The Argument Pyramid

I really like my friend Bella’s diagram: But in the spirit of this blog I would add two more layers to the top of the pyramid:

  • Take your opponent’s central point and if the arguments are sound, accept and change your mind
  • Take your opponent’s central point and put it with your counter point and create a synthesis that is better than either your or their central point: a creative new solution that transcends the either/or.

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Posted in Conflict Processes, PERSONAL CONFLICT RESOLUTION: CREATIVE STRATEGIES, Ways to handle conflict | Tagged | Leave a comment

Wars Involving the US since 1776

Useful listing of all the wars the US has been involved since its founding: 

http://en.wikipedia.org/wiki/List_of_wars_involving_the_United_States

 

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In Defense of Thomas Piketty and Ruminations on Economics

Financial Times Discussion on Thomas Piketty March 2015

I was drawn into a prolonged and interesting discussion of an article in the UK Financial Times recently that covered the apparent refutation of the work of Thomas Piketty in his fine book Capital in the 20th Century. The FT article was pretty poor journalism by FT standards, but nevertheless provoked a lot of good discussion and more importantly for me, made me think hard about economics as a discipline. I have summarized my side of the argument below which I hope makes sense. To include the original article and all the comments would make this too long.
The article and discussion thread can be seen at, though you have to register and get I think 3 free articles a month:

http://www.ft.com/intl/cms/s/0/bbf09ba8-cd51-11e4-9144-00144feab7de.html?hubRefSrc=email#axzz3W0Nwik5M

Reply #1….I don’t think the writer of this article understands Piketty or has read his book; and in my approach to such matters one piece of research does not “disprove” another in some final sense, any more than Piketty “proved” his hypotheses. Piketty raised issues, provided data and an explanation of the data in terms of a theory.  What a counter article can do is to raise questions about it the data or the theory which may or may not be damaging to it.

For instance, in relation to Piketty’s critic Rognlie as presented in this article, capital’s share of income could remain the same but with a high (and deflationary) savings rates it could still snowball itself to ever higher  concentration of wealth which is what seems to be happening and which is what Piketty focused much of his analysis on.

In a situation where the top 0.1% of US wealth owners now own 22% of US wealth and the bottom 90% own 23% I would say we have a wealth concentration problem not just a distribution of income within labor problem. I don’t see anything in this article that overturns this reality, but am open to counter argument.

I also think it interesting how much attention is being paid to this counter of Piketty which feels to an outside observer rather like desperation. Piketty’s work, as he would be the first to admit, is limited by how little data we have on wealth rather than income. And I see nothing in this article that suggests that the return on capital does not generally exceed the rate of growth of the overall economy. Any counter data.

Reply #2 I don’t think you have read or understood Piketty but I may be mistaken on the former. He is pretty clear on the limits to what we know about wealth distribution and based on recent experience his projections for 2030 (of the top 10% owning 80% of the wealth being achieved, up from 70% today)  on US wealth distribution are well on the way to being met on an accelerated basis.

The improvement in global equality is the result of the catch up by China and other countries. It is not reflected in within country inequality which in the developed world has deteriorated considerably because of tax changes to favor the rich and of course the consequences of globalization on competitive labor rates. He doesn’t assume a return to high inequality: he posits the mechanisms that are likely to and are indeed already producing it, including the snowballing of wealth as those who have it use increments and income to reinvest and increase their share of capital. It is also the likely intent of the rich to bankrupt said pension and social security systems to defeat their possible effect on their hold on income/wealth. This is already the Republican project in the US and the Conservative project in the UK best I see it. QE was very much a way to distribute asset growth unrelated to capital performance to the rich instead of say using QE for massive infrastructure investments with a good TARR and a good impact on employment and income for the majority of the population.

I find Piketty’s projections pretty plausible especially when you add the increasing political corruption of the political process to favor the wealthy and the likely impact of massive automation of white collar and blue collar jobs that seems imminent. Ownership of and benefits from the income stream created by robots will be extremely concentrated in the US in the hands of the top 0.1% who already own 22% of the US economy. And Piketty’s most important policy recommendation: a wealth tax on the wealthy seems the only way to head this off or at least the preferred one compared with the historical alternatives to correcting extreme wealth inequality: war, hyperinflation or revolution.

