you don't like the definition, how would you tighten it?

"We have a hard time getting agreement on issues of police violence?"
I could point out examples like Rodney King or the outcry in any community whenever a cop shoots someone or is shot. But I was really referring more to Miranda rights, what constitutes appropriate interrogation, what constitutes probable cause, rules of evidence, etc.

"The Bill of Rights doesn't say much on these issues, not sure why you think it does, it mostly has to do with legal principles that come after police force"
Amendments 4,5,6,7 and 8 all refer to police or judicial process before or after detention, including the prevention of illegal search and seizure. If the private "police force" is limited to investigation, detention, and interrogation, that's fine as long as there's a process to handle excesses. If you're spinning off the whole law and judicial process, things get hairier.

"The reason the definition of govt came up is that you seemed to be saying that even privately competing arbitration boards should be called govt, which is what I disagreed with.
I only called them government if they also determined the code of conduct arbitration should be based on and also provided enforcement. And if they don't, then the relationship among these functions gets complex to manage outside the confines of government.

"Is the govt=mob crowd exaggerating when a mob boss's son is elected President and then offed in a gangland-style killing?"
Which president are you referring to? JFK? I wasn't aware his dad was a mob boss.

"Nobody's wiping away Toyota, Sony, etc. only as long as they keep going back to the govt teat for more cash infusions, as they're doing now."
If they didn't, they'd still get by, I think, at this point. Even in a world where their competitors were doing it.

"However, I note that you didn't include GM, Chrysler, or Ford in your list because that is the inevitable endgame, companies that become so riddled with incompetence that they eventually have to be put out to pasture even by their govt cronies."
You're right, because I agree with you on those companies.

"TSMC certainly had no problem getting into fabs late"
They were founded in 1987, and they are one of the winners. You couldn't profitably start a company like that now (in that precise field) without government backing. That might be ok, but it is true.

"Even if your argument is true for a few fields because of idiotic IP laws, the solution is to fix those laws- for example, invalidate patents on products that are being dumped because of govt subsidy- not to start subsidizing the vast majority of markets where that IP argument doesn't even apply."
I think we can agree that would solve a lot of problems.

"As for bias, I've made it clear that I'm a libertarian, you're the one that makes unsupported statements that show bias."
It's a hazard of learning through the construction of hypothesis and then testing them. I cast away my biases in the face of evidence: I learn. I've never seen you budge, even when it seems obvious to me that you don't have a leg to stand on.

"My point about the Yucatan was that it should presumably be as remote to you as Florida, why isn't it?"
Just because I believe there are benefits to safe defense doesn't mean the boundaries are always right. Florida is much more tied to the rest of the US economically and otherwise than Yucatan. I've been to Florida several times, and I could drive there in a reasonable amount of time. Yucatan is, of course, more geographically and economically remote.

"The Egyptians and other tribes you mention may have first exhibited collectivism, but they certainly didn't take it to the extremes the 20th-century fascists took the new concept of nationalism."
Read the old Testament and tell me that again. Read about the Ottoman Empire, the Macedonians under Alexander the Great, Russia under some of the czars, the empire of Charlemagne, Spain before the Spanish armada sunk, France under Napoleon. If the fervor was a little different, the outcomes were similar.


"exaggerated your lack of arguments when I said "as always," but it's not far off when you don't have one 80% of the time, as demonstrated by your arguments in your last comment. The Nazis fought a co-ordinated group of national forces in the Allies,"
Scale matters. National forces coordinate better than local forces because national forces are large enough to accomplish something useful with looser coordination.

"German centralization certainly didn't help them win"
It did until the scale of coordinating attacks on multiple fronts got away with them. And that was largely because Hitler grew more insane and started overriding his generals. But you are correct that one of the pitfalls of truly centralized control is that your fearless leader might be insane.

"If people are cheap, govt doesn't magically solve that problem, as Chamberlain's appeasement policy in the '30s or our recent unreadiness for 9/11 demonstrated."
It doesn't magically solve the problem, but as you've illustrated, war is something we'd rather avoid at any cost, and because of that we don't prepare. If national forces say "it's not my problem", how much more so local forces?

