Some influential “texts”

Tyler Cowen called on bloggers to list the books that most influenced them.  As soon as I started looking at other lists I got worried that I wouldn’t be able to come up with anything respectable.  Yes, I am familiar with A Theory of Justice,  The Structure of Scientific Revolutions, Guns Germs and Steel, The Bell Curve, The Road to Serfdom, etc, etc.  But have I read them?  Well, 30 years ago I read The Road to Serfdom, but I really don’t remember the book at all.

Perhaps you saw the movie Metropolitan.  There is a scene where a young man is debating the merits of Jane Austin with a young woman at a New York cocktail party.   Finally in exasperation she asks the guy “Which Jane Austin books have you actually read?”  He replied “I don’t actually read novels, I read literary criticism.”  I’m kind of like that asshole.  I haven’t read a lot of the intellectual classics, but can spend 30 minutes telling you what is wrong with each of them.  Yes, I’m quite aware of how unfair this is; I know that when you boil an argument down to its essentials the work can lose much of its persuasive power.  But I did read Pride and Prejudice.   (Update: Not only am I not well read, but I can’t spell either.  A commenter pointed out it is Jane Austen.)

The other point I’d make is that even when I have read great books, they haven’t necessarily shaped my general worldview, but often crystallized ideas that I already had begun forming.  A good example is Fukuyama’s The End of History.  I had already reached the conclusion that free markets and democracy were the wave of the future (and still think so), but Fukuyama provided more of the historical, psychological and philosophical support for the hypothesis.  Sometimes I wonder whether it was inevitable that I would eventually end up with my current philosophical orientation.

Instead of a list of great books, here are some “texts” and writers that may have shaped my views, and a few observations on how they shaped my 35 year journey from dogmatic libertarianism to pragmatic libertarianism.  I believe the postmodernists say that almost anything counts as a text.  So I include films, old newspapers, magazines, etc.  Consider this an intellectual biography.

Philosophy:  I suppose my major influences have been McCloskey and Rorty.  If I’m not mistaken there is a sort of official track of philosophy from Plato through Kant, and then another strand that has been skeptical of the entire enterprise.  I guess this latter group runs from the Sophists through Hume, Wittgenstein and Rorty.  At this point in my life I’m not too interested in reading philosophy except as literature.  Hopefully when I retire I’ll have time to read Hume, Schopenhauer, Nietzsche and others whose ideas I find intriguing.  I’ve only read one book by Nietzsche, (The Genealogy of Morals) but he seems like the most interesting philosopher from a literary perspective.  (I don’t care at all for his politics.)  In other posts I’ve already talked about how McCloskey and Rorty pushed me toward pragmatism, and away from grand systems for getting at Objective Truth.  As I get older I become increasing skeptical of all knowledge claims, including my own.  At the same time, my pragmatism leads me to conclude that we need to proceed as if certain well-established propositions are true.

Micro:  My views of micro were shaped by all of the readings for the Chicago core; textbooks by Stigler, Becker, Friedman, etc, as well as packets of practice exams.  This education convinced me of how useful the competitive market model is, even in markets that aren’t perfectly competitive (which is almost all markets.)  It taught me that people are far more responsive to incentives than common sense would suggest.  That public policy trying to fix problems is much more likely to have unforeseen negative side effects than common sense would suggest.  It taught me that the world works in very, very counterintuitive ways.

Here’s one way of thinking about the Chicago influence.  When I read Matt Yglesias’ blog I see someone who seems to have basically the same values as I have.  I don’t know if he’s a utilitarian, but he justifies his conclusions with broadly consequentialist arguments.  And it also seems like he is smarter than me.  So why do I disagree on so many public policy questions?  I think it is mostly because of my Chicago education.  I think I understand how the economic system works better than he does.  I’d be the first to admit I may be wrong, as it is not easy to prove anything in economics.  But my hunch is that government fixes work much less effectively than most progressives believe.

At the same time Yglesias has a recent post defending Wal-mart’s practice of giving payday loans and another suggesting that easy money is preferable to China bashing.  That’s good.  To me, Yglesias seems much more interested in finding what works than someone like Krugman, who gives the impression of being uninterested in talking about anything but examples that confirm his current prejudice against free markets.  It’s something one must fight against everyday.  I understand that I’m biased, that I’d much rather defend the free market.  But in the end I’ve concluded that the world wasn’t set up the confirm Scott Sumner’s intellectual prejudices.  It is what it is.  If income redistribution and forced saving and central banking and carbon taxes makes the world a better place in utilitarian terms, then so be it.

But I still insist that people who have never been exposed to the full blast of a Chicago-style education don’t know how much they are missing.  I recall being taught by incredibly smart people like Becker, Lucas, Stigler, McCloskey, etc.  I think these people are underestimated by progressives.  There must be dozens of Krugman and DeLong posts that suggest free market economists aren’t just wrong, but dumb.  When I read younger bloggers like Bryan Caplan I realize how much my brain has been dulled in the 30 years since I left Chicago, how much of my (microeconomic) analytical skills I’ve lost that younger guys like him still have.  I suppose being at GMU keeps one on one’s toes.  BTW, in case anyone thinks the Chicago education I describe was brainwashing, if a student answered a question with “the free market works best” they were torn to shreds by the professor.  There were a lot of diverse political views at Chicago, the Republican/Democratic vote split among the faculty was certainly much closer to 50-50 than at Wisconsin, where I was an undergrad.

Macro: My biggest influences were Fisher and Friedman.  I read many books by Fisher, such as The Purchasing Power of Money, The Money Illusion, and Stable Money: A History of the Movement.  From the interwar period I was also greatly influenced by Cassel, Hawtry, Keynes (the Tract, not the General Theory) and Warren and Pearson.  From the post-war period Friedman was my biggest influence.  Mostly the Monetary History he wrote with Anna Schwartz.  I read it at Wisconsin, and immediately understood that the (hydraulic) Keynesian model that I was being taught was worthless, as I think even new Keynesians would now admit.  In general I like Friedman’s critiques of Keynesianism much more than his defenses of monetarism.  I was also influenced by Mundell, Hall, Lucas and especially McCallum from the post-war period.  Lucas and McCallum taught me why rational expectations were so important, and why they are so misunderstood.  I picked up bits of supply-side from Laffer and Wanniski.  I enjoyed How the World Works, although I don’t completely buy the supply-side argument.

Politics:  I once read a modern US  history by Michael Barone called Our Country.  (Actually I listened while driving.)  I recall that the book changed my mind on politics.  I used to think that the American people made the right choice when they picked the guy I favored.  Barone convinced my that there were usually good reasons for whomever was elected, even if ex post it turned out to be the wrong choice.  I developed a greater appreciation for democracy.   It’s interesting that when I read Barone now he seems like a quite hard-core Republican.  That’s not the impression I got from the book.  Did I misunderstand the message of the book?  Did Barone misunderstand the message of his own book?  Did his views change?  It seems like the entire country got much more polarized over the past 12 years.

History: I once read all the New York Times from 1928-38.  History seems really different when it is actually happening.  The people back then seemed just as smart as we are.  Of course we have a bit more history to learn from, so we did a bit better with monetary policy this time around.  But we still made many of the same mistakes, just to a lesser degree.  The class distinctions back then seemed bigger–which surprised me.  I knew that was the case for African-Americans, but I didn’t realize that class divisions among whites were also much greater, and that the upper class was so uninterested in the suffering of average farmers and workers.  Or how much wealth was concentrated in New York City at that time.  I also developed a much greater respect for the stock, bond, and commodity markets’ ability to forecast the economy.   They reacted to lots of things that seemed very important at the time, and that I think actually were very important, which are totally ignored by historians.  A good example is the gold panic of early 1937 and the dollar panic of late 1937.

The Neoliberal Revolution: The Economist magazine, which I’ve read for 35 years, was my guide to the neoliberal revolution.  By the end of the 1980s I understood that it was a global phenomenon and that it was bi-partisan.  This inoculated me against Krugman’s conspiracy theories that the Reagan revolution was all a right-wing Republican plot to grab Southern whites by playing the race card.  Even if true of the US, it doesn’t explain why the same policy trends occurred in 200 out of 204 countries.  And then there is Krugman’s argument that economies often did not do better after the free market reforms.  From The Economist I learned that you have to look at things cross-sectionally.  Almost everywhere in the world economic growth slowed after 1973.  The important point is that growth slowed much more in countries that did little reform, and much less in the more free market economies.    It doesn’t matter whether Chile grew faster or slower after 1973, what matters is that after 1973 Chile became the most successful economy in Latin America.

