On occupying, occupation, and the morality of wealth...

There must be an interesting psychology lying behind protest and public disobedience on the one hand and the more general acceptance and approbation of the protest in wider society… or is the ol’ probligo getting just that little more reactionary in his old age?

F’rinstance –

Forty years ago, the prospect of giving a number of very important people a sleepless night and to inform them of contrary opinion was not only supported in spirit but in fact. The main person to be kept awake – if that were possible – was one LBJ, then Vice-P of the USofA. He was spending a night or three in Auckland in the course of a junket round the world drumming up support for a military action that was going rather sour in a remote and previously ignored little slice of land somewhere down and to the right of China.

That was considered to be all in good fun. It was “right” to protest the military invasion of a nation – whether by invitation of the government or not – irrespective of the validity and justification of the rationale behind the action. To have the figurehead of the military action at hand and within protest range was a prospect far too good to miss. Oh, and I can not help wondering how many marriages resulted from the protest – I know of one certainly; a very dear friend whose response to the toasts at his wedding breakfast included the observation that his marriage was LBJ’s fault, that he had met his wife in the gutter outside the Intercontinental Hotel when they were both about to be arrested.

Similarly, there was the occupation of Bastion Point by Ngati Whatua. That one lasted for over a year (507 days to be precise). The objective of the protest was the land itself; its ownership; the means by which that ownership was obtained; the right of the protesters to regain what they considered to be their manawhenua – ownership – of a piece of land that had gone from disputed to extremely valuable over a period of some 120 years. Long time readers might recall my rather jaundiced view of the disputes of “right of domain” (I think that is right) in the US. The Bastion Occupation coloured thinking here a very deep colour of red.

But something seems to have changed.

The “Occupy…” protests in NZ have seemed futile from the start. On a global scale, the validity of the point being made had some strength as my previous post acknowledged. I wrote that some 3 months after the “occupation” of Auckland, Christchurch and Wellington. In recent times – these past four weeks – there has been increasing activity by “the powers that be” to clear the protests from the respective central city sites. As this has been happening, the nature of the protesters has changed; there has been quite a clear acknowledgement from the movement that began it all that their message had been infiltrated and converted by others with other agendas.

In Wellington, the coincidental death in hospital of a local character known best as “Blanket Man” had become the central point to the protest. In Christchurch, the protest against “the 1%” had morphed into a local issue – the pay increase granted by the City Council to its Chief Executive. The Auckland protest had become more about “the right to occupy” rather than the figmental 1% with which it had started.

So, I guess, the ol’ probligo has joined the ranks of the reactionary. No longer is there much point to the protest of “the 99% against the 1%”. And that raises the sad question of “Why?”.

One of the fundamentals of “capitalism” relies upon a small number of people controlling a large proportion of total wealth and a large number of people relying on the owners of that capital to provide them with something approaching an adequate living. From the time of Adam Smith to Friedman and Samuelson that division has existed and been recognised. It is not going to vanish in the twinkle of a tax-man's eye; it depends from the "natural human instinct" (TFS might call it "God-given instinct"?) of advantage, possession and greed. The real point to remember here is that "corporate greed" is nothing more than "human greed" in a pin-stripe suit and briefcase.

On the other side - as well illustrated by all the "occupy" movements - is the opposite emotion of envy; the "natural human instincts" of disadvantage, of dispossession, of not having.

As I started, the connection of these mirror images would likely make an interesting study. For my part, I can sit back this evening and reflect that I have as much as I need, that in large part I have as much as I want, and the best part of all is that I earned the best part of it for myself.

How smug. How self-satisfied. How selfish...

On being occupied, and the process of occupation...

There was a time, within my lifetime, that "occupied" had meanings ranging from "being used" as in a house or toilet, to "doing something" deriving from the idea of "occupation". The active meaning of the latter has now transmogrified to include the first, so that the idea of "occupation Wall St" and its international derivatives has made a profession of inhabiting a space to prevent its use by others. Perhaps on reflection that idea is not as new as it has been presented. F'rinstance it was a regular family occurance for one member (usually my mother) to complain about the toilet being used as a reading room; a practice that went as far as the old man installing a small bookshelf on the wall behind the toilet so that books were not left on the floor.

So that history has somewhat coloured my attitude to those who have occupied Wall St, or closer to home, Aotea Square. Add to that a strong feeling that it was the wrong people making the wrong protest about the wrong thing and you might begin to understand why the ol probligo has been fairly quiet on the occupy front. OK, and to take the point from a recent post me old mate Al put up, I will explain why.

The wrong people? It is usual in recent times for protest to be led by the young, the idealist, those who want to improve this world for their own benefit. There is nothing wrong with that really, but I do think that the protest should be led by those who have put their faith in a system in expectation that they would gain due benefit for their participation and have been sadly let down as a consequence of their trust.

The wrong protest? The right protest would be against those whose actions led to the loss. The bankers are in part to blame, no question! But I do not believe them to be the reason, though they are part of the cause. The politicians are no more to blame than the bankers. Politicians respond to the same kind of pressures as bankers; to give people what they want. I don't think that individuals are at fault either. So to protest about the "profits made by the bankers" is a waste of time in my book. And that leads to the last...

The wrong thing? The fault really starts with the fundamental nature of our society; the basis of which is measuring societal success in terms of profligance, material and monetary wealth rather than ethic, virtue and contribution.

To which end comes a book review that is very a propos the general theme. Debt (written by David Graebe) is a book which I shall be reading as soon as I can lay my hands on a copy through the local library.

Debt's striking synchronicity with OWS should not overshadow the fact that it's also a formidable piece of anthropological scholarship. The book spans the concept's evolution from the great Axial Age civilizations—adapting Karl Jaspers's label to describe the period between 800 BCE and 600 CE in Greece, India, and China—into the age of global conquest, and finally though its bizarre mutations over the past forty years. As Graeber shows, debt could not have taken the form that it did during the Axial Age without the appearance of currency, but it was also far from being only, or even principally, an economic matter. Debt was originally a moral and cosmological notion, about our debt to the gods (in India), to our parents (in China), or to the cosmos (in Greece, and sometimes in India).

I need to put the idea of debt into the context of my opening argument. Bear in mind here that I am using "debt" in both sides of the transaction; it is an obligation, it is the act of being obliged to another, of owing.

The change that has taken place is from a communal debt to creator, to cosmos, to the principle of personal debt. The measurement of personal debt I suspect does precede currency by some great margin. As evidence of that I can point to Maori who, before European contact, had a strong sense of personal indebtedness which could lead to either death or enslavement as payment of those debts. There was no monetary measurement of either cause nor settlement; cause could include losing mana (societal position) to the "debtor" requiring utu (revenge for the loss and reinstatement) as payment.

In the barter economy, survival would have depended upon ethic and virtue (like simple honesty) in dealings between individuals. Hence an agreement to provide in return for a provision (work for work, work for material object) could also operate without the need for currency.

I suspect that currency was put in place primarily so that those in power - the mafia of the time - could easily obtain a portion of the value of each individual's global indebtedness. That value in return was used to obtain the services necessary to maintain the power to collect; the coertion that libertarians like to hate.

To return to the review -

The guiding principle of Graeber's sweeping global history is that debt must not remain the exclusive property of economic historians, and moreover, that anthropologists are better equipped to take on the issue. The foundational myth on which economics rests, and which Graeber relishes debunking, is the "touchingly utopian" idea that money emerged directly out of primitive barter systems and had only to do with interest-maximizing exchange. Arguing against this from an anthropological perspective, Graeber claims that debt is the basis of society, and as such is inherently ineliminable. He illustrates this point through the example of debt to one's parents: to seek to cancel that debt would be impossible. Graeber describes a system of gift-giving in traditional societies that takes place over time, and involves gifts of slightly more or less value than the ones that preceded them, thus ensuring that everyone is always slightly in debt or in credit to everyone else. This sort of debt, he says, is nothing less than the continual creation of society. It is not so much that we owe something to society, but that society "just is our debts."

But there is also a foundation principle that has not changed in all of that time; from the time of the Axis Wars. It is a principle that I would dearly like to see whether Graebe has picked up on; it is the main reason for wanting to read his book. It is the action that society took against people who did not comply with the "accepted debt" under which they lived. In times past (and I base this on the Ancient Greeks in particular) the consequence of not complying with societal expectations was to be excluded from the protection of that society. That would mean living in what was essentially enemy territory, making and getting as best one could; truth be told it was an effective death sentence.

That prompted the idea that the process of indebtedness has changed indeed, and changed most rapidly over the past 300 years. The bridge at that time between cottage industry to industrialisation saw changes to society, and not least to the processes of economics. That change continues. It is evidenced by the recent (the last 40 years) change toward the "technology based" society.

The debt to society no longer exists. Debt has evolved to the extent that it is now expressed solely in currency terms. Debt is now owed to others, in return for complying with societal expectations.