"Enough people hire private security today to demonstrate that they understand the need for it, and I maintain that private forces would do the job much better because they'd have better incentives"
Who has the better incentive, the guy defending his house or the guy defending someone else's for cash? This is ludicrous.

"My point was that most of the forces of antiquity were private, including the army of an actual empire or a barbarian horde. "
In Greece, I can find some evidence of that, although military powers like Sparta had a warrior class that formed its military backbone. But then Greece was always more influential because of its science than its military.
For most of the rest, Persians and so forth it was a warrior class plus conscripts and mercenaries to fll out the army at war.
Rome had a large professional and conscripted military up to the time of Marius, by which time Rome was in decline. Do you call them private because they were loyal primarily to the general rather than central government?
The Napoleonic wars in Europe were fought primarily with National forces because the previous reliance on mercenaries proved inadequate.
In the dark ages, it was basically a bunch of local defense forces repeatedly getting pounded by th next wave of barbarian hordes.
In medieval times (Carovingina, Merovingian, Holy Roman Empire, and the rest of the feudal period), the organization was always noble sons as the warrior class with peasant conscripts as the primary forces. Levees to pay mercenaries were not primarily relied upon for defense.
From the early Renaissance to the Napoleonic wars, you're essentially correct from the standpoint of what I can quickly dig up: swiftly armed local populace for defense plus mercenaries. It was a pretty messy period in military history. From the Napoleonic wars on, it was national defense forces for the most part.
The Japanese always had a feudal warrior caste right up until Western intervention in the 19th century.
Bottom line: history is mixed in terms of the choices made, but the really effective militaries always had a large professional core, like ours.
Private contractors, like the folks formerly known as Blackwater, just weren't trusted, because of incidents like the recent one that caused them to get kicked out of Iraq.


How is a barbarian horde a standing army?"
It is neither a privately hired force nor a professional army. The difference between a horde and a militia is mostly exemplified by the fact that a militia-member can quit and does not rely economically on plunder. In most such societies, every adult male had specific military duties that could not be shirked. Hordes were typically not so effective against similarly sized well-trained and armed forces: it was their speed, numbers, and way of treating the losers that made them so feared.

"Enough people hire private security today to demonstrate that they understand the need for it,"
The need to defend against thieves and riff-raff is immediate and easily quantifiable, so it's not a good comparison. But you can bet it's the US Navy that will eventually have to take the Somalian pirates down.


"National forces have survived this century, despite their great waste and failure, because of mass stupidity, just like socialized medicine or education. That will change."
National forces survived because they are more effective than other solutions. Against conquerors, against pirates, against any sizable opposition. I don't think that's arguable. But they are also much more costly.
The only viable argument is whether a large national standing army makes sense unless there's another world power massing armies that doesn't have a vested interest in your security. By that standard, you could say national forces are too large, but say they are useless flies in the face of reality.

"I exaggerated your lack of arguments when I said "as always," but it's not far off when you don't have one 80% of the time, as demonstrated by your arguments in your last comment."
20% will have to do in the face of such stubbornness. I'm sorry you don't understand my argument. I'll try to work with you on that.

Ajay

March 14, 2009 04:00 PM

CompEng, I've lost interest in pointing out your loony points or dumb arguments (you mention moving out of city limits long after I noted that HOAs only have you move city blocks), so I'm just going to answer the bigger issues. Yes, Joe Kennedy, hence the shady dealings that won his son Chicago and the Presidency. You confuse a professional military with a national military. National forces survived despite their great failure because of the idiotic nationalistic impulses that politicians were able to inflame, just as idiotic notions of "universal" healthcare or "free" education keep socialized medicine and education around. When you can only bother to make 20% of your arguments make sense even in the face of opposition, I wonder at your efficacy if there were none: it must be abysmal. Your arguments are easily understood as useless quibbles, perhaps you should try to understand why they're useless.

CompEng

March 14, 2009 05:38 PM

Ajay,

perhaps when you understand why 95% of people share positions that you think are idiotic (and it's not because 95% of people are idiots), then you'll have grounds to call all my arguments loony or dumb and have me take that seriously.