Tactics: The film Gates of Heavenly Peace convinced me that reform is usually better than revolution.

Culture and economics:  I got a better understanding of culture by reading travel books and novels by V.S. Naipaul and his brother Shiva.  Thomas Sowell’s books convinced me that culture was very important in explaining economic inequality.  And yet, I still find cultural theories of economic development to be unsatisfactory.  When Asia was far behind the West you could point to cultural differences.  When Asian started doing well you could point to the high IQs scores in some Asian countries.  When Ireland was poorer than Britain you could point to the conservative Catholic culture.  But then it suddenly got richer.  The poor performance of Latin America was due to the Spanish influence.  But then Spain started growing much faster than Italy.  No problem; now people could point to all the Italians in Argentina.  The theories seem disturbing ad hoc (and perhaps offensive as well.)    I still think culture matters, but I’m just not sure how.

Communism:  I’m old enough that my ideas of economics were formed with the backdrop of communism.  We were right-wing because we were anti-communist.  (It’s very revealing that when someone on the left described someone as an anti-communist back then, it was meant to be derogatory.)  I still recall when lots of progressives thought Mao was a great guy.  Communism is to modern liberalism roughly what racism is to modern conservatism.  Conservatives claim to be free of racism and progressives claim to oppose communism, but both groups have a lot of skeletons in their closets.  The book that had the greatest influence here was Harvest of Sorrow, which described the Russian/Ukrainian famine of 1932-33.  Although the book was written by Robert Conquest, what I remember best are the quotations from Vassily Grossman—I suppose he’s the person people should read.  I learned that starvation is perhaps the worst way a person can die, and hence that the Chinese Great Leap Forward was probably the worst thing that ever happened.  (Maybe not the worst crime, I suppose it was mass manslaughter, as compared to the Holocaust’s mass murder.)  This also got me thinking about similar horrors, such as the treatment of Native Americans and the African slave trade.  Here’s a few views that came out of this soul searching:

1.  The worst thing that ever happened (the GLF), was partly motivated by one of the best of all human motivations, sharing.  That is, the same motivation that makes family life possible.  This led me to conclude that extreme egalitarianism and extreme selfishness are both among the most nightmarish scenarios.  We need to think long and hard about how to make egalitarian policies work effectively.

2.  If the GLF was a failure of communism, then the slave trade and death of millions of native Americans show the dangers of my favorite ideology, classical liberalism.  Yes, it was the classical liberals who were among the first to call for the abolition of slavery, and to organize anti-slavery movements.  But that’s only part of the story.  Samuel Johnson asked “how is it that we hear the loudest yelps for liberty among the drivers of Negroes?”  And here’s what worries me even more.  I believe that classical liberal ideas made Europe richer and more powerful than the rest of the world between 1400 and 1800.  This allowed Europe to dominate the entire world in a way that was very costly to others (even if some of the harm, such as smallpox was unintentional.)  Europe was gradually getting more ethical, but it was getting more powerful at a much faster rate.  What does this mean for today?  Even though I favor classical liberal ideas like free markets, sometimes I wonder whether the experts in fields like biotech really know what they are doing.  Are they getting smarter and more powerful faster than they are getting wiser?  Is there a danger that they could produce a pandemic for which they have no cure?  Who knows.  But after watching our “experts” handle the financial crisis, I don’t have much confidence.

I came of age during the 1970s, which made me a hard money guy.  Then I studied the 1930s and learned that it was people like me, hard money guys, who caused the Great Depression.  We need to be very careful when we are given a chance to run things.  Progressives face the same risks.  Obama’s fans are frustrated that he isn’t able to do everything he wants.  But that may be a blessing in disguise.  In his heart he’d probably prefer something like the Swedish model.  But in my view any attempt to impose that model on the US would lead to an economic disaster.  We are a very different country.

Optimism:  This may seem to conflict with what I just discussed, but I also think that we often worry too much.  The Population Bomb influenced me greatly, in two different ways.  I first read it as a teenager, and found it completely convincing.  Later I came to realize that the arguments were bogus, and I turned toward the sunny optimists like Julian Simon.  Even today this makes me a bit less concerned about global warming than someone like Al Gore, despite the fact that I agree the Earth is getting warmer due to greenhouse gases.  The things that scare me are the things were aren’t prepared for, like a pandemic.  I do think it’s wise to have a carbon tax, for lots of reasons.  But I don’t lose sleep over global warming, and expect something else will prove to be the biggest challenge of the 21st century.

I also read a book by Herman Kahn called The Year 2000.  It’s so long ago that I don’t recall whether the book was any good.  But it did impress upon me the power of compound growth rates.  I suppose that’s why sometime in the 1980s I realized that China was going to become a really big economy.  I just looked at three factors:

1.  China was abandoning communism.

2.  Other market economies with similar cultures grew really fast in the 1960s-1980s.

3.  China had over a billion people.

That’s one prediction I still feel pretty good about.

Literary influences:   Under Western Eyes and Heart of Darkness are some of my favorite political novels.  I think Conrad’s skeptical take on utopian ideologies holds up pretty well.  Both books seem prophetic, as does The Secret Agent.  But I tend to steer away from literature about society, or about politics, as I am kind of an anti-social personality.  I tend to like novels about loners, about nature, or about philosophical ideas.

I suppose my blogging style was influenced by the essays of people like Borges and Chesterton, who loved to play around with paradoxes.  They liked to start by saying something to the effect; “everyone believes X, but perhaps the exact opposite is true.”  (Obviously I don’t share Chesterton’s political views.)  Many years ago I read a lot of the essayists that right wing intellectuals typically read; Mencken, Tom Wolfe, Camille Paglia, PJ O’Rourke.  It seems like ages since I read Republican Party Reptile.  Was there really a time when it was cool to be a Republican?  Did the Republicans change, or did I change?

I also think that reading literature can open one’s mind to alternative ways of looking at the world.  Donald Richie’s books on Japan made me recognize that our way of life isn’t the only possibility, even for a fully developed country.  Post-modern European novels probably made me more receptive to the philosophical ideas of people like Rorty.  And literature in general also makes one empathize with the suffering of others, especially people who differ from us.  I suppose this makes people more liberal-minded, defining ‘liberal’ not as left-leaning, but more broadly as something like secular consequentialist.

Recently, my biggest influence has been other bloggers.


Tags:

 
 
 

69 Responses to “Some influential “texts””

  1. Gravatar of peter peter
    20. March 2010 at 10:29

    One that’s on my list but doesn’t get much mention these days is Thirteen Days by RFK & Schlesinger. It’s the best didactic on the art of negotiation I’ve come across. Nothing like the highest of stakes to create a teachable moment that continues to enlighten 50 years later.

  2. Gravatar of Michael Michael
    20. March 2010 at 11:22

    Scott,

    I enjoyed this post very much… it was a nice change of pace from some of your recent posts. Your University of Chicago education has done you well, as it has for me.

    My own small contribution to your post is that there have been many great books written over the past 3,000 years, and little time… thus do not waste time on junk.

    Regards,
    Michael

  3. Gravatar of David Pinto David Pinto
    20. March 2010 at 11:53

    I had a college roommate, who when asked about a book, often replied, “I haven’t read it, but I’ve read about it.” Your opening reminded me about that.

  4. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. March 2010 at 13:12

    Fun post!

    The section labeled ‘micro’ contradicts the section labeled ‘philosophy’. Pragmatism, at least as Rorty pushes it (and you really should read Stephen Hicks’ Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault), is a way of making far more than one should of the fact that we experience the same reality but not in identical ways.

    Reading 10 years of the NYT from decades previously strikes me as a great way to be educated on how different events look as-experienced from how they are when turned into History.

    On slavery, the main influence on the abolition of the slave trade was Christianity, as one can see from the timeline of its abolition. Pope Paul III condemned enslaving Amerindians or other newly met peoples in 1537 in Sublimus Dei. Yet many Christians happily justified slavery. The same religion being experienced in different ways.