From the review, it seems that I will not at all agree with Graebe's conclusion, no matter how much I might agree with his rationale.

[Graebe] believes that ... at a moment when capitalism seems unsustainable, the great hope for the future is to turn back to traditional human economies of mutual, loving indebtedness. For Graeber, capitalism is as much a fantasy as any utopian option: "We could no more have a universal world market," he writes, "than we could have a system in which everyone who wasn't a capitalist was somehow able to become a respectable, regularly paid wage laborer with access to adequate dental care. A world like that has never existed and never could exist. What's more, the moment that even the prospect that this might happen begins to materialize, the whole system starts to come apart."

One of the problems of history is that there is no winding back the clock. I do not think that a graceful return to (for example) an agrarian society is any more possible than the Russians or the Chinese have tried to make it. It may come about if there is a cataclysmic close to industrialisation - the kind of cataclysm that made the dinosaurs extinct be it physical disaster or disease.

I think that what I am struggling with is the separation of "capitalism" as an economic process from the underlying engine that "requires" continual growth. To that extent I know that I already disagree with Graebe but I acknowledge that the disagreement could be based upon differing ideas of what "capitalism" is.

If there is an evolutionary step to come from the current and future economic crises it is going to have to start with a re-evaluation of the relationship between society, capital, and the idea of indebtedness. In particular, the idea that societal expectations can be met by possession of material wealth will have to change; the idea that societal wealth can be represented by increasing personal indebtedness will have to change; the idea that there is a free lunch for some may have to go as well.

In the wake of the jonkey...

From Spiegel, by way of ALDaily comes thoughts on the state of politics and, directly from that, of democracy as a political form.

Habermas is an 82 y-o "philosopher" who has some considerable standing in Europe in particular and his name has passed my way on occasion in the past as well.

Jürgen Habermas, 82, wants to get the word out. He's sitting on stage at the Goethe Institute in Paris. Next to him sits a good-natured professor who asks six or seven questions in just under two hours -- answers that take fewer than 15 minutes are not Habermas' style.

Usually he says clever things like: "In this crisis, functional and systematic imperatives collide" -- referring to sovereign debts and the pressure of the markets.

Sometimes he shakes his head in consternation and says: "It's simply unacceptable, simply unacceptable" -- referring to the EU diktat and Greece's loss of national sovereignty.

...

In the past, there were enemies; today, there are markets -- that's how the historical situation could be described that Habermas sees before him. He is standing in an overcrowded, overheated auditorium of the Université Paris Descartes, two days before the evening at the Goethe Institute, and he is speaking to students who look like they would rather establish capitalism in Brussels or Beijing than spend the night in an Occupy movement tent.

...

Habermas accepts all this without complaint. He steps up to the lectern and explains the mistakes that were made in constructing the EU. He speaks of a lack of political union and of "embedded capitalism," a term he uses to describe a market economy controlled by politics. He makes the amorphous entity Brussels tangible in its contradictions, and points to the fact that the decisions of the European Council, which permeate our everyday life, basically have no legal, legitimate basis. He also speaks, though, of the opportunity that lies in the Lisbon Treaty of creating a union that is more democratic and politically effective. This can also emerge from the crisis, says Habermas. He is, after all, an optimist.

...

He rails against "political defeatism" and begins the process of building a positive vision for Europe from the rubble of his analysis. He sketches the nation-state as a place in which the rights of the citizens are best protected, and how this notion could be implemented on a European level.

He says that states have no rights, "only people have rights," and then he takes the final step and brings the peoples of Europe and the citizens of Europe into position -- they are the actual historical actors in his eyes, not the states, not the governments. It is the citizens who, in the current manner that politics are done, have been reduced to spectators.

His vision is as follows: "The citizens of each individual country, who until now have had to accept how responsibilities have been reassigned across sovereign borders, could as European citizens bring their democratic influence to bear on the governments that are currently acting within a constitutional gray area."

(emphasis is mine)

That is based upon a premise that government as a process has changed; that it no longer serves "the people" (as in the catch-cry of old); that the process of government has become the means of perpetuating the careers of the "representatives". There is a strong parallel here with the "statism" cry of the libertarians. There are parallels to the "anti-socialism" of the Republicans.

(Confirmation Bias warning here!)

Very near the top of google (on the very first page) in response to "politic opinion europe economy" comes this -

On the other hand the economic policies exercised by the EU as a whole, with anachronistic, counter-productive, centralized protectionist policies, with an increasingly aging population and with the accumulation of excessive debts at private and public level; left the continent in a position of witnessing too little growth based on too much debt - an unsustainable cycle. The European leadership seeks to address the cancer of debt in all of Europe, both eurozone and EU, by means of issuing more debt. This is in practice what the EFSF is, the "stability bonds" and the ECB monetizing debts will be. There can be no end to the cost once new debt is issued to pay for the old one. Only sustainable growth, emancipated from cumbersome bureaucratic techniques can fix the problems EU is facing.

In another more recent post he concludes -

All this is caused by the denial of the powers of the European (and local) establishment, to accept that the crisis is fundamentally caused by quasi-bankrupt banks and by a single currency that should have never been created, but was produced to satisfy the arrogance of its architects, who thought that they could design an economic project to achieve political ends.

That does beg the question - fairly severely - of the cause of the "quasi-bankruptcy" of European banks. Was it the result of the same lending policies as led to the demise of Lehmanns and the need to rescue several other American banks as well as BOS in Britain? Was it the result of the prospect of default on sovereign debt by PIIGS? He is right in that current policies are aimed more at perpetuation rather than cure.

And at this point I can tie back directly to the Jonkey and his government's policies for the next three years. First contrast between NZ and Europe is that not one of the European governments is proposing the sale of government owned assets. Is this because they do not exist? Someone could help me with that one please.

More to Habermas' point, none of the governments in the PIIGS grouping has said anything at all about the real problems. I like Protos-stavrou's comment on the CAP in Europe - About 40% of the total expenditure of the Europe group is subsidy for a sector that produces 2% of GDP. I mean to say, that definitely comes under the "Say WHAT!!??!!" heading.

It also raises the point made by Whanga-Ray (returning here to the Jonkey) that one of the easier targets for the new government will be universal superannuation. That is likely, but it is also a problem for the Jonkey. The logical solution is to defer the qualification age to, say, 67. There is one major difficulty - that was Labour's policy and has already been put down by Jonkey as not an option. There are some quite attractive alternatives within that major strategy - such as paying less super for earlier take-up, more for later take-up. Will Jonkey sugar the pill? I doubt it.

Whenever the Gnats have talked of reducing government expenditure they have always taken the direct route; first to go are the budget items which will lose the least votes, the items which have received the greatest criticism in the past and so the likes of adult education bites the dust; next in line are those who vote for "them", and so we have the reductions in day-care subsidies, changes to the DPB and Unemployment benefits; then...

There is no question that the Jonkey is almost solely responsible for the ressurrection of Winnie the Pooh. His reported comments (directly attributed to the tea-pot tape and reported by W-t-P himself) that NZ First's supporters were "dying out" have created a multitude of Erinnyes that will be richly deserved for the next three years. To make matters worse for the Jonkey, every step he takes toward monkeying with the rate of superannuation is going to create severe pains in the back seats.

And that comes back to Habermas -

Jürgen Habermas is angry. He's really angry. He is nothing short of furious -- because he takes it all personally.

He leans forward. He leans backward. He arranges his fidgety hands to illustrate his tirades before allowing them to fall back to his lap. He bangs on the table and yells: "Enough already!" He simply has no desire to see Europe consigned to the dustbin of world history.

"I'm speaking here as a citizen," he says. "I would rather be sitting back home at my desk, believe me. But this is too important. Everyone has to understand that we have critical decisions facing us. That's why I'm so involved in this debate. The European project can no longer continue in elite modus."

Enough already! Europe is his project. It is the project of his generation.

...

And then he's really angry again: "I condemn the political parties. Our politicians have long been incapable of aspiring to anything whatsoever other than being re-elected. They have no political substance whatsoever, no convictions."

Hear!Hear!!

And, I guess, that leads down a path toward the "Occupy..." protests of the past few months. The WSJ I think has a recent op-ed talking about "blind campaign donations" of past and the next Presidential election in the US. As I pointed out in my last post, DHC laments the connect between Maori Party and iwi corporations. That is a trend that started decades ago in NZ with the Round Table and similar political "ginger groups" with the last major infiltration coming from the Brethren Church. Forget the "open market" arguments, they are as relevant as climate change in this context.

This from Wiley Post says it all...

Education 102...

"The modern world has removed all barriers to education; there are no longer the class and craft divisions; there is an almost infinite increase in the complexity and depth of the knowledge required to “survive”.The removal of those barriers has created challenges which are still not resolved; they are not unique to NZ; they are the foundation of this debate; they are the “who gets what, why, and how much” of education in this modern world."


As a first illustration of the complexity of the debate, those challenges can not be simply resolved. What ever approach is taken, the words "Bill of Rights Act" spring immediately to mind.

