Arguing from/for Ignorance

I have been accused of arguing that policymakers and others are too ignorant to make comprehensive and/or detailed policies. I am guilty. My study of great decisions in history and my more recent study of cognitive barriers to compete understanding make me even less confident in big decisions. I recently saw an interesting report Federal Reserve Bank of Boston talking about some of the “causes” of the recent collapse that were not true. If we don’t correctly understand or diagnose the sickness, we cannot propose good solutions.

This does NOT mean that we cannot make decisions. It does mean that we should understand and account for our limitations. For example, the report I mention concludes that the mortgage collapse probably could not have been avoided, or at least none of the fixes proposed since would have done much good.

Instead of trying to get everything right, we need to ensure that the systems we develop are robust enough to cope with unexpected shocks. We also need to produce processes that allow for constant small corrections and iterative decision making.

I think my attitude toward information, difficulty of making predictions and human fallibility is at the core of my conservatism. It is not that I oppose many of the goals of our liberal friends, but I don't believe they can be achieved with the political-bureaucratic methods they propose to use. The weakness of this method lies in its lack of timely, accurate and actionable information to decision makers and its near inability to transfer instructions from top to bottom about any complex task.

Von Clausewitz used to talk about the problems of "fog and friction" that hinders commanders in war. War is relatively straight forward in that the goal is usually specific. Trying to manage the economy has the same sorts of fog and friction but with the added problem multiplicity of often confused and conflicting goals.

Both sides - all sides - decry the political process as they maneuver to block opponents, sometimes from even accomplishing mutually beneficial results that could impact future political prospects. My study of history, going back at least to ancient Greek times, indicates that this is how it always has been. I think it is the way it always will be. Politics is adversarial and it tends to be zero sum, i.e. loses and wins are balanced out. That is the nature of politics. We need politics to decide things we decide by other means. Politics is preferable to many alternatives, which could be strife or even violence, but it is not fundamentally a good thing. It should be used only in situation where it is required.

What is the preferred way to do things? Create a framework of consistent rule of law and let people decide what they want as individuals or in voluntary associations. Some of these associations would be for-profit; most would not. Many of the associations would be ephemeral or transactional.

The key is that they are voluntary, which means that all the people involved believe that bring involved in the enterprise makes them better off than they were before or w/o it. This has the advantage of creating greater overall satisfaction, but more importantly it is very robust. Individuals can work together, groups can be created or disbanded, and membership can be changed as necessary, w/o resort to complicated rules-making or political campaigns.

So let me sum up. I think it is impossible to anticipate all, or even most changes in our complex system in enough detail to make detailed plans. Obviously, the Obama folks did not understand enough about the economy back in 2009 to make an effective plan. This should come as no surprise, but it evidently has. No president, especially someone with the limited experience of Barack Obama, could have made detailed plans that work. He didn't, BTW.

Political leaders should set general goals and create or maintain robust systems that allow for decentralized decision making. That is all.

Posted by Christine & John at May 6, 2012 12:19 PM
Comments
Comment #343593

The authors of that article on the causes of the collapse are either ignorant or lying. I suspect it is the latter, because they seek to advance a political agenda, and so ignore everything that belies their point.

I used to think people at the Federal Reserve were very smart economists. Then I saw a former head of the KC branch on the national stage, Herman Cain, and realized that is not true. Some people at the Fed have absolutely no idea what they are doing, and apparently do no know the first thing about economics. I mean, literally nothing.

These guys who wrote that article are really some pieces of work. Take this:

“Fact 6: MBSs, CDOs, and other “complex financial products” had been widely used for decades”

“Widely used” is quite a choice phrase. These types of instruments did not get used much at all in the 80’s and 90’s, became a little more used when Glass Steagall was repealed in 1998, but diden’t become “widely used” until Phil Gramm inserted an amendment into the 2000 budget, the Commodity Futures Modernization Act, which prevented ALL government regulation and PREVENTED ANY GOVERNMENT OVERSIGHT WHATSOEVER of the mortgage derivative markets.

It was not merely unwarranted optimism that caused the crash.