    Forms of bonded labour occurred in most civilisations. Mass slavery, more rarely (basically Classical Greece and Rome, colonial Brazil, colonial Caribbean and the antebellum South). The transatlantic slave trade took off because it built on the Islamic slave trade: West African rulers were already supplying the Islamic trade (the caravan traffic across the Sahara was analogous to “the Middle Passage” with the extra horror of the mass production of eunuchs) and happily expanded into this new market. During the same period, there was mass enserfment in Russia, Poland and Prussia for similar reasons as the slavery in the Americas–available land expanded more quickly than available population (in the East through the defeat of “Tatars” and Ottomans, in the Americas through disease), so bondage was a way of keeping labour costs down and extracting a larger surplus: particularly given the expanding export markets to be serviced. Though the Russian and Polish crowns in particular wanted to ensure the economic survival of the minor nobility who were central to their armed forces. (As a medievalist, the economics of bondage is an interest: I strongly recommend Robert Fogel’s Without Consent or Contract: The Rise and Fall of American Slavery, particularly for the light in throws on American history.)

    As for what happened to the Republicans, Roe v Wade energised religious politics, getting control of Congress 1994-2006 energised pork barrel politics and they lost the moral energy of being against communism. (You are absolutely correct, it is very revealing that ‘anti-communist’ was a term of abuse.)

  5. Gravatar of ssumner ssumner
    20. March 2010 at 13:34

    Thanks Peter.

    Michael, I agree.

    David, I guess there are a lot of us.

    Thanks Lorenzo, I don’t quite follow the point about philosophy and micro. I often contradict myself, but in this case I don’t see where.

    I agree that slavery has a long history, I was focusing on the rapid expansion in the Americas in the 1700s.

    Row v. Wade happened around 1973, but the Golden Age for the Republicans was closer to 1980-96. Pork spending might have played a role. But I also think the Republican Party became increasingly anti-intellectual. If anyone wants to feel better about the Republicans, read the article on Berlisconi in the NYR of Books. You’d think it was written by The Onion. If Paul Krugman lived in Italy he’d be going out of his mind by now.

  6. Gravatar of rob rob
    20. March 2010 at 13:37

    You were supposed to restrict your list to the Top 10. 15 points off for not following directions.

  7. Gravatar of Greg Ransm Greg Ransm
    20. March 2010 at 15:28

    How did NY Times coverage compare to that in the other NY papers? Did the papers give a uniform sense of history as it happened?

  8. Gravatar of Joe Joe
    20. March 2010 at 15:45

    Professor Sumner,

    Any chance you would at some point provide us with a U.Chicago reading/study guide of books and articles for those of us who don’t have an academic or professional economic background, so that we could come to appreciate their genius?

    I’m sure many of us are limited in ability to follow very advanced economic analysis that a professional would, but I’m sure they have many writings that could show us what it is that you saw in them.

    Regards,

  9. Gravatar of Chris Chris
    20. March 2010 at 16:10

    Truth about UChicago’s core. It helps give the instincts to survive in a world that has thrown away their micro instincts (but don’t realize it!)

    Becker/Murphy/Lucas.

  10. Gravatar of Philo Philo
    20. March 2010 at 18:28

    You wrote: “If income redistribution and forced saving and central banking and carbon taxes makes the world a better place in utilitarian terms, then so be it.” Perhaps you should have added: “But that’s an awfully big ‘if’!”

  11. Gravatar of Trent Trent
    20. March 2010 at 22:47

    I really enjoyed this post. I spend a lot of time trying to figure out what I believe and sorting through why and so I really enjoyed this personal account of how that life-long experience/ongoing project has been like for another thoughtful person with some similar interests. The conversation from Metropolis struck really close to home.

    Here’s some of the other reactions I had to this post (mini-background on me, I’m a graduate student in International Relations, aspiring Foreign Service Officer):

    “Here’s one way of thinking about the Chicago influence. When I read Matt Yglesias’ blog I see someone who seems to have basically the same values as I have. I don’t know if he’s a utilitarian, but he justifies his conclusions with broadly consequentialist arguments.”

    From reading some of his older posts he’s explicitly defended a utilitarian approach to ethics and I share that same basic orientation too. In high school I was a really rampant utilitarian but sometime during college I just realized the practical differences between people with supposedly vastly different ethical views often amounted to little in practice, since utilitarians often accept norms that lead to individual un-utilitarian outcomes (like not stealing healthy people’s organs left and right to save all those needing them). But I like the basic utilitarian orientation, and I think you do for the same reason; that everything should be precisely quantified because it can be, that quality of life can be seen in tiny increments, things lie on a spectrum, not in arbitrary seeming categories. I think that’s the fundamental intellectual appeal of it to me still.

    “It taught me that people are far more responsive to incentives than common sense would suggest. That public policy trying to fix problems is much more likely to have unforeseen negative side effects than common sense would suggest. It taught me that the world works in very, very counterintuitive ways.”

    I was first consciously a convert of leftism in middle school and that still causes a lot of lingering biases in my views. However, from research I have been forced to appreciate how the Chicago school orientation matches up with the real world in a lot of ways. The book “The Wisdom of Crowds” by the Economics/Finance writer for the New Yorker, along with research into organizational effectiveness and group interest made me realize that decentralization, if politically/socially possible, is always better (like the German army!). I really identify with your pragmatic orientation and it feels like a wonderful vindication of my life long train of thought.

    “The Economist magazine, which I’ve read for 35 years, was my guide to the neoliberal revolution. By the end of the 1980s I understood that it was a global phenomenon and that it was bi-partisan. This inoculated me against Krugman’s conspiracy theories that the Reagan revolution was all a right-wing Republican plot to grab Southern whites by playing the race card. Even if true of the US, it doesn’t explain why the same policy trends occurred in 200 out of 204 countries. And then there is Krugman’s argument that economies often did not do better after the free market reforms. From The Economist I learned that you have to look at things cross-sectionally. Almost everywhere in the world economic growth slowed after 1973. The important point is that growth slowed much more in countries that did little reform, and much less in the more free market economies. It doesn’t matter whether Chile grew faster or slower after 1973, what matters is that after 1973 Chile became the most successful economy in Latin America. ”

    I love the Economist and agree with the analysis here, but I gotta see I don’t much see the point of overall economic growth when its overwhelmingly concentrated among the already-rich. I recall a statistic saying that since 1980 there was a 140% increase in the wealth of the top 2% and a mere 19% in the remaining 98% (that could be from Krugman actually, though I share most of your criticisms of his intellectual approach, especially in the op-ed pages).

    “I still think culture matters, but I’m just not sure how.”

    I’ve thought about this too, and my view is that when culture usually is said to matter, that’s really code for nation rending effects of the balance of ethnicity. I think certain ethnic balances have very predictable effects. For example, if there’s a market dominant group that is an ethnic minority, it creates major political turmoil which has negative effects on long-term economic growth. Like cases involving the Chinese in Southeast Asia or whites in Latin America the poorer majority will try to take revenge in the streets or at the ballot box. In the U.S., the disproportionately poor ethnicity is also a minority of the overall population, so stability hasn’t been as negatively impacted as places like the aforementioned examples. But I like the examples you cited of Italians, Spanish, and Argentinians: culture is often invoked in intellectually lazy ways that aren’t specific and testable.

    “I still recall when lots of progressives thought Mao was a great guy. Communism is to modern liberalism roughly what racism is to modern conservatism. ”

    That seems like a really brilliant comparison to me. It’s sickening how much naivete there is and was about autocratic governments just because they paid rhetorical lip-service to socialist and communist ideas.

    “Many years ago I read a lot of the essayists that right wing intellectuals typically read; Mencken, Tom Wolfe, Camille Paglia, PJ O’Rourke.”

    I have to say I LOVE Bonfire of the Vanities. I thoroughly enjoyed the journalist perspective which offered a really compelling realist portrayal of public affairs fought among disparate interests.

    Anyways, just wanted to say I loved the post and it has converted me into a new regular reader of your blog.

  12. Gravatar of mbk mbk
    21. March 2010 at 04:22

    Shiva Naipaul, interesting, he’s the lesser known Naipaul… I really enjoyed his “North of South”, great way to get a feel for cold ware era African politics.