Very simplistically, as soon as "Bill of Rights" gets injected the answer to the "who" becomes obvious. It has to be "ALL" people have the right to education.

And now I have to confess to one of the probligo's worst kept secrets - I have an issue with that "Right", as it applies to education. The personal issue is largely irrational, and is largely based on ignorance.

When we start considering the "who" of education the balance (in my mind at least) has to pick up the Right on one side and Benefit on the other. I have mentioned several times the family we had living next door whose third son was very severely disabled both physically and mentally. As was his Right, he was mainstreamed at school until his death at the age of 14. There is no question in my mind that the benefit gained would have been minimal., To be honest with myself I must lie alongside of that, the fact that I (at the very least) have no objective measure for the judgement. That personal issue aside, the "who" gets benefit of education has to be universal.

The same approach can be taken to the "...what, why, and how much...". The effect of the Bill of Rights (indirectly) is that all should have - at the very least - access to the same level and standard of education. That right applies (my issue above) to all, irrespective of ability, and prospective and expected benefit. I want to stress that "benefit" in this context is in two parts. There is the personal benefit with the prospect of higher future earnings as reward for the skills attained and applied. There is the benefit to society from having continuing qualified people where required and with skills appropriate to the time.

At that point too we start running into the same qualifications that I applied above; there has to be objective and supportable measures to support judgement of ability and benefit. That is a topic of its own to which I shall return. It will be important at that time to remember these contexts as well as others that arise.

For the moment, the universality of access to education leads to another decision point. There is a second balance that must be met. It is the balance between benefit and cost. The benefit side of that we will meet again as I said in the previous paragraphs. The decision that needs to be made is where the cost of education shifts from society to individual.

As a matter of tradition, that change occurred at the end of secondary education and the start of tertiary education. To state that as a matter of "fact" is somewhat misleading as it has become a bit of a moveable feast. Time was when the social funding of universities was comparatively minimal, with correspondingly high fees. Access to university qualification was by means of personal wealth or scholarship. A second level, "poor mans" tertiary qualification was provided through the technical colleges. They provided a bridge for professional qualifications and advanced technical qualifications. The third level, the trade qualification was provided by employers through bonded apprenticeships, combining on the job training with block courses from the technical colleges.

Summarising those -

• Degree and professional qualifications - Personally funded, at facilities provided from societal funding.



• Professional qualifications and advanced trade qualifications - Personally funded and/or employer sponsored, at facilities provided from societal funding.



• Basic trade qualifications - Training provided by certificated employers at no cost to employee. Bonded employees (hence low wage offset to employer).

In more recent times, the bridge between secondary and tertiary education has been changing particularly in terms of the sharing of the cost between society and individual.

For a time in the 1960's the share was shifted very much in favour of the student, the cost being borne in large part by society. The consequence was the appearance of what became known as "the professional student"; people who attended university for a good number of years emerging eventually with qualifications of little use, or in some notable cases after effective expulsion, none at all.

Societal reaction to that "over funding" resulted in the balance being moved in the opposite direction; increasing the personal liability for funding through increased tuition fees. As this shift progressed, other means of encouraging higher education were sought resulting in the introduction of student loans; the subsequent societal monkeying with the basic premise of "user pays"; further shifts in the balance between personal and social cost; pressure for "living allowances" to counter the loss of traditional seasonal employment for students...

The picture that the reader should be getting by now is of a complex rather than simple model of education provision. That was exactly my intention as many of the perceived problems with education these days are in fact consequences rather than causes.

Illustrating that point is relatively simple.

Society's measure of "potential benefit" has been imposed through testing of scholastic achievement at various stages along the path from fundamentals to eventual qualification. The potential of each individual has been (in theory at least) assessed at three critical points -

• At the end of primary education. This to ensure that pupils (in theory at least) entering the secondary level had the fundamentals of reading, writing and arithmetic, a reasonable level of general knowledge, and the ability to learn.



• At the end of compulsory education. This is set at age 15, which corresponds (roughly) with the 5th form year. School Certificate was seen to have the fundamental flaw of having half those sitting the examination fail. Actual examination results were scaled in order to achieve this consequence. There was a second failing in the process in that the examination was not compulsory. As a result, a significant number of students were leaving school without any assessment of their ability.
  
  Those successful in that School Certificate examination "earned the right" to a subsequent year of free secondary education at the end of which came another, similar, examination of attainment; again with the 50% fail cut-off. This time the examination was for University Entrance; success giving a student the right to undertake a university education. At the same level, and after a further year of study there were public scholarships awarded to the highest achievers.



• The third critical qualification comes at the completion of tertiary education; at whichever level that might have been undertaken.

The other side of "potential benefit", the trade-off, is the expectations of the student. Whether "free" education or expensive, there is the need for the system to provide the quality that should, that must, be expected by the student (or his parents).

The qualification must be valid evidence of knowledge and ability. There must be acceptance of the quality of the qualification when presented to an employer. The validity and applicability of the qualification to employment should - in theory at least - have an impact on the value of that person as an employee. That is the relatively simple mechanism by which the student gains benefit from the endeavour of attaining the qualification.

That, as I see it, is the general cycle of economic benefit that comes from an effective education system.

• Society provides a basic education to all free and as of right.


• Society gains the benefit of having people with skills that are appropriate and of value.


• People with skills and qualifications command a higher price than those without.

That economic cycle is relatively simplistic as it ignores external (to society) pressures and pricing. So if one wishes to add complexity at this level, one can examine the pricing pressures resulting from the usual supply and demand mechanisms for skills and/or qualification. This is evidenced in a wide range of different problems faced within NZ at the moment; the general shortage of junior doctors with incomes in Australia and elsewhere considerably higher than in NZ; the difficulty of persuading those doctors who do remain in NZ to shift out of the major centres (where incomes are higher) into provincial and rural centres; the difficulty of obtaining qualified senior medical staff to provide public health services at a cost acceptable to society. It is not just a case of restricted supply. The barriers are necessarily high. The cost of obtaining suitable qualifications is likewise necessarily high. The return offered from outside is higher than can be sustained internally.

At this point I should not have to specifically point out the underlying over-simplification of Karl du Fresne's rant about the current negotiation of teachers salaries.

There is something fundamentally wrong with the system when a central Auckland college has to advertise a position for six months before getting an applicant. What is even worse is when the only applicant turns out to not have adequate knowledge to provide the level of teaching required. This is not to argue that society should yield totally to the wage demands of teaching unions. What is essential is that society is aware of the connection between the economic returns to graduates and the value of the education that they provide to society.

At the same level, there is something fundamentally wrong with society when a measurable portion of the population can regard education as a waste of time and effort. For this group, holding qualification at any level provides no benefit; employment levels are low to begin with, in some instances unemployment can be as high as 30%; incomes are never far from minimum wage irrespective of qualification; there are proven instances where higher income can be obtained from unemployment benefits than from paid employment. What that indicates more than anything else is that the demand for that occupation or class of employee is swamped by the available supply.

But to return to the topic of teachers after that little wander into the wilderness -

The current qualification requirements for teachers are that they be degree qualified; in the case of secondary teachers two university degrees are of benefit, one in Education and the other in the specialty that person wishes to teach.

The present societal attitudes to graduate qualification - this returns to the balance between public and private funding of university qualifications - has resulted in the situation where all graduates start their working life with a government mortgage on their income. The size of that mortgage varies; the highest are in medicine and dentistry, the lower in commerce and some science disciplines.

If we consider at the same time the difference in return paid in NZ compared with Australia for example - a difference sometimes stated as being in excess of 100% - the obvious and inevitable consequence of the current policies is a goodly number of NZ graduates exporting themselves, leaving behind shortages of well qualified people in critical professional occulations and the accumulated mortgage held by society on their prospective income.

"Lose - lose" as they say.

And remember, as you mull that point over, some of those graduates being exported are well qualified potential teachers that NZ needs in its secondary schools. Their first year's income under NZ teaching scales (for two degrees) would be no more than some $45,000.

I work with senior clerks, no qualifications other than experiance, doing fairly routine office work, with no responsibility for controlling 30 or so unruly teenagers, who are paid as much as that.

All of which takes us full cycle on du Fresnes' rant against teachers and the negotiation of their payscales.

On economic growth...

With the G20 or whatever the most recent international economic talk-fest is being called in Toronto this past few days - along with the obligatory silly-shirt day - thoughts are filtering through the ol probligo's neurones carrying tags like "growth", "recession" and the like.

And I keep coming back to the same brick wall.

How can there be continuing "economic growth"? What is the basis for the measure of "economic growth"?

NZ has a record of our economy growing at an annual rate of 1.8%. Over the same period, China's economy has grown at a rate of some 9.5% p.a. I have to presume that these measures exclude the impact of inflation, currency changes, and the other "influences" that impact upon monetary measures.