The Federal Reserve is charged with maitaining orderly financial markets. That is its job. That is its primary duty. Without regulation and without oversight, the Federal Reserve failed to control the mortgage derivative markets. When housing declined, that was not good, of course, but it was hardly enough to cause the downturn that resulted. Small drops in the real estate market often accompany economic downturns, and foreclosures can rise to as high as two percent. The actual sum of money lost in the real estate decline should have numbered about 200 - 300 billion dollars. However, behind those mortgages an entire market existed in the world of ‘shadow banking.’ This magnified the drop in real estate; it magnified the drop by orders of magnitude; so, instead of a mere two or three hundred billion dollar decrease in real estate values, the financial markets found themselves involved in Tens of Trillions of dollars in losses.

Credit froze. A full scale asset deflation ensued. Only full scale government intervention saved the banksters, in the forms of multi-trillion dollar loans which charged little or no interest, as well as bailouts.

The authors of that article throw up a few straw men, make a few vague claims, then throw up their hands and call the financial crash the result of just another financial bubble, a little too much optimism, just so many tulips.

Baloney.

Posted by: phx8 at May 6, 2012 3:30 PM
Comment #343594

C&J, I appreciate your position that the 545 can’t make good laws. But, I can’t agree that some free thinking boards, commissions, coalitions, etc. would be an improvement over congress.

I assure you things would be no different. One must look to the cause of poorly defined or inefficient legislation. Let’s just take the recession as a little example.
The recession didn’t happen in a vacuum. It happened as part of the plan for a globalised world, breaking the back of the US middle class so we can eventually compete in the economy, etc.

But, let’s just skip that part as I know you don’t like to postulate too much on conspiracy.
But, pull thru a couple of the below urls and we’ll continue - - -

http://www.sec.gov/about/laws.shtml

http://www.pwc.com/en_US/us/sarbanes-oxley/assets/final_so_wp_2-boardsac.pdf

http://books.google.com/books?id=cvOgFdgRuVEC&pg=PT392&lpg=PT392&dq=Sarbanes-oxley+and+CDO+investments&source=bl&ots=eMhmwejA7u&sig=ruSpzMfOtHiG6zF33_x9XVO-SCU&hl=en&sa=X&ei=e7qmT5GYCIew6QHW5MCYBA&ved=0CHsQ6AEwAw#v=onepage&q=Sarbanes-oxley%20and%20CDO%20investments&f=false

http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877330,00.html

Clearly, the 545/Corpocracy was at the forefront in bringing down the US economy. Doesn’t mean that congress didn’t have the brightest, most intelligent people to ever spend taxpayer money giving them advice. People in high positions from around the world weigh in on even the smallest piece of financial legislation. How will a bill effect China, or the Egyptian bond market, etc?


But, many of the brightest thinkers are agenda driven - - lobbyists - - perhaps spending years, and lotsa corporate dollars looking to align the stars (votes) to achieve their objective. Most often the Corpocracy has the louder voice ($$) and have their way through the legislative process of lawmaking. This keeps the 545 in elected office and the Corpocracy remains spendidly happy. Puts the ‘czar’ in GE and so on… .

IMO, you can set up these ‘ephemeral and transactional’ associations till the cows come home but they can’t/won’t/don’t trump the 545/Corpocracy.

A small exemplar to close: in 1997 Indiana leased a 157 mile publicly funded toll road to a foreign entity for 75 years for $3.8B. Maintenance responsibility went to the leasee who collects the toll fee. But, the federal highway tax dollars for Indiana has not gone down. So, the national taxpayer is paying to buy the 157 mile toll road again. And, the 545/Corpocracy say? Amen!

We can’t expect reform of any measure until corporate personhood is abolished and REAL campaign finance reform achieved. Republic Sentry Party, MoveToAmend.org and ReclaimDemocracy.org refers….

Otherwise - - -

Posted by: Roy Ellis at May 6, 2012 3:34 PM
Comment #343595

Roy

I don’t advocate doing away with government regulation or rule of law. We need those things. But we should make them more general and allow adjustment.

As a guy who works with bureaucracy, I do not hate it. I think it is very good where it is appropriate. But the rule-based system not only cannot keep up with innovation, it can be used and is used by crooks to actually get away with breaking the spirit of the laws.

phx8

Shit happens. We cannot avoid all troubles, even some really big ones. Ironically, the complications of the rules themselves can sometimes help bring about the conditions they are supposed to avoid.

As I said, I have been studying this subject for a while now. I apply it to my own decision making and see how it works for others. It is not that we can produce perfect decisions, but the decisions produced are usually better than those made in the stricter rules-based situations and coming to them is much less cumbersome, which improves innovation and lowers costs.