I know the problem isn't all with me. Although I am not the smartest person I ever met, I didn't get the highest SAT score in a very good high school or a matching GRE because I'm an idiot. I didn't get A's in almost every literature, philosophy, or English class I've ever taken because I can't construct an argument.

I've tried to be patient with you despite your not accepting sense because I have learned that people, even otherwise intelligent people, believe what they want to believe if their worldview requires it. And yet I can make progress in establishing shared values with most of them over time that show any shred of interest. But apparently not with you. It saddens me, because I do care about other people's opinions, even when perhaps I shouldn't.

Looking over them, most of my arguments make a great deal of sense if you share some of my values. Most of my arguments were probes were to find out what your values are: and I couldn't find a consistent set of values to speak of. The benefits of government are primarily not to the strongest members of society. If you don't value additional security, there's no shared culture you feel bound to protect, and you don't identify with or care about the weaker members of society, then you'll probably have no interest in nation or government. Any other benefits are very indirect and extremely difficult to prove.

I suspect you find yourself surrounded in life by "idiots". I also suspect you like it that way. That's your choice. It's a free country.

Ajay

March 15, 2009 02:54 AM

CompEng, What makes you think 95% of people aren't idiots? Now we see where your real call for being proportionate comes from, a silly conformism. Anyway, I find your arguments bad because they're logically inconsistent and silly, not because you sometimes argue in favor of commonly-held and idiotic notions. Nobody said you were an idiot, all I said was that certain commonly-held notions like national defense or universal healthcare were idiotic. Perhaps you believe in those, maybe you don't; either way, you can say idiotic things and not be an idiot yourself. Your SAT, GRE, and grades mean very little, perhaps you focused more on those and their standards aren't very high anyway. I realize you've been patient in the face of what you consider to be nonsense and I appreciate that, I've done the same. I think you and I did come to some common conclusions on some things Friedman said, the only reason we discussed as long as we did is because of that. I agree completely that people believe what they want to believe but I claim it's not me doing that. While I think that you've tried to have a real discussion some of the time, I think that your arguments increasingly became illogical quibbles based on your frustration with being on the wrong side of an argument, the HOA one for example. I just got bored with pointing that out over and over again.

As for probing my values, I'd say I'm fairly libertarian but certainly not dogmatically so. I don't see how I've been inconsistent. However, I do find inconsistent how you sometimes talk about Friedman and how anti-dumping regulations are unnecessary and other times seem to argue for them. I think you're someone who understands and somewhat accepts the rationale for free markets but then sometimes argues against them regardless, with little to no rationale given. As for the benefits of govt, the central argument of socialists such as yourself is that some sacrifice has to be made for the weaker or poorer members of society, to allow them to take part in society's prosperity. What you don't realize is that that particular "sacrifice" slows growth, in economic cases, and then makes everybody in that society poorer. The less socialist US has made our poor many times richer than the richest of other nations because of that economic growth. In the case of security, I maintain that private forces would have done it much better so the same argument holds, not because of growth but because of the benefits from competition. Ultimately, I have no problem with the idiots in Sweden or SF choosing that poorer path for themselves, I just wouldn't live there myself and I will fight their attempts to force me to do the same, with their national systems of socialized medicine and education. You're right that I find myself surrounded by idiots but I certainly don't like it that way. Unfortunately, that appears to be my lot.

CompEng

March 16, 2009 09:49 AM

Ajay,

From my perspective, here's how the discussion should have run: I posit that we're better off with government, at least a minimal government, than without. You point out that in the absence of government, market actors will spring up to fulfill important government functions. I say they won't be fundamentally better than governments. You point out that they will be, by virtue that they will be better because of improved competition.
I bring up HOAs solely for the purpose of showing that private actors and government actors are not fundamentally different in nature. You reiterate the point of competition. I point out that if private actors and government are different primarily in scale, and if private actors are not fundamentally limited in scale, and if the functions of a minimal government (definition and defense of basic rights and security) benefit greatly from economies of scale, then might not they make sense to establish despite the inefficiencies of reduced competition. How small would a government have to be to be "ok"? I'm sure you would have had something to lob back at that point. Maybe you disagree, but I think that would have been an interesting discussion.