Reply #3 .Piketty’s argument in a nutshell: either reform the tax system to reverse the snowballing inequity of wealth and income, or face the three horsemen of the economic apocalypse: war, hyperinflation or revolution or a combo sandwich of all of them

Reply #4 It is always strange how people misrepresent what you write. I didn’t say theories in economics are never really disproved. I said I was a follower of Karl Popper who indeed believed science moved forward via disproof. What I did say as he did is that one piece of data, one argument against a theory that has proved to have some value in understanding the phenomena under consideration, does not immediately result in overturning the theory, particularly before those who think the theory has value have a chance to respond. And also that it helps in discarding one theory because the evidence is strongly against it, to have a better one that better fits the data.

I think it high on this basis free market fundamentalist Neo Classical economics was thrown on the trash heap given how many it has “killed compared with saved” to use your medical metaphor. Indeed in its case it has never been empirically founded nor in recent years as quant models proliferated empirically tested. It was simply a belief system about the strong case rationality of markets (of course markets have value but not without appropriate structure and regulation and the rule of law as Russia shows), which is contrary to most economic historical experience and I write as a specialist in the latter before I went into business. And certainly free markets don’t operate within large corporations as Ron Coase indicated in 1937.

Reply #5. I doubt you have read Piketty because if you had you would realize he is not really leftist. Indeed he is of the post-communist, no faith in communism generation. His whole policy direction around wealth taxes is actually intended to make the economic system more stable and sustainable. Historically he points out that massive inequality of the sort we now have (0.1% of the US hold 22% of its wealth, while the bottom 90% hold 23%: those are more recent stats than he uses) is only addressed by war, revolution, hyperinflation or tax reform. Rather conservatively he suggests the latter is the way forward. Ad homineming Piketty or those who find value in his work as leftist helps not at all.

And if you understood economics and the philosophy of science, you might understand that its theories are never really “proved” or “disproved”. Economies are complex adaptive systems with reflexivity, meaning our understanding of them feeds into the system via expectation and policy. What you have are more or less useful theories to help understand and policy.
Personally from a business viewpoint I find Piketty useful and his insights powerful. I don’t see much in his critics so far to undermine his central equation re overall growth and capital return which seems pretty sound empirically; or his account of the snowballing of wealth. And yes of course capital can be destroyed which is what wars, hyperinflation and revolutions can do. But the wealthy as he suggests via insider trading, via political corruption and via the economies of large diverse portfolio management are achieving much higher returns on their capital than the rest of us. But also paradoxically inequality is profoundly deflationary because of the lowish marginal propensity to consume of the rich so as their share of GNP grows, the come to need QE or fiscal deficits chronically to compensate for this..

Reply #6 The poison started in Chicago under Milton Friedman though paradoxically he made his name writing the Monetary History of the US with Anna Schwartz, an interesting if flawed work. I guess I would urge your Oxford contacts to do their own study of economic history, though it will make them pretty annoyed with their math/quant fundamentalism. I especially recommend to them Charles Kindleberger’s Manias, Panics and Crashes. And there are good series though a bit dated on the UK economy and European economies in the Penguin Economic History of Britain and the Pelican Economic History of Europe. They should also read a good economic history of the Industrial Revolution: there are many out there so easy to find a good one.
In 1998 I had a debate with the Chief Economist of my company one of the largest and most long lasting corporations in the US. I asked him for our corporate downturn strategy as I was working on one for my business focus. He said we didn’t need one as Alan Greenspan so brilliantly managed the US economy that we wouldn’t have any more downturns; he would simply reduce interest rates and ease the money supply.

I fell around laughing and said: “ah they reinvented economics and the economic cycle since I was at university. Have you heard of Keynes expression: monetary expansion in a downturn is like pushing string? Pull the other one. Whenever I hear the phrase this time it’s different I sell all my stocks.” A little later we had the dot.com bust and then the 2008/9 debacle. Said Chief Economist now retired, teaches at our local business school but when he sees me coming in the street he ducks into a store to avoid me.