I also do believe that the root cause of the collapse was expectation that home prices would continue to rise and then they did not. Home prices are still a little on the high side and are still dragging the economy.

Posted by: C&J at May 6, 2012 4:22 PM
Comment #343596

C&J, wow!

Posted by: Roy Ellis at May 6, 2012 4:36 PM
Comment #343597

Sure, shit happens. But more often than not, shit happens for a reason. It’s not easy to see problems develop while caught inside them. Many warned Greenspan about a frothy real estate market. He dismissed those worries.


Stepping back, the real estate markets collapsed when the Fed raised the interest rate. Until that point, they resisted raising it- despite an on-going recovery, the economy supposedly wasn’t strong enough to take a hike. Up until that point, the economy had been fueled by debt, especially private sector debt, especially private sector debt in the form of refinanced mortgages. Raising the rate sparked a series of problems, including unexpectedly high reset rates on ARM’s.

To back up another step, the Federal Reserve raised rates because of commodity fueled inflation; in particular, rising oil prices.

And back again… Why did oil prices rise? Once again, the Federal Reserve and the Bush administration failed to properly regulate commodity futures. Speculation ran rampant in oil futures, and though we may not know for a long time, I heard a story that Lehman Brothers was a big player in the oil run-up, and that was part of the reason they were allowed to fail.

Lack of oversight and regulation were hallmarks of the collapse of the financial sector. The authors of the article simply do not want to accept that fact. Instead, they blame it on the little people, and too much optimism. Little people and optimism played a part in the bubble, but that’s not what turned a downturn into a catastrophe.

Today, incredibly, the GOP continues to do everything in its power to prevent regulation and oversight. They defeated Warren for the Consumer Financial Protectin Bureau, and fought hard to prevent it from ever going into action. They fought every attempt to institute legislative reforms.

And today, we actually have a member of the financial industry attempting to buy the presidency. Enormous amounts of money back him, and thanks to Citizens United, we don’t even know their names. What a mess.

Posted by: phx8 at May 6, 2012 6:29 PM
Comment #343598

phx8

Lot of the big shit that happens is very obvious after it happens but nearly impossible to predict before. This is why so many people are rich and successful in theory but not in practice. They can easily see what they should have done and often convince themselves that they would have done it.

Re real estate - it was over valued at any interest rate. Now it is easy to see that. Rates are very low today and the people who didn’t pay their mortgages were not paying higher payments in most cases, as the study shows.

Re oil prices - if you can understand the mechanism, I suggest you go into business and become richer than Buffett.

How is it that oil prices are so high today?

Posted by: C&J at May 6, 2012 7:06 PM
Comment #343600

Oil prices- any individual who plays commodoties is taking crazy risks. The old saying goes: You know how to make a million dollars in futures? Start with two million.

Peak oil accounts for high prices, along with increasing worldwide demand. Speculation accounts for the wild swings. The Obama administration has proposed specific legislation for limiting speculation in oil markets. It includes some very good ideas, including increasing the margin amount required. That alone would make a huge difference.

Posted by: phx8 at May 6, 2012 8:04 PM
Comment #343601

“I recently saw an interesting report Federal Reserve Bank of Boston talking about some of the “causes” of the recent collapse..”

C&J,

The article you linked to is not the analysis or position of the Federal Reserve Bank of Boston on causes of the recent economic collapse. It is an article authored by independent writers in a publication of the Bank of Boston. The distinction is important.

Posted by: Rich at May 6, 2012 8:24 PM
Comment #343604

phx8

Wouldn’t it be good if stupid rich people tried to game the oil market? It would help equalize incomes. The problem with speculating on oil is that it takes up a lot of space and storage costs are high.

Peak oil is a meaningless concept unless you can factor in prices and technologies.

One of the the biggest unexpected developments of the last decade was the rapid deployment of fracking technologies in both oil and gas. It has made North Dakota a big oil producer and ruined Russian plans for a natural gas cartel. None of this was predicted ten years ago, yet it will be the biggest effect on energy in the next ten years. Of course, something else completely unexpected may change all this too.

This is the problem with detailed central planning.

Rich

Still an interesting article. Which parts do you find contrary to the evidence?