    Culture and development, well I have a lot of experience here, I lived and worked on 4 Continents and visited all 6… My conclusion, still, is that fixed rule systems (aka the rule of law, which I really only understood fully after reading Hayek in my 20’s) have a large influence on development regardless of culture or form of government. The switch from stagnation to development in my opinion comes when understanding of the respect for the rules – any rules – develops in a country, when the exercise of power switches from arbitrary (tyranny, marauding bands of criminals, corruption…) towards some kind of regularity, a.k.a., some kind of law. Only then do future actions become predictable in their consequences. Only then can you calculate for the future. Simple “order” is step 1, a decent rule system step 2. You could have monarchies or enlightened dictatorships or democracies, in various cultures – if there is understanding of and respect for the idea of the rule of law, you have planning, saving, reduced time preference, and development. If this understanding and respect does not exist, you don’t have it. This is why I regard with suspicion any pragmatic preference for expediency over principle, and means at odds with the ends. Bending rules destroys the crucial predictability of future events, and therefore creates moral hazard, not to mention reduced investment.

    I have sympathy for the idea that one does not have to have read all books cover to cover. Many books only have one or two ideas in them to begin with, sometimes it’s enough to read the title and you get it, the reading is mere entertainment. Borges had some nice story about book ideas he was too lazy to make into actual novels, so he just described the general ideas…

  13. Gravatar of ssumner ssumner
    21. March 2010 at 05:35

    rob, I was never very good at following directions. 🙂

    Greg, I also read the WSJ, the Economist, and especially the Commercial and Financial Chronicle. The NYT seemed to have the best and most complete coverage. I didn’t notice big differences in what they covered or how they covered the stories. Like today’s WSJ, there was a significant split between news and editorials. The news coverage seemed relatively unbiased to me, in the sense that it did not always reflect the biases of the editorials. Here’s a good example. Frequently markets reacted to news events in ways that seemed inconsistent with the paper’s editorial stand. In that case the news division went ahead and reported what happened, regardless of the implications. The only place I could find where bias played a slight problem was when there was a run on on the dollar. The respectable news media was reluctant to report this story, as it was viewed as being anti-social, as encouraging more panic. But it was still possible to find discussion of gold hoarding if you looked closely enough. And sometimes they would report the story after it was over, so as not to feed the panic. The CFC also reported many stories from other papers, and this helped overcome the very right wing bias of the CFC. The NYT seemed moderately conservative, and Economist seemed moderate. But it’s been years since I read some of them, so my memory might be a bit faulty.

    Joe, If you are not a trained economist, you might be better off focusing on the older stuff, such as Friedman, Stigler and Coase, who are relatively non-technical. Friedman’s “Money Mischief” is lite reading, and his Monetary History is excellent. He also wrote collections of essays that included micro topics. You could probably find these collections on Amazon.com.

    There would also be collections of essays by Stigler, and also Coase. Stigler also has a good micro textbook, but it is pretty old by now.

    You could take a look at Lucas’s Nobel Prize lecture, it might be online somewhere. Becker wrote a book on the Economics of the Family. It is probably somewhat technical, but you might be able to skip over the equations and get the basic ideas. There is also the Becker-Posner blog, which is a good introduction to Chicago thinking. Just reading back through the posts might be the best introduction to Chicago for a non-economist.

    Whether you agree or not with the specific theories of these economists, they all have extremely good analytical skills.

    Thanks Chris, Murphy arrived after I left Chicago, but he also seems very good. Perhaps some of my US readers could give suggestions to Joe.

  14. Gravatar of DW DW
    21. March 2010 at 05:36

    Scott,

    I like the post modernist slant of listing media as opposed to books. You’ve out-Cowen’d Cowen here.

    I’d recommend checking out Eric Barker’s “desert island” series. He lists the twitter feeds, blogs, podcasts and books he likes best.

    http://www.bakadesuyo.com/

  15. Gravatar of ssumner ssumner
    21. March 2010 at 05:55

    Philo, I should have added “and I think they do.” But I certainly have an open mind on these questions, and don’t think we should to a lot of income redistribution–rather it should be targeted at the working poor. (Disabilities should be handled separately.)

    Trent, Thanks for the very informative comment. It’s good to know I was right about Yglesias. I agree that mandatory organ transplants can create a dilemma for utilitarians. But I think the way around that is organ markets. Then no one is forced to give up an organ, and it also is the best policy in utilitarian terms.

    I forget to mention The Wisdom of the Crowds, which did influence me (although, again, I had already done a lot of future targeting research by that time.)

    Is the wealth data from the US or the entire world? I was talking about the world as a whole, and in that case the gains definitely have impacted the very poor in countries like China and India.

    I think wealth data is misleading, as it ignores human capital. I’d focus on consumption, which has gone up for all classes.

    Thoma Sowell is very good at discussing the so-called “middlemen minorities” such as the Chinese in SE Asia.

    Glad you like the blog–I won’t return to blogging full time until this summer.

    mbk. I have actually only read 2 books by Shiva Naipaul, North of South and the one on Jonestown (I forgot the name.) He died pretty young as I recall.

    I agree with your view about rules. How’s this, “it’s expedient to have fixed rules.” Or is that an oxymoron? In any case, in other posts I’ve called myself a “rules utilitarian”, so I don’t think regulators should be given a lot of discretion to pick the utility maximizing result in each case. let’s pick rules that usually give us the highest utility.

    I actually do read most books I pick up all the way through; I haven’t yet adopted Tyler Cowen’s utility maximizing technique. My problem is that often I will read an essay about a book, and then not even want to start the book. I was all set to read Guns Germs and Steel, and then read a long essay by Diamond, so I didn’t bother with the book. I still hope to read it someday.

  16. Gravatar of Bill Stepp Bill Stepp
    21. March 2010 at 13:26

    I felt like throwing The Economist in the trash yesterday.
    They are in favor of every government intervention out there, save tariffs, including the O-junta’s assault on healthcare. Its founders must be rolling over in their graves.

  17. Gravatar of John John
    21. March 2010 at 13:26

    I’m not sure Nietzsche had any politics.

    His proto-Nazi sister recompiled some of his stuff to seem like he was a proto-Nazi, but he’s on the record saying uncomplimentary things about her like “It is my sister who most prevents me from embracing eternal recurrence” and “Why did you marry that Nazi scumbag Forster” (I guess that one’s more of a paraphrase).

  18. Gravatar of CIP CIP
    21. March 2010 at 14:12

    I would like to think that the Chicago school is not as obtuse as DeLong and Krugman claim, but I keep waiting to hear a coherent macro argument from them – especially one that makes some contact with empirical fact. Instead we get Cochrane’s hysterical whine that Krugman has dissed him and the quickly refuted predictions of Casey Mulligan. All those faux Nobels and nobody who can write a coherent essay?

  19. Gravatar of Drew M Drew M
    21. March 2010 at 14:39

    Out of curiosity, what do you think about the institutional econ studies using game theory to frame some elements of culture? From what I’ve seen, a lot of the framework still seems to be in an infant stage, but it at least makes an effort at adding some culture to the mix when discussing development (though I realize it only covers some basic political measures and is not even close to all-inclusive).

  20. Gravatar of Flaul Flugman Flaul Flugman
    21. March 2010 at 14:57

    This is all excellent, interesting stuff except for the swipes at Krugman. Did he knock over your mailbox or something? I realize he’s not the greatest economist, columnist, or Princeton professor in history, but I’ve never seen him take half the positions you attribute to him here. You seem like a very talented guy, but you’d do better without such a chip on your shoulder.

  21. Gravatar of Trent Trent
    21. March 2010 at 15:20

    “Is the wealth data from the US or the entire world? I was talking about the world as a whole, and in that case the gains definitely have impacted the very poor in countries like China and India.”

    Oh wow I can’t believe I didn’t specify that, yeah it was for the U.S. alone. I’d definitely say that, no question, economic liberalism and globalization have benefited hundreds of millions of people in China and India. But it really bothers me how inefficiently it gets spread around and how slow the main beneficiaries of that kind of growth are to act in their own class interests and share it in the cause of national stability.

    “I think wealth data is misleading, as it ignores human capital. I’d focus on consumption, which has gone up for all classes.”

    This makes sense too. It annoys me how often growth statistics are cited on their own as proof that things are getting better without adjusting for population growth and inflation, but focusing on consumption seems to control for those factors just about perfectly. I wish I’d thought of that!

    “I was all set to read Guns Germs and Steel, and then read a long essay by Diamond, so I didn’t bother with the book. I still hope to read it someday.”

    Man that happens to me ALL the time.