Y'see, if the NZ economy has "grown" by 1.8%, does this mean we have spent and consumed that much more (very likely) or produced and made that much more (less likely).

Underlying that question is an even more fundamental bother. Is there a limit to the true value of the global economy. If there is, then the fight to increase "growth" has to be considered as a change in balance; more to one meaning less to another.

The immediate suspicion is that is only part of the answer. It is as likely that the limits are in the measurement of "wealth" and "total resource".

Thoughts?

On taking quotations out of context -

How many times have these words of Adam Smith been quoted in support of the neo-capitilist ideals of disaffected Americans -

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love."

Me old mates at ALD tagged a commentary at New Statesman that picks up this point and correctly places it in the context of his earlier "The Theory of Moral Sentiments".

Read the article for the detail. I recommend it.

What does deserve quotation is another (equally out of context) relating to the "political economy" from Adam Smith -

..."first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and second, to supply the state or commonwealth with a revenue sufficient for the public services".

Next thing will be members of the American right quoting the likes of Karl Marx's economic theories in support of their neo-neo-capitalism. The driver behind such a move might well come from this thoughtful article from Der Spiegel -

Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.
...
A Huge Bubble

The world was saved, temporarily at least, but since then it has accumulated more debt than ever before in peacetime. The national deficits of the 30 members of the Organization for Economic Cooperation and Development (OECD) have grown almost sevenfold since 2007, to about $3.4 trillion today. Their total debt burden has also grown dramatically, to a record-setting $43 trillion. In the euro zone, national deficits have even grown 12-fold in the same time period, with the euro-zone countries accumulating $7.7 trillion in debt.

The current government debt bubble is the last of all possible bubbles. Either governments manage to slowly let out the air, or the bubble will burst. If that happens, the world will truly be on the brink of disaster.

When Greece faces a possible bankruptcy, the euro-zone countries and the IMF come to its aid. But what happens if the entire euro group bites off more than it can chew? What if the United States can no longer service its debt because, say, China is no longer willing to buy American treasury bonds? And what if Japan, which is running into more and more problems, falters in its attempts to pay for its now-chronic deficits?

The conditions that prevail in Greece exist in many countries, which is why governments around the world are paying such close attention to how -- and if -- the Europeans gain control over the crisis.

Now that is frighteningly close to some of the ol' probligo's worst fears. Galahs like MK should, but won't, listen.

Time to go play Gorillaz...

How a Stern response works - 1

Probligo, There is no simple answer; however, the numbers you show include all the free passes given to illegal aliens [1] and moochers living off those who actually do pay their fair share[2]. That having been said, another reason for high costs have to do with greedy lawyers making a fat living off civil court cases filed simply to make money rather than to correct some fault which may or may not have caused injury to their client. Regardless of the outcome, doctors have to protect against such suits, hospitals raise their prices and so on and so on [3].

Having watched our government screw up almost everything they get their hands on, what is to keep them from destroying the health care system far below any standard we now have? Nothing! [4]


This isn't about government providing health care so much as it has to do with government taking control of health care which in turn turns citizens into subjects. Subjects are much easier to control when you have their health controlled.[5]

Aside from the cost of doing business, there's another detail, that of Agency, the right of individuals to act on their own without having to bow and scrape to anyone.[6] Our system, as inefficient as it is, mostly due to government intervention I might add, does work to supply the best medical service anywhere in the world [7] as proven by the fact that world leaders come to the USA for treatment when the going gets ugly [8].

No, you can have your government health care doled out [9] and may you always enjoy good health; I'd have preferred the socialists we have here to have moved to a country which would more suit their desires and to have left the best form of government alone [10].

[1] Valid point number one. Do those illegals have green cards, TF? Alternatively, you have agreed that you would not find carrying a photo-id as being an insult to your freedoms (despite the fact that two of your most notorious enemies in Hitler's Germany and Soviet Russia had the same government controls). Why should the health system not ask "green card, please". Or perhaps you could have your number tattooed on your forearm! That would be even better, never leave it at home!

There is the first grouch here as well. It is the practice of using politically correct generalisations such as " all the free passes", "illegal aliens" and " those who actually do pay their fair share".

Now I do understand the category you think of as "illegal aliens". It is a very extensive group that ranges from Mexican wetbacks who pick fruit in California all the way through to ET himself. But in truth, what proportion of the total population would they represent. Here in NZ (yes, people do try very hard to immigrate here illegally) they might number in their hundreds. A "clean out" of illegal Polynesians(in the late 1970's), most Samoans and Tongans, in what became known as "The Dawn Raids" resulted in about 800 people being sent home and about 2000 being granted permanent residence eventually; in the main justified by the fact that they were employed in jobs no one else wanted.

Perhaps, just for me, you could explain your concept of "their fair share"? Is that just a politically correct code name for "only for themselves"? or perhaps "no more than I absolutely have to"? Or is it more a convenient way of dropping out of an unsupportable position?

[2] I have already dealt with the politically correct generalisation here. Still, valid point number two. NZ has its share of "free-loaders and moochers" too. It is probably as big a problem here as it is in the US.

Our current government (it is Conservative to the extent of being "right of centre) is arguing that that number includes women whose men have walked out (to Australia) to avoid paying family support, those teenage girls who get pregnant and whose families refuse to support them, and other instances of one parent families. There are some 40,000 on the DPB at present, about 1% of the total population.

Do you include unemployed in that total? Yep, they are freeloaders too.

How is about youngsters no longer covered by their parents insurance, but who are not able to afford their own insurance?

How about those aged over 55 whose insurers have told them "you are too much of a risk - insurance declined".

When did you last look at an insurance proposal form? Ever seen that question "Have you ever had a proposal or policy of insurance declined or cancelled? If yes, please provide full details." You automatically write or tick off "No" and pass on to the next. How much do you really know of insurance law? The principle of a "fiducial relationship"? The duty you have of full and relevant disclosure, and the consequences if the insurer gets the slightest whiff that you "forgot" something relevant.

[3]Valid point three. How to overcome the litigious nature of American life? Why does anyone in the US become a doctor? I certainly would not want to... By all means expect professional standards of health care.

But what you are getting is truly what you want - an unregulated society. After all, if locksmiths do not need to be registered, why should you expect doctors to be the same? It impinges on their God-given right to work as and how they please. Caveat emptor prevails. Pick the wrong one and you might be able to get yourself rich. Sue someone just because he cut your fingernails instead of curing your in-grown toenail. Who cares?

[4] You mean you are happy with the way things are? I'll repeat my previous question, TF. What will you do when you can no longer afford your health insurance? Go on Medicaid?

If it is broken, what have your political champions ever done to try and fix it? Anything? Ever? Why did their solutions not work?

[5] Political claptrap number three. If a Democrat government ever changed the system so it applied only to members of their party, what would be your solution? Mine would be armed insurrection.

[6] Political claptrap number four. I had heart surgery two years back. In what way did I have to "bow and scrape" in order to have that (life-saving to me) done? It was two spits better than my private insurance that refused to fix it "because it is a pre-existing condition". OK, I could have sued them, but there is no way I could afford to... That would have cost more than the surgery.

[7] ...providing US citizens with the 46th highest life expectancy in the world. If that is what the best can do, give me our second-rate health system any day.

[8] Yep, state leaders from places such as Israel, Iraq, Zimbabwe and Russia. Name one world leader from the EU, or any of the members of OECD, who has gone to the US for health care. There are none. They use the health system in their own country.

[9] Political claptrap five. Doled out? No. Sufficient resources to meet demand? Yes.

[10] Political claptrap six. You have the government and system that you deserve.

What is becoming apparent, TF, is that for reasons you can not explain - other than the fact that he is a Democrat - you do not agree with what Obama is doing. It becomes a matter of opposing simply because he is "one of them" and not "one of us". The important thing is to sling around as much shit as you can in the hope - vain hope I believe - that more of it will stick to others than does to yourself.

Your simplistic response that "the money does not matter - I leave that to my wife and my accountant" is clear evidence of that.

Holiday occupations... Animal Spirits 1

I made mention (if I recollect in a comment to ATOW) that the Christmas break was going to include the absorption of "Animal Spirits", a comparatively short summary of "human psychology and the economy and why it matters for global capitalism", written by George Akerlof and Robert Schiller.

The title originally comes from "spiritus animalis" which in its old (mediaeval) useage meant "of the mind" or "animating force"; the fundamental life force of man. In its modern use it has attached to economics - blame Keynes for that - as a reference to a restless or inconsistent element in the economy.

A & S summarise those animal spirits as -

Confidence. A&S use that specific term as it directly and intentionally connects with Keynes' "multiplier effect". I personally think that given some of the twists used by A&S to mould "confidence" to their extension of Keynes' useage it might have been better to use "belief" rather than "confidence". The essence is the propensity for humans to follow a persistent line of thought irrespective of its truth and irrespective of positive (optimistic or growth) or negative (pessimistic or recession) trend.