Posted by: C&J at May 6, 2012 8:51 PM
Comment #343609

“Rational” is the market economist’s “inconceivable”.

I do not think you know what this word means.

I mean, if your paper starts out with the notion that people did the rational thing considering their excessive optimism… Zzzzttttt! Stop right there!

Why are we assuming rationality? Or, more precisely, why are we assuming pure rationality here?

My belief is that sometimes we learn or are taught to inhibit behavior that is based on bad animal impulses, and sometimes it’s our poverty or lack of means to do something that keeps our behavior in check. I’m sure many of the people who ate sensibly in times past, and didn’t get fat didn’t do so because they were well taught, they did so because when they were confronted by how little they had, they adapted accordingly.

Given the money, given the opportunity, though, people eat to excess. Why? Because we’re built that way. Get that stuff in your stomach quick, before its back to starvation! Some Republicans comment about fat poor folks, how that’s such a first world problem, but it’s becoming a problem wherever we export our convenient culture. It isn’t so much that people in other times ate better because of some wisdom. They ate less meat because they couldn’t afford it, and many of the meals required more effort to put together, that we now get pre-packaged or made easily at some restaurant.

Our difficult task is to learn self control without the limitations of our environment or our current means being the inhbiting factor. We’re having to learn how to apply ancient wisdom, ancient lessons in a society that provides the illusion that we’ve progressed beyond the threat of want and the hard wages of excess.

What I also believe is that emotion and rational thought often end up mixed together in wierd combinations, so often our rational brains get hijacked to do work for the parts of our brain we really shouldn’t be relying upon for decision making.

From my perspective, we get these booms and busts because people get committed, maybe even addicted to the pursuit o a certain plan of enrichment. People feel compelled by the material enrichment of others, other people buying homes and getting money from refinance and all that stuff, other stock marketers competing to fill a demand or make a buck off of hedges, and nobody’s wanting to be the wet blanket or the designated driver who can’t be part of the party.

That’s where the notion that we can just let the system police itself becomes an insidious trap. People respond to social pressures, and as I’ve witnessed in my life, the last thing some people want to be told is no, and very often, their succeess gets a huge “do not disturb” sign on their necks.

But that’s not all. People will tend to distrust their own feelings, as they see things failing, or not working like advertised, and they’ll allow folks to browbeat them into not giving up on an investment or whatever, owing to their uncertainty.

Without law or investigations, very often the pathological behaviors continue, become the norm, becomes emotionally entrenched, and the social issues keep folks doing the irrational things that keep the market expanding that bubble, until of course somebody slaps the market upside the head with the facts.

Don’t get me wrong, there will always be bubbles and people getting into them, and things shorting out when it goes bust. But the question is, how much are we contributing to the size and the intensity of these bubbles.

Posted by: Stephen Daugherty at May 6, 2012 11:07 PM
Comment #343610

C&J,
Speculators do not take delivery of the commmodity. Producers of the product use futures to hedge and control price. Speculators are necessary to take the other side of the transaction; instead of the safety the producer needs, the speculator takes risk. The problem with oil is too much speculation. Furthermore, speculators with enough capital can drive the market up or down. Like I said, the story was the Lehman Bros played a big role in driving the market up a few years ago. They were a smaller investment house, so they felt compelled to be more aggressive and take more risks than the bigger firms. But that might just be a story…

Posted by: phx8 at May 6, 2012 11:11 PM
Comment #343611

C&J, yes the price of oil relates directly to your article, so lemme try.

J.D. Rockefeller founded Standard Oil Company in 1870. By the 1880sm SO controlled 90% of gasoline refining, 80% of marketing of oil products SO had perfected the use of the corporate trust, a monopoly or conglomerate if you will. Individual companies act independently but are really managed by the trust board of directors.

In 1911 the FED used anti-trust law to break up SO into 34 separate companies. What to do? From WWI thru the 70’s SO of NJ (Exxon), SO of NY (Mobil), and SO of Ca (Chevron) joined with Gulf, Texaco, BP and Shell to form a ‘cartel’ nicknamed the ‘seven sisters’. These seven companies owned most of the world’s oil and controlled the economic fate of entire nations.

In 1973, the 7 sisters earned 2/3rds of their profits abroad. Flush with dough they wanted to buy up smaller US independents. Enter Regan and the era of ‘greed is good’ to the rescue!! From an anti-trust attny for the Clinton admin: “older concerns about protecting small business and preventing concentrations of political power have been discarded.”