But that's not the discussion we had. I expect you to try to poke holes in my essential arguments. But from my perspective, almost every time I put two words together, you had some niggling criticism to make, and I felt compelled to respond. You repeatedly brought up the same point, for instance that competition was a virtue of HOAs over government. Ok, I get it. I got it the first time. I thought I acknowledged the point, but it didn't at all negate mine! I let myself get distracted into defending almost every word I ever said, and I got increasingly verbose and annoyed as I tried to swat back. And I certainly did throw a few out form left field like the argument for dumping. But when you were suddenly dismissive against all my arguments as idiotic and pointless, I was immensely frustrated at what I saw as the pot calling the kettle black.

You're right that I misdiagnosed our communication problem. It wasn't bigotry on your part. It's more that neither pure iconoclasm or being unwilling to let any little criticism drop make for a very positive discussion. At least that's what I see.

It's true that smart people do say stupid things. But please don't insult my intelligence by splitting hairs between "80% of the stuff coming out of your mouth is pure stupidity", and "you're an idiot". They're not quite the same, but they're awfully similar in practice.

Finally, I don't think 95% of people are idiots because, when I engage people on their terms and in their areas of interest instead of mine, they usually have at least something to offer intellectually. Maybe you're so insanely smart that 95% of people really are idiots compared to you, but it seems more likely a failure in your perception. I see that an awful lot in people that are a little smarter than average, especially pessimists and skeptics.

I'm absolutely chagrined that I lost my temper a couple times. I generally do enjoy discussions with smart people even if they are a bit caustic: I can take that with a grain of salt. But by the end, you were crossing the line of what I'm interested in sticking around for (and I guess I was too). If we discuss something again, let's keep things a little more positive shall we? And I'll try to keep from slinging back at every criticism.


Ajay

March 17, 2009 08:27 AM

CompEng, It is interesting that you have such a precise notion of how the debate should have played out: why discuss at all if you already have a particular path in mind? I think we did go along that path until I got sick of your muddy arguments. You finally raise a new argument about economies of scale- economies of scale is a minor concept that has been so overstretched in the last century as to have become bullshit- but at this point I'm uninterested in continuing. The fundamental distinction between an HOA and govt is competition; if you can't see that, I thought repeating it might help. I didn't call your arguments idiotic, I said they were illogical quibbles. You can be smart and still produce lots of those, but the fact that you understand and apply Friedman's insights at all puts you at the 99th percentile. So, I think you're a smart guy but your thinking is sometimes muddy and you often make vague, contradictory arguments, perhaps because you sometimes try to include opposing viewpoints to show that you understand that viewpoint too. That just leads to contradictory statements if you provide no indication of which viewpoint you believe in more. 95% of people are idiots, remember Sturgeon's Law, but they can always provide observations that one might not have seen, so I'm not saying not to engage with them. I'm saying you're extremely unlikely to get any useful analysis from them, as they have almost no power to reason. It is not that I'm insanely smart, it's that everybody else is fairly dumb.

CompEng

March 17, 2009 10:08 AM

Ajay,
I'm weary of contradicting you, so I'll keep to relatively safe territory.

I think it's always appropriate to have some understanding of how you expect things to play out. I knew some parts of my logic chain were more vulnerable than others and required more clarification, and that's where I expected the interesting parts of the discussion to be. And just because you have a plan doesn't mean that you don't expect surprises.

"The fundamental distinction between an HOA and govt is competition; if you can't see that, I thought repeating it might help."
I did... but it didn't negate the insight I was trying to extract. I did foolishly try to mitigate your point just because I could.

I agree that smart people can produce lots of quibbles that don't lead anywhere: I wasn't quite sure that was the precise nature of your criticism. Thank you for clarifying.