Fairness. In NZ the last statutory attempts (by Auntie Helen) at resolving relationships between employers and employees required of both sides that they engage in negotiations in "good faith". As a legal codification it agrees fairly well with A&S's thoughts on the setting of wages. Essentially it leads to the discussion of the relationship between unemployment, wage levels, and inflation.

Corruption. Actually A&S include "and anti-social behaviour". I do not think that is neccessary; it is a redundancy. That it is very quickly reduced to the single word might indicate that they thought so as well. I occurs to me that the meaning of "corruption" can also be extended. There is the neo-classic meaning of "bad dealings" connecting to the "antisocial" idea. There is a second, older, and perhaps even a more appropriate meaning as well; in terms of "corruption of the flesh". Those with older heads will make the direct connection to death, but there is also the "corruptions" that are self-inflicted - the moral corruptions of the flesh.

Money illusion. This is an interesting one. It is the ability of humans to relate "value" to monetary numeration, but at the same time being unable to comprehend the impacts of inflation and deflation on the value of the monetary unit. So, the quantum of $1 million can be understood, but the impact of monetary inflation (or deflation) at 3% per annum for 5 years on that sum is not. (As it happens, that would make the "value" of the monetary unit reduce by about 17% or prices would have increased by some 20% over the five years).

Stories. The one word term is used by A&S as a shorthand for "sense of reality, who we are and what we are doing". Personally I think it is a very powerful and concise term and especially since it links with the first of "belief". Also in that context it gives rise to an extension into many other (than economics) facets of human existence that warrant further examination; at the very least by this old and somewhat rejuvenated probligo brain.

Interesting things discussed along the way -

The multiplier effect originally proposed by Keynes became the "Hick's multiplier" and as a result of the latter's (further) analysis became attached almost exclusively to monetary and GDP effects within the economy rather than Keynes' intended "confidence multiplier".

Samuelson thought that Keynes (in some instances) went too far and in others not far enough. That the two were "opposed" is not as significant as how much they were actually in agreement.

The classical Adam Smith view of the invisible hand creates a useful mechanism for examining the fundamentals. However it is only useful in the explanation of those fundamentals. Samuelson I recall wound his way through this minefield by using the "reasonable man acting in a reasonable manner" as an essential of the prim misses required to reach a delusion. That any man acts reasonably at all times may be so, but reason is not always perfectly logical. "Reason" is not part of the definition; instead "reasonable" is the mean of human behaviour.

The main discussion in the book centres on the reasons why "conservative" economics does not accurately predict either the occurence or the progress of "bubbles"; primarily because the impact of the spiritus animalis on the real economy is ignored.

All in all it is a thought-provoking read. Worth the effort and providing a somewhat different light on recent macro-economic events.



UPDATE - to add after-thoughts under the heading of "corruption"; to add the closing paragraph.

Essentially, what Watts (what? Only three wots? That’s not very bright!) should be arguing is that the global financial system got to the point where:

• It is self-sustaining and self-replicating.
• Self-referential and circular functions had become undetectable and unmeasurable.
• Responses of the system to external stimuli were becoming increasingly chaotic as a result.

Then it is not a case of individual companies being “too big to fail”. That is a political crock, reasoned to justify governmental intervention of a particular kind and for equally political purposes. At the political level, that kind of intervention can be justified provided that the rationale is honest – it is for political reasons that A is too big to fail. The cause of the failure might well be unforeseen circumstances arising from the global financial system. That is accepted. That is not the reason for the intervention; that is political, whoever does it.

Intervention, at its best, can do no more than try to hold the system in its current form of “equilibrium” whatever that might be. Any action that might disturb that equilibrium runs the risk of the global system going haywire or imploding. No one can point at any part of the global financial system as say “There is the initial cause – the tree that fell on the powerline”, as Watts has pointed out. However, his attempt at divining the cause to Lehmans’ door is as correct and effective as blaming the Pharoahs.

What must be considered here is that if the US government allowed Lehmans (or any of the other “too big to fail” financial companies) to fail (and similarly in Britain, in Japan, in Europe) then the consequential catastrophic failure of the global financial system would have been laid squarely (and fairly) at the respective government’s doorstep. To not recognise that as a primary political motive is shortsighted and just plain wrong. If the catastrophic failure had occurred (as it may still) the outcome for the likes of the US and other western nations would be bleak indeed. The main beneficiaries would be those economies with little to lose and the resources to take charge – led by China and India, perhaps Russia and South Africa if they could get their political houses in order.

The second consideration is that China currently owns some USD4 trillion of the US in the form of US Government Bonds. Add to that the likely indirect investment in the US private sector (by investment in banks that have on-lent the funds) and a very large part of the US is “owned” by (mortgaged to) China. And it must be said that the current Administration would be responsible for only a small part of that debt. The best part of it has gone up in smoke (literally) “in defence of freedom and the American Way” in Iraq and Afghanistan.

So, to all those who want to criticise their governments for their actions and reactions to prevent the potential collapse of the global financial system I want to propose the following –

1. If the present system is allowed to collapse, then there has to be some way of rebuilding it with the safeguards that are missing from the present system. As there has been very little in the way of commentary on what form it may take, it is useless to try and impose this or that political outlook on the future.
2. If the present system is allowed to collapse, the “owners” of the new system are likely to be those who have the resources – natural and/or economic – that will give them the power to control the system. As I have said, that could well lead to the present “masters” being overturned with totally unpredictable results.
3. The difficulty with the present system stems from size, rather than individual elements. I have posted on that aspect previously, and it requires no repeating here. It is the comprehension of the size that is the problem.

In the first episode I compared the global financial system with a Persian Carpet.
We can see the pattern, the inter-relationships, made by the thousands of individual tufts. We can even estimate the total number of tufts that there might be in the whole carpet.

But what happens if we examine one tuft. Enlarge it many many times – holy Mandelbrot!! It looks almost like the original carpet! This time around though, instead of looking at the whole carpet we have a small group – perhaps a nation, a city, perhaps a commodity market, perhaps an international company. It interacts with neighbouring tufts, with the “tufts” from which it is made, and via the carpet backing with other more distant tufts.

Now, repeat the same exercise. This time instead of organisations as the basis, consider the idea of information. The Persian carpet is the “summary” of the global financial markets. Think of it as a financial report. The individual tuft is the financial report set of an individual organisation. It presents information that is based upon a large number of individual transactions. Each of the threads within that tuft could be a category of income or expense, or transactions with another tuft. One has to know the rules for the tuft (how it works, what it contains) before it makes sense. In the context of the total carpet that tuft means very little. Removal of the tuft does change the carpet, it diminishes it.

Now, if you want to chage the pattern of that carpet, where do you start? Which tuft is the first to be moved, or removed? If you come across a tuft that is particularly worn, how do you go about replacing it so that the pattern is maintained, the integrity of the carpet remains?

Financial complexities... 3

The third factor that I want to introduce here is that of “self-referential” systems. Now this is something that is very easy to illustrate. It happens to anyone who uses complex or extensive spreadsheets. All of a sudden things come to a grinding halt with the succinct little message that you have created a “circular reference”; a formula is dependant apon a formula that depends upon… the answer of the formula it is trying to calculate. Now spreadsheets can not continue as long as that circular reference exists. It can not work round it. It stays stopped until the circle is broken.

But the truly complex system, such as the financial system that Watts is discussing, can depend upon such circular, self-referential, relationships. Note, please, this differs from feedback. It is the system itself changing and modifying as its complexity increases. The development of the whole derivatives market was impossible 100 years ago except in very small markets. It is the increasing speed and complexity of global communication (another factor that Watts refers to but does not develop) that has allowed the derivative products market to reach the importance and the instability that has led to the current crisis.

So, that is how close Watts got himself to third, to a three base hit. He was within a fingernail of success.

The homer in this is in a quite different direction. It comes from a tv programme, a news excerpt I think that led to a “re-enacted instance” involving the purchase of a car.

Essentially, when you are choosing between two or more alternatives there is a limit to the amount of relevant information the brain can use to make the decision. There are any number of systems and research ideas into how that limit can be overcome; ranging from processes to determine the most important factors in the choice to ranking each alternative between chosen factors.

That limit, given that no “artificial aids” are used, cuts in at four factors and removes any reasoned decision at six factors. So, in the car example a person provided with the full technical specs of two cars will revert to “four door wagon manual and I like the look” or “I prefer Toyota” rather than a reasoned analysis of make and model, engine capacity, safety, fuel consumption, drivetrain, wheel/tire size, acceleration, and all of the other information provided.

So, in making an investment decision it is far more likely that the investor will look at a small range of data, will close the paper, and run with what his brain tells him “feels right”. Even given full information, it is likely that the decision will not be fully rational.

This is being borne out time after time in the past two years by people who have invested in Finance Houses at the sharp (high-risk) end of the market with the same confidence as they might invest their money in a bank at less than half the offered return. “Safe as houses!”