Since 1991, more than 2600 mergers took place in the US oil industry. Since 99 the megagiants conglomerized; Exxon with mobil, Chevron with Texaco, Conoco with Phillips, and BP with Amoco/Arco. Shell purchased several ‘baby SO’s. Z They exercise control and pricing through these companies and the crude oil futures market. The futures market has replaced OPEC as the key price control for crude, largely unregulated and prone to excessive speculation and manipulation. Markets are manipulated to fake shortages where supplies are sufficient, Sux if tgese teb are tge kargest ciroiratuibs ub tge wirkd, taking in $167B in 06 alone, nearly $50B more than the top ten companies in the second tier, commercial and savings banks.

Wal-Mart edged out Exxon Mobil in 07, surpassing its sales - - $379B cto ExMo’s $373B. But, Wal-Mart’s $12/7B I profits were a mere one-third of ExMo’s. Put to good use big oil spent more money to get GW Bush elected than it spent on any election before or since. Receiving in turn, a President, VP and SecState who were former oil patch exec’s. Every agency and every level of bureaucracy was filled with former oil industry lobbyists, lawyers, staff, board members and exec’s. Money expended on elections is small potatoes to the hundreds of millions spent on lobbying congress.
Where SO used to set the price for oil it is now done by energy traders, including those who work for and on behalf of big oil. Economists and energy analysts estimate that 20 to 25 percent of the increase in the price of crude is directly attributable to the actions of energy traders. Some put the speculative premium at half the price of a barrel of oil. A number of traders perfected their art while working for Enron and now exercise their skills on the crude oil futures market.

Large banks and investment houses engage in the buying selling of hedge contracts where more profit is derived through the volatility of oil/gas prices.

In 92 some energy companies formed the ‘Energy Group’ and asked the CFTC rule that trades be called ‘swaps’, not crude oil futures contracts, and that the trades be exempted from CFTC’s oversight. The CFTC agreed. Wendy Gramm was chair/CFTC from 88 until Clinton was elected in 92. On the final day of the Bush admin Wendy enacted the Energy Groups request. She resigned six days later and within a month or so joined Enron’s board of director’s.. Two days into the Bush admin Senator Phil Gramm, Wendy’s husband, came to the forefront in energy futures. After GW Bush and Kay Baily Hutchinson, Gramm received the most in campaign contributions from Enron. Then on Dec 12, 2000, Gramm, w/o any hearings, debates or public notice Gramm slipped the ‘Enron Loophole’ into a 262 page CF Modernization Act. Going beyond exempting swaps and OTC futures trades from gov’t regulation he authorized the oil patch to trade between themselves or on other exchanges w/o gov’t regulation.

In May 2000, just before the CFMA became law several oil companies and banks established the Intercontinental Exchange (ICE) to trade oil futures w/o gov’t regulation, just as the original Chicago Board of Trade and the Butter and Cheese Exchange of NY operated more than a hundred years ago. Today, about half the oil futures trades are done by ICE. It’s 07 profits were 60% higher than its third-qtr profits in 06.

Each barrel sold is added to the demand. As the demand rises so does price, The higher the price rises, the more speculators enter the market, the more speculators the more demand and etc. However, the price rise has nothing to do with supply.

Naturally, big oil companies play into the feeding frenzy. Shell, Marathon, and BP North American have been caught, and others known to be players, in ‘energy trading not directly related to our physical business’.

Big banks and Big Oil have a lot in common: they have interlocking boards, lobby together, contribute to the same political candidates, share energy traders, share corporate titans and so on . .

Getting late - - most of this info gisted from The Tyranny Of Oil by Antonia Juhasz.

As I posted some weeks back the peak driving season came early this year as elections are on in Nov. Prices are likely to be in the $3.25 range come Nov, below the radar range of the average driver.

But, please expand on how your free thinking coalitions and commissions are going to cut thru this stuff, keeping in mind there are lots of little Phil’s and Wendy’s out there.

Otherwise - - -

Posted by: Roy Ellis at May 6, 2012 11:16 PM
Comment #343641

Stephen

“From my perspective, we get these booms and busts because people get committed, maybe even addicted to the pursuit to a certain plan of enrichment. People feel compelled by the material enrichment of others, other people buying homes and getting money from refinance and all that stuff, other stock marketers competing to fill a demand or make a buck off of hedges, and nobody’s wanting to be the wet blanket or the designated driver who can’t be part of the party.”