    This interview (http://globetrotter.berkeley.edu/people4/Chua/chua-con0.html), readable in about 20 minutes, sums up pretty well how political and economic structures can interact badly with certain arrangements/balances of ethnic power. Like I said, I think a lot of discussion about the mysterious cultural factor in politics and economics can be explained by focusing on ethnicity specifically (which makes me also wonder, is one of the reasons ethnicity/culture is still so salient because there are more genetic differences between ethnic groups than we’re willing to admit? An evolutionary perspective also seems to suggest yes). Samuel Huntington’s “clash of civilizations” thesis could have been made more rigorous and specific from reading Chua’s book, in my opinion. Anyways, it really made me rethink development.

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. March 2010 at 16:57

    One mystery for me is, why did Whit Stillman stop making movies after his ‘trilogy’ of ‘Metropolitan’, ‘Barcelona’, and ‘The Last Days of Disco’?

    I wish I’d remembered some of the lines delivered by Chris Eigeman in ‘Metropolitan’ back when we were arguing over whether economics concepts could be dramatized. I think his character must have been an econ major.

  23. Gravatar of StatsGuy StatsGuy
    21. March 2010 at 17:16

    Interesting read… some comments –

    Right after I realized the power of compound growth rates, I realized that on a large enough timeline most things that appear to be compound are really S-shaped curves in their early stages. Bacteria population in a petri dish, for example. One wonders if human population is similar – or technological progress. Etc.

    Pandemics… I’m somewhat less concerned about acute pandemics than you from the perspective of world civilization. Even if a pandemic knocks out 5% of the world population (particularly if it targets sick/elderly), the globe will recover – perhaps even be better off. From a personal and family perspective, I’m terrified – read Cruel Windfall (or, like me, a review of Cruel Windfall).

    I’m more concerned about the aggregation of the costs of globalization – things that don’t get measured in GDP (or get measured as increases in GDP) but in fact are a tax on human utility/productivity. The accumulation of persistent and known disease pandemics that add ever greater taxes on society… AIDS, Hep C, Tuberculosis, MRSA… antibiotic resistance. Invasive species that reduce biodiversity and dramatically alter ecosystems. Single-species crop dependence. Lately, consider adding poorly regulated financial instruments.

    Much of history can be framed as a race between Civilization and Darwinist dynamics. The great question – have we achieved escape velocity, or merely delayed and exacerbated the inevitable decline. If we fall, my sense it will result from three things – 1) a global system that focuses more on efficiency than robustness, and hence is obsessed with tearing down barriers and promoting interdependence in order to arbitrage cost differences. 2) That the number of small and hidden costs will accumulate, particularly those that require efficient public action to identify and moderate. 3) The growth of subsystems (ideological, religious, biological, economic) that flourish in a free, interdependent, and liberal society but are inherently toxic to the structure in which they flourish.

    The fear is that if the system is too unified and interdependent, too tightly coupled, the fall of one component could cascade… But any component (nation) that tries to isolate itself to preserve robustness will lose out due to hypercompetitive dynamics. A dynamic that takes 100 years to manifest, or happens (randomly) every 100 years, is not enough to counter the converging pressure of competition.

    But alas, you are an optimist – I think optimism and pessimism are merely choices, since one can always martial arguments for one side or another.

  24. Gravatar of mbk mbk
    21. March 2010 at 22:57

    Statsguy,

    “Right after I realized the power of compound growth rates, I realized that on a large enough timeline most things that appear to be compound are really S-shaped curves in their early stages. Bacteria population in a petri dish, for example. One wonders if human population is similar – or technological progress. Etc.”

    A simple model of an S-shaped curve is the logistic equation from population ecology. It is the combination of a geometric / exponential (compound growth ) curve with a fixed limit population, the carrying capacity K. K is the maximum sustainable population in the long run in the given ecosystem. The salacious thing about the logistic equation is that in its discrete form (modeling non overlapping populations in discrete time steps of growth) it allows for overshoot of K (boom and bust) or oscillations around it, instead of a smooth S-shaped asymptotic limit. It has also been the poster child of chaos theory because it can generate chaotic fluctuations quite easily: just make the growth rate very high…

    I use the logistic equation to teach the idea that not everything with a negative feedback in it has to necessarily converge towards a single equilibrium point, anything from S-shaped, to boom and crash, to cycles, to chaos, is possible. This potentially applies to all sorts of mechanisms in the economy that include negative feedbacks through some kind of more or less fixed carrying capacity – say market size for a product.

    This being said if you allow for innovation, or expanding market sizes, the apparent limit of a fixed carrying capacity is raised, so one must be careful with analogies.

    On the potential dangers of total transmissivity of everything in the world economy – I have often wondered to what extent a certain compartmentalization (think biological cells with their controlled import export systems) could be beneficial to robustness. Then again what about large countries – the US works as a unified system of considerable size, and it works well, by comparison to other economies. So why would this not work at the word wide level? I suppose the necessary compartmentalization / local isolation, can be achieved at firm level, or at local political level.

  25. Gravatar of C. Maoxian C. Maoxian
    22. March 2010 at 00:05

    Austen with an ‘e.’

  26. Gravatar of Tracy W Tracy W
    22. March 2010 at 03:21

    CIP:

    I would like to think that the Chicago school is not as obtuse as DeLong and Krugman claim, but I keep waiting to hear a coherent macro argument from them especially one that makes some contact with empirical fact.

    That Margaret Thatcher cut government spending in the UK in 1981 in the middle of a recession, in the face of opposition from over 300 economists based on Keynesian economics, and based on advice drawing from Milton Friedman, strikes me as a good example. And then Ruth Richardson did so in her 1991 budget in NZ, again in the middle of a recession. Both countries saw a recovery in GDP growth, starting at the same time. (Of course, this does not prove causality, but as there is no way of doing controlled experiments in macroeconomics it is always impossible to prove causality, all these events do is show some relationship between the macroeconomics of the Chicago school and empirical fact, and also disprove the naive Keynesist hypothesis that cuts in government spending always lead to a worsening in GDP).

  27. Gravatar of scott sumner scott sumner
    22. March 2010 at 06:14

    Thanks DW. I would bring literature, not political/economics books to a desert island. So my list of influential books is very different from a list of favorite books, which would be mostly fiction and travel books.

    Bill, I thought they had been quite critical of Obama’s big government approach, but I haven’t read the newest issue.

    John, I think his views had political implications. He certainly wasn’t a fan of utilitarianism. I didn’t mean to imply he was a Nazi. Nor was Marx a Stalinist. But both philosophers had views that may have contributed to political developments that they themselves would have opposed. So its complicated.

    CIP, You said;

    “Instead we get Cochrane’s hysterical whine that Krugman has dissed him and the quickly refuted predictions of Casey Mulligan.”

    A few points:

    Does Cochrane “whine” anymore than Krugman about being misrepresented? I don’t think so.

    Krugman did misrepresent Cochrane.

    Krugman misrepresents lots of people, including me.

    I am also critical of Chicago economics, but I don’t think it is stupid. Not everyone in the world buys into Krugman’s liquidity trap model where once rates hit zero all the laws of economics go out the window. Not buying into that model doesn’t make one stupid, it’s just a different point of view.

    I often disagree with Krugman, but I also frequently go out of my way to praise his brilliance.

    Krugman caters to the intelelctual prejudices of his left-leaning readers. After reading Krugman they think “Well, we certainly don’t have to pay attention to all those Nobel prize-winning Chicago economists, they are as stupid at the Tea party members.”

    Studies have shown that there is a huge spike in the number of workers who find jobs right after their 26 weeks of unemployment comp runs out. What is Krugman’s explanation for that spike? He doesn’t have one, but he seems to think anyone who does offer an explanation is either stupid or insensitive.

    You might want to read the recent New Yorker piece on Krugman. He says that conservative economists are often corrupt, only spouting free market views because they are paid to, not because they believe them. Then in the next sentence he says he is puzzled that they took his criticism personally. I read it three times, and wondered whether the New Yorker was playing a cruel trick on Krugman, or whether it went right over their heads as well.

    Drew M., I haven’t looked at those studies. Have they been successful? Culture is so complex that I would think it is very difficult to model with game theory.

    Flaul, You said:

    “This is all excellent, interesting stuff except for the swipes at Krugman. Did he knock over your mailbox or something? I realize he’s not the greatest economist, columnist, or Princeton professor in history, but I’ve never seen him take half the positions you attribute to him here. You seem like a very talented guy, but you’d do better without such a chip on your shoulder.”