Reply #7…Well free market fundamentalist Neo Classical economics does seem to me to be a somewhat irrational belief system rather than a science and quant models based on little connection to reality have some of the negative features of alchemy indeed. And the orthodoxy rampant you rightly criticize in my view.

But that said there are the makings of a change. There have been interesting economic thinkers in the past and any reform of the subject would do well to study the alternative theories of the past to develop better ones going forward. I also commend the study of economic history, of what actually happened with as little ideological bias as possible. No economist should be allowed to practise without a good grounding in the economic history especially the booms and busts of the last 300 years.

But that said economics is studying the collective behavior of 7 billion people these days. Its insights can influence their behaviors so it is reflexive. And economies are more like clouds than clocks. We are studying something more like an economic ecology or climate system and so 19th century physics pre Quantum etc is probably not a good model anymore than alchemy is. The other factor is that economics is always political and I tend to want to call it what it used to be called Political Economy. Free market fundamentalism did not take off in the 1980s because it was supported by the data but as ideological underpinning for a politically conservative movement to increase inequality and reduce the role of the state (though it failed in that given defense spending drives).
I do think we need to rethink the methodological approaches of economics and be a bit more humble in what it can achieve, a bit prone to test theories and try to measure what works policy wise more honestly and openly.

Reply #8…Quite so. I have worked in companies which defied these principles for decades. Indeed one case for 100 years. But it requires constant effort to find the asshole managers (pardon my language) and fire them over and over again. You have to have some sort of accountability system and of course this applies to picking. You have to get some good senior managers who can pick the next level and so on. It is hard because people are so taken by spin and bs. But it is possible or our civilization would not have reached where we have. But its hold is fragile given the rising tide of incompetence.

There few good managers in the real value add sectors of the economy. A sort of Gresham’s Law of bad managers driving out the good has been the result of a sort of short term sociopathy driven by stock options and other incentives to spin rather than deliver real sustainable results. Most managers these days cannot manage another human being in any effective way, let alone develop their talent. “People are our greatest resource” mantra of so many companies is total bs in terms of how they behave.

Meanwhile in the finance sector insanity has taken over the casino. Risk is hidden. Opaque products invented. (God spare us “financial innovation” as Paul Volker quipped the only worthwhile financial innovation of the last 50 years was the ATM) and worst of all the stock analysts judge what will happen to the casino’s view of stock prices, and understand almost nothing about the real businesses whose real future  value stream the market is no longer interested in.  Sitting in on a corporations meeting with stock analysts is hilarious if you know the business concerned. Almost medieval in its abstraction from reality.

What we have is so far from the delusions of the free market fundamentalists; yet they are so deep in their own anatomy that they don’t see the disconnect, don’t see the systemic problems and have learned nothing from the 2008/9 debacle. And economics has contributed so far nothing to unpick this mess. And of course the worst economics departments of all are in business schools heaven help us. I would probably close the business schools and like Mao but more benignly send their teachers and students out on the assembly lines, down the mines, on oil rigs or on farms and let them learn how value is created first hand.

Reply #9….Upton Sinclair said it well: ‘It is difficult to get a man to understand something, when his salary depends on his not understanding it.” This neatly incapsulates the treason of the clerks of the economics profession, especially the economics professors sitting on the boards of reckless Wall Street institutions destroying value while they said nothing. The profession needs a good purge and rewriting of the text books to purge out the Neo-classical nonsense and quant disregard of reality.

Reply #10….That is indeed the problem with the hold Neo Classical Orthodoxy has on the subject. When I studied economics it was inconceivable that you didn’t study both economic history and the history of economic thought. And maths. But the ever more sophisticated quant models are bloody useless. However sophisticated their maths their assumptions are detached from reality and the models are not tested against said reality. Hence the 2008/9 disaster.
What is interesting is that the economics profession has learned nothing it  seems, though there is pressure from students in the Post Crash Economics movement for less orthodoxy, more economic history and more history of econommic thought. I would add behavioral economics as per Kahneman and Tversky. I also think economics professors should not be corrupted by serving on City and Wall Street boards to keep schtum on the limitations of Neo Classical economics. The treason of the clerks indeed.