And they were wrong. And so were their Financial Advisers. And so were the salesmen of the products being offered. And it goes on down the line as has been proven by so many in the past two years including Watt.

But no one has asked the question “Why were they wrong?” There are many who were looking no further forward than the next commission check, to be sure! There were many who just believed, without question, what they had been told. A large number would have been taken in by (what I know as) “The Brightest Men in the Room Syndrome” (TBMRS).

Even TBMR would have been operating close to the “six level” – choosing out of those six the factors that best suited their sale and which (they thought) were the strongest reasons.

It is important to note here that this leaves out intentional dishonesty. We are talking of the mythical “reasonable man” here and not the snake-oil charlatan (of which, incidentally there seems to have been far too many). But that is how TBMRS works as Enron proved.

To return to the point, Watts is correct in that the complex system is at fault. For any of the reasons he has given, and for the few others I have run through here. As he concludes –

Government regulators telling firms they can't grow or innovate sounds like dangerous meddling in free markets. But there are at least three reasons to think that it is reasonable.

First, there is already a precedent for precisely this kind of government intervention - namely anti-trust law, which effectively guards against firms growing so large that they stifle competition. Perhaps what we need is an "anti-systemic risk" law that would aim to avert systemic risk before it is too late. No doubt firms that are denied the right to grow under this law would complain; but firms complain about anti-trust rules as well, and somehow our free market system has survived, in part because the beneficiaries of anti-trust rulings are often smaller and more innovative.

Second, the current crisis has demonstrated that markets do not automatically regulate systemic risk any more than they automatically guarantee competition. Pragmatically speaking, therefore, government intervention is required to prevent markets from destroying themselves, and the relevant question is what kind of intervention is effective: preventive management, or after-the-fact rescue.

Third, and most fundamentally, there is something badly wrong with the kind of free market that ends up at the mercy of a single firm. Failing to deal with systemic risk, in other words, creates a world that is not only uncertain, but also unjust, in that individual firms can generate immense profits by taking risks that everyone else ends up bearing as well. Taking free-market principles seriously, therefore, requires us to acknowledge that firms that are "too big to fail" are really too big to be permitted to exist.

And, I regret, that is a silly gism based upon at least two delusions. (Don’t you just LOVE Dodgson?).

Watts’ first conclusion is right, there is precedent for governmental intervention in markets.

His second is really the question he set out to answer, though I suspect that he and many others will have forgotten that. Further, it is in the nature of markets to develop in a manner that makes choice and determination more rather than less difficult. I give credit that he speaks of the markets “destroying themselves”.
The third is just wrong. Until the point is reached where one firm has total control of a market, there has to be equilibrium. That point of stability requires the composition of the market to act as individuals. Lehman was not in that position. Not one of the players within the international market was “too big to fail”. The system would have continued without Lehman had they (or any other individual component) been left to die.

To blame the downfall of the global financial system on one firm, such as Lehman, as he and so many others have done is nothing short of simplistic nonsense. Watts had the right line – the complexity of the system – and failed to follow it through. It was not one firm, nor was it one product such as loan derivatives or short selling.

The “culprit” is a system that has become so large and so complex that nobody can say that they “understand” or can “predict” its total operation and outcomes. The internal relationships are such that even small changes in one factor can lead to large swings in seeming totally unrelated outputs.

Because of that complexity, fault-finding and remedies are reduced to the same level as mediaeval medicine, “Take this and if it doesn’t kill you it might cure you. At best it will have no effect”.

Essentially, what Watts (what? Only three wots? That’s not very bright!) should be arguing is that the global financial system got to the point where:
• It is self-sustaining and self-replicating.
• Self-referential and circular functions had become undetectable and unmeasurable.
• Responses of the system to external stimuli were becoming increasingly chaotic as a result.

Then it is not a case of individual companies being “too big to fail”. That is a political crock, reasoned to justify governmental intervention of a particular kind and for equally political purposes. At the political level, that kind of intervention can be justified provided that the rationale is honest – it is for political reasons that A is too big to fail. The cause of the failure might well be unforeseen circumstances arising from the global financial system. That is accepted. That is not the reason for the intervention; that is political, whoever does it.

Financial complexities... 2

The point here is that the output from the systems that Watts is discussing is comparatively, deceptively, simple. It is intended to be so that users – the people who invest money in the system – can understand the levels of risk impinging their investment and the value their investments have earned. It is the Persian carpet that is hung on the wall. It is an agglomeration of pretty colours and an apparently organised pattern. Understanding the detail that lies behind it, the seed values, the process, is beyond the understanding of any person.

The output is prepared from the accumulation of detail into increasingly generalised categories,

- by people who “understand” what they are calculating,

- but can not necessarily grasp the enormity of the detail and risk that they are given as inputs

- by people who individually work to prepare summarised number descriptions of the detailed data for which they are responsible. (Whew!!)

No one can describe the output from these systems as “wrong”. They are not. They are a logical and systematic accumulation of the financial data of the business. They do not “fail” as a result of the incorrect process or interpretation of individual transactions, or even an individual category of transaction.

The difficulty, and Watts has touched this, is placing that output into the world-view of the larger system of many similar reports and how they might interact.

The delusion is, therefore, that an objective investor has little chance of accurately assessing either the “value” of his return, nor the level of risk that he is investing against.

Again, simplicity can be surprisingly complex.

The intent here is to introduce the principle of feedback. In the system proposed by Watt, there are innumerable feedback points. Again that is a point on which he has touched, primarily from the aspect of governmental review and control of the system.

If feedback is introduced to the system at the wrong point, or in the wrong fashion, then the resulting consequences will not be as planned or intended. That, in Watt’s example, is just what is happening.

That is the major line of criticism aimed at virtually every governmental attempt to minimise the (national, economic, political, individual, business... take your pick)impacts of the collapse of the global financial system.

The third factor that I want to introduce here is that of “self-referential” systems. Now this is something that is very easy to illustrate. It happens at least once to anyone who uses complex or extensive spreadsheets. (My favourite at work has over 65,000 formulas, some of them nested to three or four levels). All of a sudden things come to a grinding halt with the succinct little message that you have created a “circular reference”; the current formula is dependant apon a formula that depends upon… the answer of the formula it is trying to calculate. Now spreadsheets can not continue as long as that circular reference exists. It can not work round it. It stays stopped until the circle is broken.

But the truly complex system, such as the financial systems that Watts is discussing, can depend upon such circular, self-referential, relationships. Note, please, this differs from feedback. It includes the system itself changing and modifying as its complexity increases.

Those changes might internally created (evolved) to cope with or provide new opportunities. The development of the whole derivatives market was impossible 100 years ago except in very small markets. It is the increasing speed and complexity of global communication (another factor that Watts refers to but does not develop) that has allowed the derivative products market to reach the importance and the instability that has led to the current crisis.

They might also be imposed from without - environmental pressures requiring adaptations. The biggest and most obvious are government controls. The difficulty here is that if the control, the environmental influence is against the direction the systems is wanting to adapt then the result is a series of work-arounds, further evolutions which accept and ameliorate the impact of the changed environment.

So, that is how close Watts got himself to third, to a three base hit. He was within a fingernail of success.

Financial complexities... 1

ust occasionally my old mates at Arts and Letters turn out a truly thought-provoking link – such as this from Boston Globe with Duncan Watts suggesting that systems ( he uses as examples the power grid crises in 1996 in Oregon and 2003 in the Northeast states) can become over-complex for which he suggests the term “systemic risk”.

Over the past year we have experienced something similar in the financial system: a dramatic and unpredictable cascade of events that has produced the economic equivalent of a global blackout. As governments struggle to fix the crisis, experts have weighed in on the causes of the meltdown, from excess leverage, to lax oversight, to the way executives are paid.
Although these explanations can help account for how individual banks, insurers, and so on got themselves into trouble, they gloss over a larger question: how these institutions collectively managed to put trillions of dollars at risk without being detected. Ultimately, therefore, they fail to address the all-important issue of what can be done to avoid a repeat disaster.
Answering these questions properly requires us to grapple with what is called "systemic risk." Much like the power grid, the financial system is a series of complex, interlocking contingencies. And in such a system, the biggest risk of all - that the system as a whole might fail - is not related in any simple way to the risk profiles of its individual parts. Like a downed tree, the failure of one part of the system can trigger an unpredictable cascade that can propagate throughout the entire system.

There is no need to retrace the whole of his article though I do intend to return to his conclusions.

Overall, he has covered the bases fairly well, provided that you are happy with a two-base hit. The idea he has used is a propos and makes for an interesting read.

The “Out” call at third though comes because he has missed an extremely important factor; one which does not in any way contradict what he has said but in fact is an augmentation of the prim misses he has started with.

It starts with the “complex system”. Now I, and anyone else with half a brain knows what Watts is talking about here; essentially a system which has a large number of inter-related and inter-acting nodes, where many of the relationships and interactions are not clear or well defined.