    Actually, he is one of the greatest professors at Princeton. I take swipes at him because he is the most visible and intelligent proponent of ideas that I am opposing. I have seen him take all of the positions that I attribute to him here. Have you never read his posts on how Reaganomics was sold through an appeal to white racism? Or how the Chilean free market reforms weren’t very successful because Chile did not grow faster after 1973 than before. If you don’t believe my claim that he said these things, just scroll back through his posts–you will find everything I said is accurate. The Chilean post was pretty recent.

    Trent, Those are good points. It will be interesting to watch how the debate over the role of genetics plays out in future decades. It’s not my field, so I don’t have strong views on the subject. But it is very hard to debate this issue because it seem to me to be the one area of science that is almost intrinsically insulting. Actually, I think much of the humanities is nothing more that high IQ people insulting low IQ people, but most others don’t see things that way. But if you argue one ethnic group is superior to another, it seems inherently insulting, at least to me. Whether it is true or not is, of course, a different issue. You won’t see me wade into those waters. Or criticize those who do (on either side.)

    Patrick, I really liked his films. Your post makes me want to re-watch them.

    Statguys, That’s a good point about the s-curve.

    I’d consider a pandemic that killed 350 million to be far worse than a 5 degree rise in global temps. In the long run we can fix those environmental problems, and bring temps back down. The 350 million are still deprived of life.

    I think interdependent economies are far more robust than autarckies. Closed economies are very susceptible to local disasters.

    I don’t think optimism and pessimism are choices, I think they are hard-wired into the brain. I am not all that optimistic. I would consider my worry over possible pandemics to be a fairly pessimistic view. Certainly if our policymakers had the same concern, then policy would be far different—we’d devote much more resources to preventing pandemics.

    I was pessimistic in the 1970s when I thought the world was moving toward socialism. When that trend reversed in the 1980s I got more optimistic about economic issues. I also noticed that “there is a lot of ruin in a nation” and that made me less pessimistic.

    mbk, You comments make sense to me. I admit to not being well-informed about chaos theory, but when I first heard about attempts to apply it to things like financial markets I had my doubts, and still do.

    Thanks Maoxian, I am a horrible speller. It is only because of spell-check that you miss my worst errors. I’ll fix it.

    Tracy, I’d add that fiscal stimulus this time is more than double the level of 1982-83, as a share of GDP. And yet the recovery in 1983-84 was far more rapid than our current recovery.

    Again, I’m not saying that Chicago economists haven’t made some weak arguments, but that’s no reason to treat them like morons. Krugman’s argued that unemployment comp doesn’t increase the unemployment rate, that FDR’s high wage policies boosted employment, and that monetary policy is ineffective once rates hit zero. Those are also weak arguments. His defenders will say “he meant conventional monetary policy, he just forget to say it.” Bingo, and that’s exactly the sort of mistake he ridicules Cochrane for making. It’s clear what Cochrane meant if you read the whole essay.

  28. Gravatar of StatsGuy StatsGuy
    22. March 2010 at 06:14

    mbk –

    Yep, and I have to wonder what the economics field would look like if they spent more time on DifEQ and less on comparative statics. Perhaps they might model currency fluctuations in a manner similar to predator/prey cycles, with a lag time due to the costs/time required to shift production and/or depreciate old production and make new structural investments. Comparative statics, however, relies heavily on the notion that such differences would be arbitraged away, but that presumes a level of omniscience that markets do not have. Saying that markets are the best we can do does not imply they are particularly good.

    Here’s intrade’s prediction for health care reform. One week ago, it was at 40%. Now it’s at 95%.

    http://data.intrade.com/graphing/jsp/closingPricesForm.jsp?tradeURL=https://www.intrade.com&contractId=709242

    How are markets supposed to arbitrage against this degree of uncertainty? Heck, we still can’t even explain business cycles. They seem to just happen – and so we start to rely on them happening by themselves without taking actions that may have helped cause them historically, which I would argue is partly what led the Fed and others to go silent in end of 2008 while the economy fell off a cliff. (Look, our curve-fitting models suggest that employment will start to pick up in 6 months and peak at 8%!)

    And in all of this, we truly expect markets – a horizontally structured spot-transaction system – to arbitrage against 1-in-100-year events, or systemic global risks in a hypercompetitive environment?

    If one considers auction theory and the narrow margins in modern economies, this suggests that almost every industry in existence suffers from the Winner’s Curse.

  29. Gravatar of scott sumner scott sumner
    22. March 2010 at 06:22

    Statsguy, late 2008 was a perfect example of why we need to listen to the wisdom of markets. The markets were screaming that money was way too tight to hit the Fed’s aggregate demand targets. The Fed ignored those warning and now we are paying the price.

    You said:

    “Saying that markets are the best we can do does not imply they are particularly good.”

    I strongly agree, and this is a point that many overlook. I think the sub-prime fiasco shows that markets make some pretty big mistakes, there is no getting around that fact.

  30. Gravatar of Blackadder Blackadder
    22. March 2010 at 07:53

    Scott,

    What’s the name of the Berlisconi NY Review of Books article you mentioned? Is it online somewhere?

  31. Gravatar of amusing sentences « Beyond Rivalry amusing sentences « Beyond Rivalry
    22. March 2010 at 08:20

    […] amusing sentences Posted on 2010/03/22 by mmwm “Perhaps you saw the movie Metropolitan.  There is a scene where a young man is debating the merits of Jane Austen with a young woman at a New York cocktail party.   Finally in exasperation she asks the guy ‘Which Jane Austen books have you actually read?’  He replied ‘I don’t actually read novels, I read literary criticism.’  I’m kind of like that asshole. ” (at The Money Illusion) […]

  32. Gravatar of johnleemk johnleemk
    22. March 2010 at 08:29

    CIP,

    What about Lucas and rational expectations? Considering this is one of the foundations of New Keynesianism, it’s hardly stupid or unpersuasive, even if it sometimes seems to be taken too far.

    I am a bit skeptical about the Thatcherism which others have brought up. Thatcher approached economics from an angle which didn’t always make economic sense; for example, she focused a great deal on deficit reduction as the key to fighting inflation, in spite of repeated entreaties from Friedman, et al reminding her that this is not what deficit reduction would accomplish.

  33. Gravatar of Drew M Drew M
    22. March 2010 at 08:43

    Unfortunately I do not have my computer with me so I cannot cite any papers offhand, but recently Elinor Ostrom’s work has touched on some aspects of modeling culture in this framework. Although I don’t know that I would call the papers “successful,” they do explain some of the oddities in development economics as to why certain solutions work in one country and do not work in a seemingly similar country. A lot of the models use probabilities of aversion and similar methods to “model” aspects of culture in a framework which is admittedly limited, but I think it’s a good start. I agree that an issue as broad as culture is difficult to model in almost any mathematical framework.

  34. Gravatar of Sumner on the Neoliberal Revolution Sumner on the Neoliberal Revolution
    22. March 2010 at 08:44

    […] lots of great stuff in Scott Sumner’s post on “ Some influential ‘texts‘”. I especially liked this bit: The Economist magazine, which I’ve read for 35 years, […]

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. March 2010 at 10:07

    ‘Patrick, I really liked his films. Your post makes me want to re-watch them.’

    In which case you might enjoy this insightful essay on them:

    ———-quote————
    No wonder Alice yearns for the order and restraint of traditional social forms. This is a lonely new world. “I’m beginning to think,” she says poignantly in the next scene, “that maybe the old system, of people getting married based on mutual respect and shared aspirations, and slowly, over time, earning each other’s love and admiration, worked the best.” “Well,” quips Charlotte crisply, “we’ll never know.” Alice’s yearning is [Whit] Stillman’s social vision””his movies are a plea for measured, romantic restraint.

    However worried Stillman may be about changes in American culture, they fade to insignificance when contrasted with Euro-nonsense. That contrast is the focus of his second film, Barcelona, which places two American cousins, Ted and Fred, in that city in the “last decade of the Cold War.” It’s a city where “the sexual revolution . . . went far beyond [the U.S.]. . . . The world was turned upside down and stayed there.” To their sexual irresponsibility, Barcelona’s Europeans add a full measure of political irresponsibility, making the film’s American characters seem idealistic and earnest by comparison. Here, Stillman’s ironic send-up of American culture plays off against his appreciation of its preeminent value.