Reply #11 .Science is not just a lab experiment business like 19th century physics or the physics experiments I did in High School. Biology especially when trying to understand complex adaptive systems like say the Amazon forest is quite like economics. Hard to conduct controlled experiments but still possible to understand a lot scientifically and formulate useful theories and test them. And economic policy is exactly an experiment to see what works pragmatically. Hard as so many variables, but mostly we know what works. We do have economic history and we have a lot of historical data and we can measure most policy actions numerically.
Our problem is political. It doesn’t suit our ruling elite to run the economy in ways we know work for most of us. They prefer to run it into the ground in their narrow sectional interests. Hence QE though it was probably unavoidable once the world economy was in the ditch. Hence the failure to rein in Wall Street, pre-2008,despite any intelligent observer seeing where it was headed. Heck my 90 year old father who left school at 14 was sending detailed warnings and forecasts to the UK Treasury and they were close to what happened but a little off on the timing.
I also rather like the post-Soviet Russian joke: “Marx lied about Communism but told the truth about Capitalism” Sort of Grouchiste?

Reply #12….I try to really think about these issues and found the article provoking of thought if misconceived. Responding to it has made me think about a lot of these issues. I was also pleased by other comments made, though it still disturbs me that after the crash of 2008/9 and also the catastrophically increasing consequences of inequality some of those commenting were in denial about all this and yet not really able to argue back against the points I and other were making. Piketty has started a marvelous debate that had largely been absent around the inequality not just of income but of wealth. I have moved a little beyond his positions perhaps but he re-started my focus on these issues.

As Keynes said and I try to do: “when confronted with new data, I change my mind. How about you?” Mymemory of his words not his exact words, and I apply that to arguments: if you someone makes a good argument I tend to think hard about it and change my views if I can’t refute it. Too many on this thread merely fall silent when their argument bites the dust.

Reply # 13…There are many fine books on the crash. I especially like Gillian Tett’s Fools Gold and Martin Wolfs The Shifts and the Shocks. I think that economics only seems incomprehensible because it fell into the hands of a Neo Classical orthodoxy which thought markets were god like in their rationality and they are far from this. Indeed in my view there is no such thing as a free market. All markets have structures of governance, even drug cartels with their territories. And understanding and regulating governance is key to all markets. As a small example: Canada though its economy is pretty cyclical has never had a banking crisis because its bankers are not nuts, the system is tightly regulated and laws against predatory lending protect consumers and the stability of the banking system.

Reply # 14…Yes economics has some quantum features because our forecasts and policy actions change what we observe. But I think if you ground economics in economic history, how economies have really behaved. If your theories are not quant math model fantasies, but tested and refined against reality not free market ideology. If you bring in behavioral economics aka the psychology of economic decision making. And if you actually understand all the different economic theories of Smith, Ricardo, Marx, Marshall, Pigou, the Austrians, Keynes, Friedman etc you have a shot at understand the complex adaptive system called our economy.

Reply #15 As a decent economic historian back in the day, I don’t actually recall data on inequality levels for pre-industrial societies. Certainly Feudal societies seem to have high inequality though what their GINI index was I doubt can be measured. And the recent feudal societies of say late 19th century China were pretty unequal. Today South African and Brazil are the two most unequal developing countries and both are very much held back by their inequality which limits their domestic markets not to mention education levels and productivity of the labour.

I am a great admirer of the benefits of markets. But if you know economic history you will also know that no country in the world industrialized or modernized without a strong role for the state. Not the UK, US, Germany, France, Russia, China, Japan, Australia etc And after the 1930s experience between 1945 and 1970ish the state acted quite strongly and successfully to regulate economies and reverse hold in check inequality and growth was quite strong and real rather than financial sector delusional growth.