Being an old-time computer-wallah, and I mean OLD, “systems” has a flavour to it which turns my brain to parallels from that kind of world. So, with your patience I will indulge.

“Complex” systems can be extremely simple. The complexity can come from a number of different factors.

The most critical of these must be the system “Output”. Many moons back I taught myself to write Q-Basic, a language used by a number of accounting systems as well as the general home-writer. One of the programs I wrote with it used a model from Scientific American. It was two fairly simple formulas of two factors and a geometric (if I remember rightly “atan”) function. By taking the “answers” to the first calculation and feeding those back to the formula it was possible to print to the screen (in colour eventually) a veritable Persian carpet. Given the same two seed values, the result was always the same – the same carpet was generated. By choosing a different pair of seed values though you could arrive at a totally different carpet, or nothing at all.

Now that original model came out of the first days of “chaos calculation” and re-iterative functions. Who remembers Mandelbrot, and fractals these days other than Wikipedia? It was used to illustrate that a reiterative function could, in time, bring results that varied hugely from the initial calculations and even from the immediately prior calculations.

The point here is that the output from the systems that Watts is discussing is comparatively, deceptively, simple. It is intended to be so that users – the people who invest money in the system – can understand the levels of risk impinging their investment and the value their investments have earned. It is the Persian carpet that is hung on the wall. It is an agglomeration of pretty colours and an apparently organised pattern. Understanding the detail that lies behind it, the seed values, the process, is beyond the understanding of any person. The output is prepared from the accumulation of detail into increasingly generalised categories, by people who “understand” what they are calculating, but can not necessarily grasp the enormity of the detail and risk that they are given as inputs by people who individually work to prepare summarised number descriptions of the detailed data for which they are responsible.

This is the week, that was...

I was, earlier in the week, going to do a blast about an article that appeared in the Herald. After digging around, it became apparent that the only (at that time) other sources were Ha'aretz and the Beeb. There was no comment in Jpost, apart from one or two rather desultory letters to the Ed that skirted around... All of that seems to have gone, though the Beeb article still eads the news.google search engine. The Jewish Weekly also has the story - for those who might be interested.

This morning, I turn to the old fav ALDaily and there is an echo of the response I posted a couple weeks back to TF's item on narcissism.

Rather than being written by a "world reknowned expert on narcissism" (the one whose only qualification is an off-the-shelf Doctorate in "Philosophy of Physics")this is from a journalist, Emily Yoffe, who has taken the time to research

This is the cultural moment of the narcissist. In a New Yorker cartoon, Roz Chast suggests a line of narcissist greeting cards ("Wow! Your Birthday's Really Close to Mine!"). John Edwards outed himself as one when forced to confess an adulterous affair. (Given his comical vanity, the deceitful way he used his marriage for his advancement, and his self-elevation as an embodiment of the common man while living in a house the size of an arena, it sounds like a pretty good diagnosis.) New York Times critic Alessandra Stanley wrote of journalists who Twitter, "it's beginning to look more like yet another gateway drug to full-blown media narcissism." And what other malady could explain the simultaneous phenomena of Blago and the Octomom?

These days, "narcissist" gets tossed around as an all-purpose insult, a description of self-aggrandizing, obnoxious behavior.

And too, can I add, as a politically charged epithet for people whose politics are somewhat different to one's preference and whose appearance is far more widely praised than one's own.

She rather spoils the line of thought with this;

A recent study titled "Leader Emergence: The Case of the Narcissistic Leader" describes how narcissists have skills and qualities—confidence, extraversion, a desire for power—that propel them into leadership roles but that when true narcissists are in charge, other aspects of their makeup—a feeling the rules don't apply to them, a need for constant stroking—can have "disastrous consequences." Yes, we're talking about you, former Illinois Gov. Rod Blagojevich. After Blagojevich was caught on tape trying to sell a Senate seat, he reveled in the opportunity to appear on talk shows, making the case that he himself was a victim—self-pity being a favorite narcissist refuge.

A line from a New York Times profile of him is as trenchant a description of narcissism as is found in most psychology textbooks: "[He] is unapologetically late to almost everything, and can treat employees with disdain, cursing and erupting in fury for failings as mundane as neglecting to have at hand at all times his preferred black Paul Mitchell hairbrush." There it all is: the sense that other people don't matter, the belief others are instruments for the narcissist's use, the self-admiration.

Well, at least she chose a valid instance.

Another of ALDaily's links led to this piece from Geoff Mulgan ; one which , I recommend, requires reading and careful thought; one which, I suggest, is in the realms of far-sighted analysis that we should see far more of in future. Yes, TF, he is a "socialist" but he does not present socialism as "the answer". He raises very valid, and to the point, questions.

The US banking system faces losses of over $3,000bn. Japan is in a depression. China is headed for zero growth. Some still hope that urgent surgery can restore the status quo. But more feel that we are at one of those rare points of inflection when nothing is the same again.

But if one dream is over, what other dreams wait in the shadows? Will capitalism adapt? Or should we be asking again one of the great questions which has animated political life for nearly two centuries: what might come after capitalism?
Only a few years ago that question had been parked, deemed about as sensible as asking what would come after electricity. Global markets had pulled China and India into their orbit, and capitalism’s triumph appeared complete, with medievalist Islam and the ragged armies that surround the G8 summits jostling to be its last enfeebled competitor. Multinational companies were said to command empires greater than most nation states, and in some accounts had won the affiliation of the masses through their brands.

Yet the lesson of capitalism itself is that nothing is permanent—“all that is solid melts into air” as Marx put it. Within capitalism there are as many forces that undermine it as there are forces that carry it forward.

His conclusion -

Capitalism’s crisis is, of course, a global one, and has shown up the limitations of the global institutions that took shape half a century ago. China is set to become a dominant player in a strengthened IMF and World Bank, followed by India and Brazil. The G20 is edging out the G8 as the club that matters. And waiting in the wings are possible new institutions to police and manage carbon, to handle everything from global migration to the regulation of biotechnology, alongside less formal institutions to help the world’s public to engage, from e-parliaments to global campaigning platforms like Awaaz, an online newspaper.

No one can know which of these possibilities will come to fruition. There are in principle an infinite number of directions social systems can take. But history suggests that at key moments evolution is highly selective. Only a few models turn out to be sustainable, with an affinity to the prevailing technologies, values and power structures.

In the first phase of the crisis the most successful claimants for support have been the big, failing (and well-connected) industries of the last era of capitalism. But the arguments are moving on—to how recovery plans can back job growth, fixing the future (as in San Francisco’s electric car infrastructures or Korea’s massive green jobs programme) rather than trying to fix the mistakes of the past. It’s not clear yet which politicians will be able to articulate a vision of a “servant capitalism” better suited to the 21st century. David Cameron has made some attempts—hard though that may sometimes be for the descendant of generations of stockbrokers. Gordon Brown is a son of the manse, but also deeply implicated in the crisis. Obama should be ideally suited to offering a new vision, yet has surrounded himself with champions of the very system that now appears to be crumbling.

The result is that a large political space is opening up. In the short run it is being filled with anger, fear and confusion. In the longer run it may be filled with a new vision of capitalism, and its relationship to both society and ecology, a vision that will be clearer about what we want to grow and what we don’t. Democracies have in the past repeatedly tamed, guided and revived capitalism. They have prevented the sale of people, of votes, public offices, children’s labour and body organs, and they have enforced rights and rules, while also pouring resources in to meet capitalism’s need for science and skills, and it has been out of this mix of conflict and co-operation that the world has achieved the extraordinary progress of the last century.

To discover what comes next, maybe we should look upwards. Skylines provide the simplest test of what a society values, and where its surpluses are controlled. A few centuries ago the greatest buildings in the world’s cities were forts, churches and temples; then for a time they became palaces. Briefly in the 19th century civic buildings, railway stations and museums overshadowed them. And then in the late 20th century everywhere they were banks. Few believe that they will be for much longer. But what will come next—great leisure palaces and sports stadiums; universities and art galleries; water towers and hanging gardens; or perhaps biotech empires? We need to rekindle our capacity to imagine, and to see through the still-gathering storm to what lies beyond.

At which point I want to return to the Emily Yoffe piece, and her conclusion.

If the observers who say that part of our economic troubles result from a mass case of narcissism, from consumers who thought they should have the house of their dreams financed on bad debt to bankers who thought they deserved eight-figure bonuses for packaging that bad debt, then perhaps we are about to be cured. Twenge and Campbell point out that the 1920s was a narcissistic era whose economic collapse led to the Great Depression and the greatest generation. Perhaps it's time to dig out those Depression-era recipes for humble pie.

Humble pie that should first be served in the Middle East.

On parallel histories... and depression

Do you remember this?

...there is one section of the community that has benefitted from that wealth. It is not the mum and dad investors, the ordinary people. It is the community that has earned multi-million dollar bonuses and stock options; the hangers-on who pimp worthless product to an unsuspecting and ignorant market.