    The comedy concedes throughout that the film’s American protagonists are peculiar, in many of the ways that Europeans say we are. Ted, a junior sales executive for a Chicago-based multinational, embraces the earnestly optimistic self-help model of Ben Franklin and Dale Carnegie. “The classic literature of self-improvement really was improving,” he proclaims. It may be a naive and simplistic view, Stillman allows, but in a country of self-made men, it is effective, and it certainly allows us to be successful abroad.
    ————endquote———–

  36. Gravatar of Ten Influential Books « Beyond Rivalry Ten Influential Books « Beyond Rivalry
    22. March 2010 at 11:31

    […] The Money Illusion […]

  37. Gravatar of John Merryman John Merryman
    22. March 2010 at 11:47

    Scott,

    The internet has been hell on my already poor reading/attention span, so I can identify with the part about getting the idea and not reading the whole book. In this era of exponential media, it seems that knowledge is information, but wisdom is editing. I recently wrote the following in an effort to clarify our current dislocation, as I see it. I thought it might respond the general effect of your influences, if not the intent of listing them:

    Breaking the Big Mold: Untangling Time, God and Money

    The earth doesn’t travel the fourth dimension from yesterday to tomorrow. Tomorrow becomes yesterday because the earth rotates. Time is a consequence of motion, not the basis for it. It is not the linear narrative along which the present moves, but the changing configuration of reality by which the future becomes past. This is relevant because as individual points of view, or collective histories, we travel against context from past events to future ones, but as generations rising and falling, life is integral to context, with the future as potential and the past as residual.

    This is not deterministic, as one influences the context as well as being influenced by it.

    Monotheism is similarly reversed. The absolute, as universal state, is basis, not apex. A spiritual absolute would be the essence of being and elemental consciousness from which life rises, not a moral and intellectual ideal from which it fell. Good and bad are not a metaphysical conflict between the forces of light and darkness, but the basic biological binary code. Amoebae are attracted to the beneficial and repelled by the detrimental. What is good for the fox is bad for the chicken, yet there is no clear line where the chicken ends and the fox begins. Life is a constant process of creation and consumption, bootstrapping itself up out of the muck. The future rises as the past crumbles.

    We may all be branches of the same tree, but the result is that we all point in different directions, so viewing one’s cultural idiosyncrasies as anything more or less than what purpose they serve is delusional. Meaning is what’s left when all that is meaningless is distilled away, but we all view the results from different perspectives. Remember it was the polytheists who invented democracy, since multiple gods(memes) required a need for conciliation and cooperation. Whereas monotheism mostly validated monarchy.

    Without motion, there is void, but motion destroys what it creates. Only what has existed forever, will exist forever.

    At this point in time, on this little blue planet, we are suffering the effects of a collective delusion, as our bubbles of notational wealth evaporate. What we have forgotten is that the laws of supply and demand also apply to capital. Since the supply is infinite, it is demand, those willing to borrow and able to pay this capital back, which determines how much wealth can be stored in the economy. The bankers just feed our desire by creating artificial demand of those willing to borrow, but not able to pay it back. As well as manufacturing enormous bubbles of extraneous circulation.

    What if we were to simply accept money for what it is, drawing rights on community productivity, rather than the delusional notions of infinite wealth we dream it to be? That would make the monetary system a public utility, much like public roads. You own your house, car, business, etc, but not the roads connecting them and no one cries socialism over that.

    Since it is the attempt by everyone to hoard as much of these drawing rights as possible which both destroys the monetary system and seriously distorts the economy in service of it, treating it as public property would make excessive hoarding socially irresponsible and necessarily illegal, much like being a road hog and driving recklessly is not acceptable.

    It would also have a far more conservative effect on the economy as well, since everyone would be far more careful what value they drain out of social and environmental resources to convert into currency in the first place. We all like having roads, but there is little inclination to pave more than we must. This would open up the space for all sorts of organic social and economic mediums of exchange to develop.

    A publicly supported currency requires a public banking system, which, like democracy, must be bottom up. With local banks funding the communities that create the wealth in the first place and serving as boards for regional banks and currencies.

    Growth is bottom up, not top down. Leaders are those who understand it is their responsibility to manage this growth, not assume they are the primary recipient of its fruits.

    My 2 cents, monetary and otherwise.

  38. Gravatar of rob rob
    22. March 2010 at 12:11

    when you ask “Did Barone misunderstand the message of his own book?” it reminded me of Milan Kundera’s perplexing claim that a novel should be smarter than the novelist writing it, otherwise they should do something else for a living. but it seems possible that the mere form of a well structured work–because the form itself is evolved and meaningful– can yield a result more meaningful than the same author might be able to deliver in a form which itself has less to offer.

    or if nothing else the ambition to write a high quality work could make one more conscientious than they are the rest of the time.

  39. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. March 2010 at 15:27

    Seek, and ye shall find. Here’s one scene from ‘Metropolitan’ that I was talking about; Chris Eigeman’s character with some astute microeconomic advice for the West Sider who professes to be a socialist who is opposed to Debutante balls on principle, but is making new friends by attending them.

  40. Gravatar of Philo Philo
    22. March 2010 at 18:01

    “The worst thing that ever happened (the GLF), was partly motivated by one of the best of all human motivations, sharing.” Well, it certainly was not motivated by a desire *to share*; at best, it was motivated by a desire *to compel everyone else to share*.

  41. Gravatar of scott sumner scott sumner
    23. March 2010 at 04:50

    Blackadder, It’s called “Videocracy.” Berlisconi must be the worst leader of any developed country right now. Their articles are usually online. Highly recommended. Reading it makes me laugh when I think of all those Europeans who said “How Could Americans have elected Bush twice?”

    Johnleemk, The early Thatcher years were a bit shaky as I recall, as there weren’t really any roadmaps for what she was trying to do. It’s discouraging how Gordon Brown (a Krugman favorite) has reversed many of her achievements and screwed up the UK economy. We are following in their footsteps.

    Drew, My view has been not so much that policies only work in some cultures, but rather policies only get adopted in some cultures. If we tried to implement the Danish model here we wouldn’t end up with Danish policies, but something much worse, as we are more corrupt and more centralized.

    Patrick, Thanks, now I really have to see those films again.

    John, I think the first part of your essay is very good, but don’t understand the second part:

    1. Isn’t money already a public utility, controlled by the government?

    2. I don’t see hoarding as a big problem, the Fed can simply increase the supply to accommodate any hoarding.

    rob, Yes, I think I also recall reading that comment. From Borges onward you find many such views in post-modernism. And of course “no one reads the same book twice.”

    Thanks Patrick. That dialogue is interesting. It suggests that it shouldn’t be about inequality per se, but rather injustice. There is generally no injustice in a rich guy having more money that a middle class guy.

    Philo, Agreed, but my point was that it all started with a dreamy Marxist fantasy about a world based on sharing. The GLF was one of the few times that “to each according to their needs” was actually implemented. Does that make sense? I am interested in anyone’s feedback because I think this is an important point.

  42. Gravatar of John Merryman John Merryman
    23. March 2010 at 08:56

    Scott,

    Thanks for the consideration. You would be surprised just how much of a negative reaction the point about time draws on physics discussions. It really raises issues about the whole mathematicization of the field. The same logic used to say the measure of time is another dimension of space, based the velocity of light, could be used to say temperature is another parameter of volume, based a given quantity of energy.

    Safe to say, I don’t bother with many religious discussions.

    Yes, money already is a public utility, but most people don’t think of it that way and our political system, capitalist democracy, really is based on the assumption of it being private property. You might be thinking of hoarding in terms of what gets stuffed under the mattress, but it’s the foundation of our society. Consider pension funds. They are enormous stores of notational wealth we save up to retire on, but saving that amount of value is far more problematic than is taken into consideration. It requires someone or some institution to take on an equivalent amount of debt and be sufficiently productive with that capital to pay it back with interest. Not only government debt, but the whole real estate bubble was largely driven by the need to invest far more wealth than the economy could hold. Who were buying all these mortgage backed securities, etc? Pension funds and money managers who needed to produce returns. Everyone blames the banks and subprime borrowers, but it was this need to store enormous amounts of capital which was the driving force behind it. Just for a moment, consider what would have been the effect of privatizing Social Security? Where would that money have been invested? Bigger real estate bubbles? Borrowing for more wars in the Middle East? The government did try to build up a surplus for the baby boom generation and what did they do with it? Buy government bonds.