This happens. The problem is that when it is happening most people can’t tell. After it happens, everybody says they knew. However, their actions indicated that they did indeed NOT know.

It is NOT rational and is NOT based on accurate information. The problem with a formulation that advocates additional government activity is that government is also run by people who do NOT always act rationally and do not always has access to timely and accurate information. In fact, government bureaucrats are often less likely to have access to accurate, timely and detailed information and/or the capacity to analyze and act on it.

I repeat – as I always do – that we need government and rule of law. My problem with the liberal idea of more intrusive government is that in expanding the government’s mandate is that as it expands and politicians make more promises, government loses some of its ability to accomplish its core responsibilities. Ask yourself this. Can government build a road or an airport faster today or fifty years ago? Could government actually plan and complete Hoover Dam today?

We agree that bubbles cannot be avoided. We also agree that government has responsibility to mitigate them if possible. The “If possible” part is the key. What we can usually do is make our systems robust enough to endure the inevitable bubbles.

We can avoid those we understand, but it is a tautology that we cannot cope with those we do not. Like old generals, we prepare to fight and win the last war, but the next one has different rule. Often the over-preparation for the conditions of the past make us less able to cope with the future.

Phx8
The problem with oil is that you can only speculate so long before the oil has to go somewhere. The speculator does not take delivery, but it needs to be sent somewhere. Beyond that, oil production is capital intensive and produces necessary products. For example, the Saudis can cut production only so far, since they need to feed other petrochemical industries.

People talk about speculation a lot. It probably can change the prices for oil in the short term, raising it for a short term followed by lower prices. People have been talking about speculators for years. After we study the past, we find no sustained cases of it. Producers have at times slowed production, but this is a different story. Even in these cases, however, the mighty cartels are undercut in the longer run.

Roy

See above – Rockefeller gets a bad rap. I suggest you read his biography by Ron Chernow. Rockefeller was a tough and sometimes not completely ethical businessman, by our standards. He believed in monopoly and in crushing opponents. But after Rockefeller, oil was cheaper and more readily available than it was before and his organization of the market helped make this possible.

Rockefeller was the richest man in the history of the world and will never be surpassed – if we are counting his wealth and power in relation to the size of the American and world economy. Today, nobody wields the kind of power he had.

The price of oil is not “set” by energy traders. Oil is not a free market. MOST – the vast majority - is state controlled. In all state-backed firms control 80% of the world’s oil reserves.

The energy equation, however, is changing rapidly and unexpectedly, as unconventional/alternative oil and gas is coming on the market. These supplies are decentralized and will make the U.S. and the Americas in general the oil and gas powers of the next decades.

All the energy “truths” we grew up believing are now changing. All those things we used to know to be true, will be different.

Posted by: C&J at May 7, 2012 8:21 AM
Comment #343646

Oh, I think people can tell, but they feel conflicted about acting rationally, because humans instinctually value rewards, even when faced with great risk.

Bubbles in general cannot be avoided. The question is, do we get smaller bubbles which burst sooner, with less collateral damage, or do we allow titanic ones to develop which just blow the whole market up when they go?

And even if Bubbles of that size are inevitable, is it possible to structure the market so that you get a modest recession like we had in the 1990s, instead of a near-Extinction Level Event like we had this last time?

As for Rockefeller and the others? Sure he created a more organized market, but why do we believe his is the optimal choice, especially since you seem to emphasize that one person cannot exercise perfect judgment on what the market needs? Or is this just some point where human nature magically differs between folks in the private and the public sectors?

I mean, that’s where I think you fail to perceive the problem of letting the market run loose. Power and information doesn’t behave differently in one case over another. Any time you get a big enough company, bureaucracy and institutional inertia will set in. Any time you get a very few companies that make up a critical amount of the market share, it becomes harder to simply let those businesess fail when they do things wrong as a lesson to others.

I think you misunderstand what Liberals actually want. What if we could agree that constraints need to be set both on private and public power, in order to ensure freedom, robustness in society’s innovation, finance, and other necessary components?