The future balance of policy seems to me likely to have to shift as we are on the cusp of massive automation of blue collar and white collar jobs. I don’t see how we can navigate those changes with free market fundamentalist Neo Classical economics which I sense you hold dear. There never was much empirical support in the economic history and it was embraced for political reasons in the 1980s rather than because it tested well. I don’t know what the new synthesis is and it will include a strong role for markets, central planning having shown its limitations once basic industrialization by late comers is over. But I commend study of economic history sans ideological lenses to all economists and to your good self. We are also on the cusp I suspect of a deflationary downward spiral in China, and Europe as in Japan the last 20 years. Some of it will be driven by the simply fact that the wealthy have a higher margingal propensity to save than the rest of the population so as inequality shifts vast sums in their direction the effect is deflationary.

Now as I understand it on the wealth front. the top 0.1% of the US has 22% of all wealth while the bottom 90% of the population has 23% of all wealth. This cannot fail to be deflationary and one reason the US became addicted to QE, to fiscal deficits, though the other reason is that it allowed the Chinese to manipulate their currency and suppress domestic consumption to run balances of payments surpluse with the US which as deficits to the US are massively deflationary. China of course has its own inequality problems between regions that will come to haunt it plus the limitations of its use of markets. We’ll see.

Thanks for your comments that made me reflect on this issue. And as always of course I may be mistaken and I post to learn not to win whatever that means.

Reply # 16….I am a professional negotiator among other things and have negotiated with communists, Neo-Nazis, and yes even capitalists. It’s doable, talking across these divides. But we do seem to have reached a position where unenlightened self- interest and a refusal to argue but instead retreat into mental bunkers is dominant. Don’t know the answer to when people never think about their own thoughts and how valid they are. They are somewhat unreachable until reality bites. By the way, I didn’t mean any disrespect to religion in my previous comment; just the folks who aren’t open to argument or data and who are doing such damage.

Reply # 17…A major down turn in China is perfectly avoidable with a little common sense. And indeed a sizeable number of better economists predicted the 2008/9 collapse and many of them are described in Michael Lewis’s book the big short. They first of all warned against it and no one listened so then they shorted the market to bet against it and made billions. The problem is the blind orthodoxy. There are plenty of solutions that would work. The issue is political: the wealthy have in the US and other countries taken control of the political system and corrupted it. The solutions to this are pragmatic. Mystical ones don’t work.

And if you want to see an historical example of pragmatism versus bs take World War 2. The US, UK and Soviet Union were fundamental pragmatists who had no time for the metaphysical bs of the Germany or Japan. They out produced them, out fought them and reduced them to rubble. As George Orwell memorably said of anti-pragmatist fantasists: “We are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.”

I guess I have run things, businesses with lots of people in them. Pragmatism of some sort is the only way to do this. Or to construct economic policy. The failings of it are the source of learning if we are open to it. Fantasizing about alternative philosophies does not feed people, build needed things or provide needed services. As Deng Xiaoping memorably said: “I don’t care whether a cat is black or white so long as it catches mice”. And the Chinese with all their problems would rather be where they are than where they were in say 1968 Cultural Revolution metaphysics and 10s of million killed.

Reply # 18….Cassandra in Greek myth was condemned to be able to see the future, but not be believed. There are mMany Cassandras these days.

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Economics and Power by Norbert Haring

I rather liked the fact that this talk was given as a seminar to the British House of Lords. Imagine it being given the US Senate? There would be a lot of heart attacks especially as it starts by quoting Karl Marx….aaarrrgggghhhhh…

Norbert Häring‘s presentation for the seminar “Economics and Power” on 23 March 2015, House of Lords, London:

Ladies and Gentlemen, To pay tribute to the Marxist jargon, in which Lord Skidelsky has phrased the title of my subject, I would like to start with a quote from Karl Marx: “The ideas of the ruling class are in every epoch the ruling ideas. … The ruling ideas are nothing more than the ideal expression of the dominant material relationships, … the relationships which make the one class the ruling one, therefore, the ideas of its dominance.” In my own words, that says that not all economic ideas are created equal. Some ideas make it into the leading academic journals, others can hardly be published. Some ideas make those who develop them successful in academics or even famous and influential. Other ideas sentence those who develop them to a life at the margin at best.

Ideally, this would all be a function of how convincing the idea is and how good the academic is at developing the idea, writing it down and marketing it. But we all know, that excellence by itself does not get you very far. Another important ingredient for a successful career is how convenient your subject of study and your results are for powerful interests in society.