In other words, we are seeing what happens when the economy is run by snake-oil medicine men and itinerant side-show freaks.

Thanks to the old confirmation bias and the good folks at ALDaily I have come across The American featuring an article titled “Our Epistemological Depression”. Now, I had to look “epistemology” up in the COD to make sure I got it right. “The theory of the methods or grounds of knowledge.”. The opening paragraph

The history of socialism is the history of failure—and so is the history of capitalism, but in a different sense. For the history of socialism is one of fundamental failure, a failure to provide incentives and an inability to coordinate information about supply and effective demand. The history of capitalism, by contrast, is the history of dialectical failure: it is a history of the creation of new institutions and practices that may be successful, even transformative for a while, but which eventually prove dysfunctional, either because their intrinsic weaknesses become more evident over time or because of a change in external circumstances. Historically, these institutional failures have led to two reactions. They lead to governmental attempts to reform corporate and financial institutions, through changes in law and regulation (such as limited liability laws, creation of the FDIC, the SEC, etc.). They also lead market institutions to reform themselves, as investors and managers learn what forms of organization and which practices are dysfunctional. The history of capitalism, then, is the history of success through dialectical failure.

I am not going to dispute the difference. Socialism (true socialism, not the kind Americans dream of in their nightmares) stifles experimentation, expels individuality. Capitalism on the other hand (in its dreams at least) sees the individual as prime, sees wealth as the incentive for innovation and greed. That Muller sees the success of Capitalism (yes, the capitals are important to me...  ) as derivative from “dialectical failure” (the failure of logical debate?).

But [the various known causes of the current crisis] are not the whole story, and certainly not the most original part of the predicament. What seems most novel is the role of opacity and pseudo-objectivity. This may be our first epistemologically-driven depression. (Epistemology is the branch of philosophy that deals with the nature and limits of knowledge, with how we know what we think we know.) That is, a large role was played by the failure of the private and corporate actors to understand what they were doing. Most heads of ailing or deceased financial institutions did not comprehend the degree of risk and exposure entailed by the dealings of their underlings—and many investors, including municipalities and pension funds, bought financial instruments without understanding the risks involved. We should keep this in mind when we chastise government agencies such as the SEC for failing to monitor what was going on. If the leading executives of financial firms failed to understand what was taking place, how could we expect government regulators to do so? The financial system created a fog so thick that even its captains could not navigate it.

In other words, “they knew not what they were doing”.

Arguable, there were some who knew very well what they were doing. The lessons lie at the next level down with the people who "accepted" what they were told or even not told but believed. (Does that sound familiar? It should!!)

Has that changed? Is it likely to change? Reading both the lines and between the lines of the new Administration it seems likely not. Well not yet anyway. Muller again...

The cult of “accountability” was linked to key innovations that turned out to have unanticipated undersides. One was the shibboleth of linking pay to performance, which put a premium on schemes that purported to measure performance. This tended to produce “hard” numbers that seemed reliable but were not. It created tremendous incentives for CEOs, executives, and traders to devote their creative energies to gaming the metrics, i.e. into coming up with schemes that purported to demonstrate productivity or profit by massaging the data, or by underinvesting in maintenance and human capital formation to boost quarterly earnings or their equivalents.
Two milestones in the process of creating the fog of finance were the transformation of Wall Street investment banks from private partnerships to publicly traded corporations (beginning with Salomon Brothers in 1986), and the repeal of the Glass-Steagall Act of 1933 through the Gramm-Leach-Bliley Act of 1999. The former created tremendous incentives for risk-taking, since the firms no longer invested using the money of their top executives, who instead were remunerated based in large part on the amount of business the firm conducted, creating incentives to increase business by producing ever more complex and opaque financial instruments, such as collateralized debt obligations, swaps, etc. Then along came Gramm-Leach-Bliley, which opened the door to unlimited contagion, so that when one financial sector turned downward, it took the rest with it.

Looking ahead, the sort of government regulation and private re-organization that will be most beneficial will focus on these epistemological problems. Some of this goes under the rubric of transparency: making the asset holdings of financial institutions more publicly visible in order to reduce the problem of counterparty risk. Equally desirable would be transparency through the reduction of complexity, which includes avoiding intra-institutional contagion through greater limits on the ability of financial institutions to engage in an open-ended variety of financial activities. It means, in short, the reformulation of something like the Glass-Steagall Act, which would separate savings banks, investment banks, insurance and brokerage from one another.

Would that help? Well it might in the short term. The difficulty is the requirement for “new” controls – the anathema of Capitalism. The very greatest difficulty is really stated elsewhere. Remember Enron? That particular shibboleth is one which Capitalism would like very much to sweep under the carpet of history. Yet, in truth it is exactly the same process as has been the current “financial crisis”. A group of high level managers, accounting and financial practices used to increase their personal wealth and at the same time to conceal the truth, self promoted as “the brightest men in the room” beyond question or even doubt.

And, while one or two individuals have thus far been brought to account (to justice and not money) the lunatics are still in charge of the asylum.

Depressing thoughts, Depression generally, and the end of Christmas...

I am sitting here, replete after a lovely dinner of my wife's version of silverside beef, mashed spud, peas and a brown sauce (that was my contribution) and listening to the last of my Christmas presents... On the CD at the moment is Portishead and their "Third". Challenging listening, kinda partway between rock, folk, and Stockhausen or Blumenthaler.

Dredging my way through all of the weekends dross and general garbage, I came across Mike Moore writing in the Herald on a subject in which he would be uniquely qualified not just in NZ but internationally. Moore gained much (very justified) kudis for his short term at the helm of the WTO a few years back. Looking at the photo accompanying the article the rest has done him a world of good.

Remember the drama of the G20, the Top 20 industrialised nations, and their summit in Washington, DC, to address the need for concerted global action to address the economic crisis?

Presidents and prime ministers triumphantly agreed not to introduce any new protectionist measures, and to conclude the Doha Development Round.

Mindful of how the Great Depression of the 1930s was prolonged and made deeper by unilateral trade restriction, and that trade fell by 70 per cent in a few years, leaders left this important meeting basking in the glory of dynamic corrective action.

Once home, the opposite of what was said happened. China re-introduced tax breaks for exporters. India imposed caps on imports of steel. Duties on car imports into Russia have been raised. Billion-dollar bailouts to car manufacturers in the US were announced and France promised to protect companies from foreign predators with more than $12 billion. From Indonesia to Ecuador and Argentina, countries have introduced protectionist policies.

Lets just list those out -

China - tax breaks (government subsidies) on exports.
India - steel import quotas.
Russia - increased duties on imported cars.
USA - "the bailout"
France - (not listed by Moore) renewed and increased government subsidies on dairy production and export.
France - anti-competition (government) subsidies for French companies.

... and so the list goes on, almost interminably. No one can say that Moore has been complete in his list.

The World Bank suggests trade growth will be the lowest since World War II. Korean exports are down by 30 per cent (January, compared with a year ago); Taiwan 42 per cent and Japan 27 per cent.

Cargo leaving Long Beach, Los Angeles, fell by 18 per cent in a year. China's exports are falling dangerously - their growth may be cut by a third, creating severe social distress.

Friends report the air in Hong Kong and Beijing is cleaner than at the time of the Olympics, such is the industrial contraction.

Lloyds report that there are miles of ships anchored off Singapore and elsewhere, and that shipping companies have offered to waive fees on containers in some places, just charging broker costs to move half-full ships and maintain some cash flow.

Just too depressing.

But it doesn't end there.

Along with Portishead, I have also acquired the first two cd's out from Little Bushman. Long time readers will recall me singing the praises of Fat Freddy's Drop. Also recalled will be my thought that the music scene in NZ, and Wellington in particular, is almost incestuous in the way it works. Little Bushman was started by Warren "Mad Dog" Maxwell as a kind of offshoot from Fat Freddy.

Been looking for the lyrics for "Nature of Man" out on the 'net - no go. I'm not going to break the copyright. Google them, you can pick up any number of sampler tracks from MOG and elsewhere. The first stanza will give the idea -

Sunni against Shiite, Black on Black
Man against woman
What you think about that
Protest on a Catholic
Persecute the Jew
Can't help the neighbour
Neighbour might sue me.

Blame it on the Bible. Blame it on the war.
Blame it on the Govenor. That you voted for.
Dictator dining on the eagles purse
A Red moon is rising up above the Earth.

Take a look around. It is powerful stuff.

It is also quite depressing.

And that is before one gets anywhere near the latest Israeli military excusion (well, what else could it be if not a Cook's tour?). All of the lies and the bullshit that goes with it. (No, TF, I am not saying just the Israelis, the Israelis, Hamas, the US, all of them...

Put it on the ground
Spread it all around
Dig it with a hoe
It will make your garden grow.

...)

All just too depressing. But it is also in the nature of man.

Good night! Tomorrow is Obama Day! Good luck America. Good luck world!