Posted by: Stephen Daugherty at May 7, 2012 11:50 AM
Comment #343647

Oh, I think people can tell, but they feel conflicted about acting rationally, because humans instinctually value rewards, even when faced with great risk.

Bubbles in general cannot be avoided. The question is, do we get smaller bubbles which burst sooner, with less collateral damage, or do we allow titanic ones to develop which just blow the whole market up when they go?

And even if Bubbles of that size are inevitable, is it possible to structure the market so that you get a modest recession like we had in the 1990s, instead of a near-Extinction Level Event like we had this last time?

As for Rockefeller and the others? Sure he created a more organized market, but why do we believe his is the optimal choice, especially since you seem to emphasize that one person cannot exercise perfect judgment on what the market needs? Or is this just some point where human nature magically differs between folks in the private and the public sectors?

I mean, that’s where I think you fail to perceive the problem of letting the market run loose. Power and information doesn’t behave differently in one case over another. Any time you get a big enough company, bureaucracy and institutional inertia will set in. Any time you get a very few companies that make up a critical amount of the market share, it becomes harder to simply let those businesess fail when they do things wrong as a lesson to others.

I think you misunderstand what Liberals actually want. What if we could agree that constraints need to be set both on private and public power, in order to ensure freedom, robustness in society’s innovation, finance, and other necessary components?

Posted by: Stephen Daugherty at May 7, 2012 12:01 PM
Comment #343652

Stephen

The “near extinction” bubble of 2007-8 was not really that bad. I know we like to wring our hands, but we responded well in general. This recession took us back to levels we had not experienced since… the 1980s.

If you read the linked article, you see that there was probably no way to avoid this bubble based on the knowledge of the time. We were indeed robust enough to survive it. And we could adapt.

Re Rockefeller - we never reach a truly optimal state. It was better than when he found it. It could have been even better or much worse.

Rockefeller, BTW, also invented the philanthropic foundation. Even when he was very poor, he gave away at least 10% of his income to charity. When he got so rich that he could no longer handle the admin of giving away so much money, he created a professional foundation. Another gift of Rockefeller. Bet you didn’t know that.

Re what liberals want - I think we often want very similar results. We go after them with different means. I think we have to be more humble in our analysis of our ability to anticipate drastic changes.

My favorite example is the new age of energy. All this extra gas and oil is going to be a challenge. We never thought the problem might be too MUCH fossil fuel, but in the next decade that is going to be the challenge.

Posted by: C&J at May 7, 2012 12:28 PM
Comment #343655

Stephen

Let me add a few more unexpected big challenges.

1. Rapid aging and end of population growth in many developed and even many developing countries. Who saw that coming in 1970?

2. Nexus of energy development moving from Middle East to Americas and South Atlantic.

3. Re-industrialization of America based on proximity to market and abundant energy.

4. Replacement of many heavy materials with nano-engineered materials. Replacement of “rare earth” minerals with nano-engineered materials.

5. Bio-engineered materials replacing drugs and even products made in factories.

Posted by: C&J at May 7, 2012 1:02 PM
Comment #343683

C&J-
I’m something of a futurist myself, but I’ve been watching things long enough to know that nothing unfolds as smoothly as it is imagined.

Just look at the movies they made in the sixties and seventies about this time period. Look at the size of their computers! They didn’t anticipate the personal computer. They didn’t anticipate miniaturization that would make chips so cheap and small you could fit the computing and graphics power of computers ten years beyond their then current technology and then ten times more in a mobile phone device.

Often, the issue is that people think in terms of the interfaces of their day. When and if you go see Prometheus in the theatres this summer, note how Ridley Scott imagines computers in that pre-Alien movie, as compared to how he imagined them in 1979. Look at James Cameron’s computers in Aliens, and compare them to Avatar’s.

We begin from the familiar to speculate about the unfamiliar, but the future is often shaped by forces that are the next step beyond what we first anticipate, and those constrain encourage, and shape our future in ways we have trouble imagining.

Folks in the midst of the space-race imagined us exploring Jupiter and its moons by this point in our history. They did not conceive that folks would stop with the dream of exploration, but instead believed that we would keep going. They created their computers in fiction with the room-sized machines they knew in mind, not today’s compact machines. When they thought of the media used, they thought of reel-to-reel magnetic tape or some kind of film they rarely looked at a few chips soldered to a connector, which is what modern flash drives basically are.