Economics, like all social sciences, is a product of the prevailing economic and political conditions and has a role to fulfil. If the interests of the powerful change, so does economics.

I want to give you some examples of how the mainstream conception of economics conforms to the interests of the powerful groups in society and how it changes with these interests.

 

Pulling up the Ladder: From Mercantilism to the Free-Trade-Doctrine

My first example is the switch from mercantilism to the free-trade doctrine of David Hume, Adam Smith and David Ricardo that happened in the 18th century.

Before British economists discovered free trade, the nation had been following a protectionist industrialization policy. Starting with Henry VII in 1485, this strategy turned Britain from a poor exporter of raw materials to a leading exporter of cloth. Henry levied export taxes on wool and gave privileges to wool manufacturers.  As British capacity to manufacture wool increased, he and his successors raised export duties on wool. Finally, Queen Elizabeth banned wool exports altogether.

This is how Britain became the leading producer and exporter of manufactured goods. Only after Britain’s predominance was firmly established, did British economists start preaching free trade to the world. Many fell for it, but others, like Friedrich List in Germany orAlexander Hamilton in the US took this new Gospel as what it was: as an attempt to pull up the ladder on which the British manufacturing industry had climbed up to world leadership.

The same would happen again in the US. Starting with Alexander Hamilton, the country pursued a protectionist industrialization strategy and was very successful with it. Only after the US had had become the industrial leader, did its economists start to preach the gospel of unconditional free trade.

 

Neoclassical Labor Market Theory as an Antidote to Marxism

As a second example, I would like to point you to the emergence of the neoclassical doctrine around the middle of the 19. Century. This was the time then Karl Marx told workers, that they were being exploited and the threat of revolution was rife everywhere.

Classical economics was not a good antidote to Marxism. Adam Smith would not have disagreed too much with Marx on exploitation, as you can gather from the following (slightly abbreviated) quote:

What are the common wages of labour depends everywhere upon the contract usually made between those two parties… It is not difficult to foresee which of the two parties must have the advantage in the dispute, and force the other into a compliance with their terms. The masters can hold out much longer… Though they did not employ a single workman, (they) could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week.”

This was not an admissible attitude for an economist any more, once workmen were threatening to use force to end exploitation. Economists who wanted to preserve capitalism needed to overcome the classical economists’ analysis of wages that are a product of negotiating power.

The following is how neoclassical pioneer John Bates Clark formulated the challenge:

Workmen, it is said, are regularly robbed of what they produce. This is done by the natural working of competition. If this charge were proved, every right-minded man should become a socialist.”

With the marginal productivity theory that Clark and others developed he rose to the challenge of disproving the charge of exploitation. His theory claimed that at the margin, every factor of production, including labor, was remunerated exactly with what it contributed to the final product.

I would like to emphasize however, that the early neoclassical economists were quite open to redistribution. Since they saw marginal utility decline with income, they considered redistribution from rich to poor to be a welfare-increasing policy. At that particular time, this attitude was not against the interest of enlightened rulers. This was the time when Bismarck introduced social security in Germany to appease workers and fend off the threat of revolution. The rich needed to be convinced, with the help of a convenient economic theory, that some limited redistribution of income was to their own advantage, since it helped preserve the status quo.

 

Defining away distributional concerns to discredit redistribution

This takes us to the third change in doctrine which I would like to highlight: By the 1930s, the main threat for the wealthy had shifted from revolution to redistribution enforced by the democratic majority. This was also a time of preparation for war. Thus, priorities of the rich and the rulers had shifted to discrediting redistribution and towards making the best use of national resources.

As a first step, Lionel Robbins and others banned interpersonal utility comparisons.  Robbins redefined economics to be,

“the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

This dogmatic change had the effect of pushing distributional concerns outside the realm of economic reason. Economic efficiency became the sole target. As, on efficiency grounds, it could be argued that redistribution was bad, economic reason became associated with as little redistribution as possible.