It's also true that listing both points of view isn't always illustrative of the right way to view a situation. When not being used as a smoke screen, the tactic is often useful in scoping out the territory that a true solution must cover in order to be completely satisfactory.

I philosophically disagree with the perspective offered by Sturgeon's Law. It's not precisely wrong, but the more useful point of view is that 90% of an art form covers the same territory, so there's no need to expose yourself to all of it. A few examples will do, and then you can focus on the 10% that offer more.
I find the "glass is half full" perspective is logically equivalent but psychologically and socially healthier.

CompEng

March 17, 2009 10:51 AM

An amendment on my comment on Sturgeon's law: there is a certain percentage of any art form that really is truly awful, I just put the number lower than 90% :)

Ajay

March 17, 2009 01:05 PM

I would add one more thing I just thought of: Sturgeon's Law is essentially derived from the fact that 95% of the audience is fairly dumb. They are the ones who buy the trash 90% after all. Of course, the nature of broadcast media leads to products getting even more debased in order to appeal to a wider audience of idiots. My hope is that digital media will at last be free of that homogenization, though the audience will be the same at least initially.

CompEng

March 17, 2009 05:02 PM

Ajay,

There will always be jobs in finding and communicating that top 5-10% of media.

Ajay

March 17, 2009 10:24 PM

Read your statement back and see if it says anything nontrivial. What changes is that there won't be a dominant 5% anymore, because the internet allows unicast as opposed to broadcast. As I explained in another thread, Katie Couric gets replaced by a 100 news anchors, each with roughly similar-sized audiences, greatly flattening out the distribution so that it's difficult to even talk about a top x%. 90% of the content will still be crap because the audience is still composed of idiots, but it will be better because it can be focused instead of homogenized.

CompEng

March 17, 2009 11:17 PM

Ajay,

No, it was a trivial reflective statement ;)

I think you're probably right, although some media will still retain much of the popular culture. After all, you can watch almost any sport, and yet soccer, basketball, football, and baseball retain most of the attention. But there will be a big diversification among the rest. This way everyone can have news focused towards exactly what they want to hear. Even more so than Fox News or its liberal foils. I'm afraid that will generate louder idiots.

Ajay

March 18, 2009 12:40 AM

What makes you think you can watch any sport? The only reason those are the top sports is because they already were the most popular before TV and then were amplified much more by being broadcast. I maintain that once everything is unicast there will be many more sports, all unicast online, and they will take much of the audience from the current top sports. Look at how the X-games took off because of cable TV, there will be a great flowering of alternative sports online. This will lead to the same flattening of the sports distribution as the network anchor distribution, 3-4 top spots being replaced by 100 or more. As for news, there will always be some mad fringe that only reads the Nation but any particular loud idiot will have a much smaller audience because that schtick only works for the lowest common denominator and some extremists, not for most. If nothing else, better that there are 20 loud idiots who utter varied and more focused nonsense to smaller audiences than one big idiot who garners a large audience.

CompEng

March 18, 2009 02:00 AM

Ajay,
There will definitely be some inertia, but otherwise you're generally right. There are some wildcards coming, though. One is that with more and more high-def being switched on fiber, Verizon et. al are likely to do away with the net neutral pricing model. Getting micropayments right is one response, but another tested model is bundling. Bundling and promotion deals won't stop diversification of choice, but they could slow the process.

Ajay

March 18, 2009 02:37 AM

Inertia, shminertia, there is a punctuated equilibrium coming and the catalyst is micropayments. As you understand, micropayments will play an important role in monetizing all the choices that the online unicast model will allow. Verizon and AT&T are irrelevant, the future is open fiber networks like the one in Utah, UTOPIA. The existing telcos will either open up in imitation of that model or be destroyed by new entrants who do. Bundling is dead, it is an artifact of a world of broadcast tech. Despite people talking about bundling as a possible intermediate solution for years, essentially nobody uses it online. You will always have subscriptions, where you lock in a lower price by subscribing up front to recurring broadcasts of your local wallyball league or favorite news program rather than paying higher micropayments prices later, but that's as far as pricing rigidities will go.

Thank you for your interest. This blog is no longer active.

 

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