Often people get too complicated in what they dream up. There’s a virtue in simplicity and manageability, because of course people will have to control these machines. More on that later.

As far as the severity of the crash, consider that the money markets went so beserk, that they closed them for fear that letting them go would send us back to the stone age. I blogged about this, about the event. People were talking seriously about the end of capitalism.

And yes, it didn’t happen, but only because the government, through the Federal Reserve and the Fiscal Stimulus Obama passed, responded massively to the problem. Without the help of the systems they put in place, the banks would have collapsed.

You even cited that intervention, much larger than the stimulus, with the “first stimulus” argument you tried on us a few months back. That wasn’t free market economics at work. Why did you favor that, pray tell? Could it be that you didn’t trust the system to fall into a new normal that was recoverable, however painfully, if it didn’t happen?

As for Rockefeller? I watched PBS on a regular basis for much of my life. I’m well aware of all the philantropists out there, and I even saw documentaries about the Rockefellers.

I’m aware of both sides of what they did. So you lose your bet. Don’t assume I’m ignorant of something just because I don’t take your favorable view of his business practices.

As for your predictions about energy?

You miss some critical factors. One is that much of the oil in question is in harder to reach places, or is in a form that’s harder to refine or harvest for different reasons. Another is that the global markets will not let that oil stay here, nor are we any longer the sole customers, so we can reap the main benefits ourselves.

Both factors will increase the price.

As for energy being the factor in America’s re-industrialization? Well, the trouble with that is that American markets will still require American wages. I think Neil DeGrasse Tyson is right that innovation, not availing ourselves of the old technology, is what will bring people back here. If the other sides of the economic struggle haven’t figured out how to make a certain product or provide a certain purpose, we will reap the benefits.

As for the challenges for our future?

1) Transition to renewables and wind and solar. Do we get around to it in time to avoid paying the further penalties of our dependence on oil?

2) How do we handle the social shifts in communication technology, especially given how interactive things may get? If we see mobile computing and augmented reality (overlays of digital renderings over real world imagery)) come to the fore, how do we develop the etiquette to deal with game players and data consumers essentially acting out to illusions only they can see?

I mean, already, the internet, texting, and mobile phone use have changed how folks interact, what kind of privacy they expect, what sort of knowledge they expect to have at their fingertips. I mean, really, what I would have given, as a child, to have had Wikipedia or an iPhone at my disposal. It certainly would have lightened the load of things I carried around.

I think of these things sort of in a paradigm of losing material and technological constraints on behavior, and having to learn how to curtail our bad impulses, since the world doesn’t do it anymore. A man starving in the slums doesn’t have to worry about the problems of overeating. A man who has the money and resources to get that hamburger, has to learn how to say no to that impulse.

I think a similar question can be asked of what we do on Wall Street nowadays, with alogrithmic trading and the problems of what happens when instant information can turn a fat-fingered response into a worldwide flash-crash.

More later.

Posted by: Stephen Daugherty at May 7, 2012 11:39 PM
Comment #343732

Stephen


They never unfold as we hope. Sometimes things are better. We don’t have the imagination to understand all the things that will happen. This is precisely why I argue for general processes and not detailed plans by large organizations.

Re capitalism - as I told others, the term “capitalism” was largely developed by those who wanted something as a foil for socialism et al. There is no such thing as capitalism. Unlike communism, there is no accepted text that lays out its precepts. Rather it is a pragmatic response to unfolding events. That is why I always use the term free market, unless I am specifically referring to Marxist mistakes.

I addressed this in a very practical way in Eastern Europe. I found that too many of the entrepreneurs there had learned their “capitalism” from Marx, who never understood it. Their behavior was in this caricature of reality. We sponsored seminars and meetings to talk about the subtle realities of the free market, things that Marx and many socialists just didn’t understand and the reasons why the market has been so resilient among the predictions of it imminent demise.

Re ignorance - I didn’t assume you - personally - were ignorant of this for bad reasons. My experience with Rockefeller is that most people know the myths and half truths around the man, promulgated by “biographers” like Ida Tarbell and others with personal grudges.

In fact, IMO, we suffer from several mistaken paradigms promulgated by well-meaning but only half aware history teachers. If I had several lifetimes I would work on this. Of course, I would just accrete my own flawed interpretation on top of others.

Posted by: C&J at May 8, 2012 8:04 AM
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