 

Cold-War-Economics: Anti-collectivist and Efficiency-oriented

The fourth example of a shift in economic doctrine suiting the interests of the powerful is a continuation of the third. It is the emergence and eventual predominance of methodological individualism and of the anti-collectivist schools of thought, called rational choice and public choice.

It was the time of the cold war, economists were enlisted in the ideological battle to win the minds and hearts of the people for capitalism. The aim was to focus attention on the strong point of capitalism – efficiency of allocation –  and to discredit what socialism claimed as its strong points –  planning, collaboration and fairness of distribution.

Ken Arrow ostensibly proved that it was impossible to come to rational collective decisions. Anthony Downs, Mancur Olson and James Buchanan built on this and portrayed the government and trade unions as the enemies of liberty. The more government did, the bigger was the threat to liberty.

 

The Taboos

There are some ideas, which the powerful do not like to be discussed at all.

Power is one such thing.

The powerful have a need to legitimize their power. If that is not viable, they like their power to be downplayed as much as possible to the point of becoming invisible. This is what mainstream economics is doing. Look in the index of a random economics textbook for  “power” and chances are that the entry will not be where.

Power is tantamount to the absence of competition. The opposite is also true: perfect competition, the darling of mainstream economics, is tantamount to the absence of power. This is why treating the economy as if something close to perfect competition was the rule has a very important political implication. It negates the presence and importance of power.

If you pretend that workers routinely have a next-best alternative to their current job, which is only marginally less attractive, there is no power of the employer. There is no justification for unions, for layoff-protection or for unemployment benefits. If you pretend that market-power is the exception, instead of the rule, you cannot tax companies without doing a lot of harm. You cannot ask for higher wages, without losing employment. If you pretend that there is a well-functioning market for top managers, CEOs will have no real power and will need to be rewarded very handsomely for any value that they help to create.

Such assumptions which define power away almost always yield results which are very much in the interest of the powerful.

 

Money is Power

Money is Power, goes the saying.  Thus, another subject that the powerful, don’t like to be discussed is money. And mainstream economists are abiding. Banks putting out profit targets of 25 percent and achieving these were not considered excessively powerful by economists. They were declared efficient and successful.  Financial institutions which individually control the flow of billions of dollars do not have any power that is worth analyzing for mainstream economics.

Even money itself has been deemphasized to the point of disappearing. Some of the most famous economists have declared that money is just a veil over what is going on in the real economy. JP Morgan and Goldman Sachs are utterly powerless in such a setting. The leading macroeconomic models– even thosae used by central banks – do not have a meaningful role for money.

The following is what Claudio Borio of the Bank of International Settlements says about the importance of money:

Modeling the financial cycle correctly requires recognizing the fundamental monetary nature of our economies: the financial system does not just allocate, but also generates, purchasing power, and has very much a life of its own.”

A financial system that creates purchasing power is very powerful.

But this is not an admissible conclusion. The power to create money is not to be seriously discussed. Therefore, almost all major economics textbooks are telling students the lie that banks are mere interamediaries, who are just channeling the money from savers to investors. The fact that banks produce the money which they lend out, is hidden behind a nonsensical money multiplier mechanism. The way this mechanism is presented, it works exclusively with cash that is being deposited, lent out and redesposited multiple times. In this mechanism, it is not visible how individual banks create purchasing power. It just happens by some magic of the system.

There is a good reason for this obfuscation. Many people still feel like President Andrew Jackson did about money creation by private businesses. They would consider it an aberration, an abuse of power. If you tell these people, how banks really create legal tender, they will either call you a conspiracy theorist, or, if they believe you, they will be outraged.

It is this popular attitude that makes it so important for banks to have economists camouflage the process of money creation.

The consequence of the taboo to treat money and debt seriously is occasional policy failure. As long as economists observe the taboo, they will remain unable to understand a monetary economy. They will be unable to learn from past mistakes and avoid them in the future.

Thank you.

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Conflict Humor: The New Republican View of the Chain of Command

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Iranian Nuclear Weapon Capability Negotiations and its BATNA

Whatever the difficulties or failings in the attempts of the President Obama administration to negotiate an end to Iranian moves towards nuclear weapons, the recent letter to Iran by 47 Republican Senators seems to me like an act of ill thought through madness.

But setting that to oneside, there is the key question when anyone criticizes a negotiation strategy: what is your alternative strategy? I haven’t really heard one, and when I raise this issue with Republican critics of the President’s strategy on line, they tend to fall silent or talk about endless much tougher sanctions and they are equally silent when I ask what their alternative to a negotiated agreement is: their BATNA in technical negotiation analysis: the Best Alternative to a Negotiated Agreement which is your walk away option, what you will do if you can’t make a good agreement and what you can do unilaterally.

I thought it might be interesting to reflect on this issue as a way to critique the critiques of the negotiating strategy and give some thoughts on the factors at play:

  • The US has not traded with Iran since 1979, with the exception of President Reagan who broke his own countries sanctions to trade arms for hostage releases in the Lebanon as part of the Iran Contragate scandal
  • The US is therefore not really in any position to increase or continue damaging sanctions on Iran, without the support of other countries most critically the EU, China and Russia who did or do trade with Iran.
  • So any negotiating strategy based on sanctions needs international support, whether the Republican Party leaders or its base like it or not. That is the reality.
  • So far the sanctions currently in place with international support seem to be working to force the Iranians to negotiate. What and how we negotiate is harder to know.
  • But clearly agreement would need to include strong provisions to prevent current Iranian nuclear capacity leading to its possession of nuclear weapons and for onsite inspection to monitor and verify this. This is not easy work.
  • For those who argue against any negotiations at all, or who are trying to sabotage the current multi-nation negotiations, I would ask what their BATNA is, their Best Alternative to a Negotiated Agreement is? In the context of these other realities:
  • Iranian nuclear facilities are widely distributed, and unless the Iranians have only half a brain, built underground in long tunnels that make  it hard even with bunker buster bomb strikes for them to succeed. They must have been expecting air strikes on these facilities for a decade or more.
  • Moreover, Iranian air defenses are not 1980s Soviet era Iraq level defenses, but 2000s era Russian defenses: mobile best in the world air to ground S-300s etc, mobile radars which are protected by hundreds of decoys rendering HARM anti radar missiles useless.
  • So air strikes will likely be both useless in eroding the nuclear capability and costly
  • A ground invasion is a deeply forbidding project, requiring huge numbers of ground troops, $ trillions and based on the Iraq invasion, would take maybe 6-12 months to prepare for, more than enough time for Iran to actually build the damn bombs and deploy them against an invasion, use them on Israel or whatever suicidal acts the opponents of negotiation attribute to them
  • To me, watching Iran over the last 30 years or so, their leaders seem deeply strategic, cautious and patient. They are difficult people to negotiate against for these reasons. Fanatical and stupid they don’t seem to be, whatever terrifying things they occasionally say to distract their people from domestic discontents, and much as I might dislike what they stand for.
  • So I don’t actually see a military BATNA, a military solution that makes sense, though you might want to leave it as a sort of hinted at unspecified option, it doesn’t seem to me a credible one. And for negotiationg power BATNAs have to be credible or you just look foolish.
  • So we are left with the President’s strategy:
  • Negotiate with international support backed by international sanctions to achieve a no nuclear weapons agreement on Iran with appropriate verification
  • Recognize that the only real BATNA is indefinite continuation of sanctions
  • In the event we opt for long term sanctions without an agreement, I don’t see the incentive for Iran to not just go ahead and develop a bomb, knowing it has the sanctions with or without developing a bomb.
  • Not a negotiation place I would like to be in.
  • Or of course, we could move away from focus on the nuclear weapon issue to try to achieve a grand bargain to sort out the middle east once and for all. Good luck with the US leading that when the Republican opposition only includes a few grown ups any more. This is not President Eisenhower or even Reagan’s Republican Party.

I would welcome critique of my analysis.

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Conflict Map: Iran’s nuclear sites

For those of you contemplating air strikes against Iran, here’s a useful map though it may conceal the fact that many of the sites include long tunnels to make it very difficult for air strikes to disable key systems. They are also near major population centers and sites of religious significance so bombing if it were successful may well release nuclear radiation on the Iranian population and enrage Shias world wide for religious reasons.

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