    Which brings up the question of government finances. To budget is to prioritize and then set limits of what can be afforded. The current system is designed to overspend because they buy votes by adding expenses to enormous bills that can only be passed or vetoed. The result is more debt and more Treasury bonds to sell. It’s like negotiating with your kid on how many candy bars he can have, if he eats the apple.

    If they actually wanted to budget, why not break the bills down to their constituent items and have every legislator assign a percentage value to each item and then re-assemble the bills in order of preference. The president would draw the line at what would be funded. This would divide responsibility, allowing the legislature to prioritize, while giving the president final authority over total spending. Since making the cut would be graded on a curve, there would be much less incentive to trade favors and the percentage system would allow legislators to fine tune their granting of favors to other legislators and lobbyists. Of course, this wouldn’t create endless amounts of government debt for people to buy to store capital.

    Storing capital is like storing electricity. In any quantity it has to be kept moving and generally used as it is generated. It is a large scale social contract which has to be respected, or it eventually becomes worthless.

    That why we need to limit the uses of money to where it is necessary, not try to use it as the glue for the entire society.

    Getting a bit off the topic of literary influences.

  43. Gravatar of mbk mbk
    23. March 2010 at 10:30

    John, I like your take on the philosophy of money as a claim on someone else’s productivity. I like to think of this particular function of money in a slightly different way, in a balance sheet logic. Money can only be someone’s asset if a corresponding liability exists, be it perceived value of current goods or perceived value of future productivity. If the value of current and future goods and productivity declines then the “value” of monetary assets also declines, and capital is destroyed in a sense. A practical consequence of this is that to me for instance there is little fundamental difference between pension plans backed by future taxation (“social security” sensu USA), stock/bond investments, bank savings given out as loans by the banks, or forced saving plans a la Singapore (monies duly reinvested into something else by the government pension fund). In no instance is “value” actually “stored”. In all above cases people collect claims (and hopes) on future productivity. If the economy doesn’t exist in the future, all are equally worthless. Sure, in accounting terms and technicalities of future value and compounding there is a difference, but not in the underlying accounting equality of value=expectation. I suppose this is why Scott would like to anchor monetary policy in NGDP, something that maybe I start to understand now.

    Scott, StatsGuy, re: logistic equation and chaos etc.: I am less interested in chaos itself and more in positive and negative feedback loops in dynamical systems. In biology these are common and usually tuned to homeostasis and both high robustness (ability for recovery from shock) and high stability (high resistance to shock). In signal and control theory, and engineering generally, feedback and phase shift effects are well understood and the nasty effects of the wrong kind of feedback are held in check by design, usually through either friction (shock absorbers), input controls (filters prevent feedback in the danger zone), or output controls (amplifiers slowed down when approaching the danger zone). Biological predator prey cycles have been likened to business cycles at least since the 1950’s and all the math is well understood. But somehow I am left scratching my head that mainstream economics does not seem to argue along these lines.

    One more thing re: Wisdom of the Crowds. I take it Scott that you conflate the EMH with the case for the wisdom of the crowds. Now Surowiecki makes a point if I recall, that the crowds are only wise if the crowd is varied (no group think) and the information sources to the crowd are also varied (in essence, uncorrelated). This leaves open the possibility that markets fail to correctly value assets and predict the future (and make the weather!) in those instances where a majority of participants exhibits correlated behavior, be it because of psychology (manias…) or impoverished sources of information (ratings agencies…). That this correlated behavior is even possible suggests that prices in markets are not following a true random walk but a chaotic path, that is hard to distinguish from random in the same way as your computer’s pseudo random numbers, which are generated by a deterministic function. The nasty side effect of this is that chaotic movements can autonomously synchronize on occasion, and this would then be a third pathway (along with poverty of information sources, and group think) to generate true mispricing, i.e., market failure.

    It should be noted that any expert group opinion, including government action, then contains elements of all three above pathways to mispricing.

  44. Gravatar of John Merryman John Merryman
    23. March 2010 at 14:42

    mbk,

    Reality is truth. Answers are the part people are willing to pay to hear. No profession can be based on telling people the truth, only on finding the answers they want to hear. Economists have to make a living too.

    The result is that we keep discovering ever more effective feedback loops to exploit, but create ever larger crashes when they are depleted.

    Re; my point above about time: Two particles collide and create an event. The remnants of the particles go from past events to future ones, but the events go from being in the future to being in the past. Energy manifests as information. Information defines energy. Energy is what is always going into the future. Information is only along for the ride, for as long as it is manifest. So ultimately, information goes future to past. So the question is; What does the future hold? The answer is wherever the energy is going, as the information currently defining it is crumbling like an old sidewalk, with grass pushing up through it.

    The feedback loop which has currently been pushed to the breaking point is capitalism. This lowest common denominator of economic contracts is devouring all other social and cultural prey. It would be one thing if private banks issued and were responsible for their own currency, but the central banking model makes the state responsible for the currency, while private banks profit from managing it. This will prove to be the noose they put around their own neck, because eventually rights revert to those who hold the responsibilities.

  45. Gravatar of mbk mbk
    23. March 2010 at 20:59

    I think you lost me here John. I meant all this in a much more down to earth way and I believe that generally, our system of trade and economic exchange is voluntary, and beneficial to all.

  46. Gravatar of John Merryman John Merryman
    24. March 2010 at 01:52

    mbk,

    I see it in as fundamentally bottom up process. Which is not always a pretty picture. We, in this day and age, are floating on a cloud of hundreds of millions of years of hydrocarbons, much like earlier civilizations were built on various forms of forced labor, two legged and four legged. I’m not pessimistic, because I see human civilization as the nascent central nervous system of a planetary organism. In many ways our civil and technological advances imitate biological processes and I think we are the planet’s effort to grow a brain.
    This doesn’t mean I believe in some centrally planned, top down civil structure, because a central nervous system is a feedback loop within the larger organism that is designed to protect and preserve the whole.
    Otherwise, we are just top predators in a collapsing eco-system, as the bankers are top predators in a collapsing financial system.

  47. Gravatar of scott sumner scott sumner
    24. March 2010 at 06:24

    John, You said:

    “Consider pension funds. They are enormous stores of notational wealth we save up to retire on, but saving that amount of value is far more problematic than is taken into consideration. It requires someone or some institution to take on an equivalent amount of debt and be sufficiently productive with that capital to pay it back with interest.”

    I have a big pension fund with zero debt. It’s all stocks. Right now our tax system is strongly biased in favor of debt. So I agree that it would be desirable if we reformed our tax system so that we had less debt. But I also think we need much more saving in this country.

    mbk, You said;

    “Money can only be someone’s asset if a corresponding liability exists”

    I disagree. Gold coins aren’t anyone’s liability. They are net wealth

    You said;

    “One more thing re: Wisdom of the Crowds. I take it Scott that you conflate the EMH with the case for the wisdom of the crowds. Now Surowiecki makes a point if I recall, that the crowds are only wise if the crowd is varied (no group think)”

    This is precisely why I like markets. There is far more diversity of opinions in the market, than in a government regulatory committee like the FOMC, or among academic professors. Thus markets forecast better than government regulators, or economics professors.

    I like Singapore’s pension system better because it provides much more incentive to work, save, and invest, or to create wealth.

  48. Gravatar of John Merryman John Merryman
    24. March 2010 at 08:27

    Scott,

    Theoretically stocks are not notational wealth, but tangible assets, or a legal portion thereof. The problem is that when we are trying to save more notational value than there is tangible value, the result is asset inflation, as the price becomes more a factor of what someone else might pay for it, then earnings of the company. Not only does this start a bubble, but far more insidiously it creates a situation where the actual economic value of the company is no longer a function of the services and products it provides, but how it can be sold to the financial community, which leads to all number of unhealthy effects for its core function. GMAC and GE would be good examples of the results.

    As for gold, it is a good example of money as a social contract, since its value is a function of what other people will value it at, as opposed to tangible use. So, yes its value isn’t due to anyone’s liability, but it is due to everyone’s desire.

    Markets are an eco-system and their participants are the equivalent of organisms. While organisms are constantly coming and going, eco-systems are far more stable, but are still subject to large scale disruptions, especially when something as fundamental as the medium of exchange, the currency, becomes very close to a monoculture and everyone becomes more concerned with hoarding the medium than trading in it.

  49. Gravatar of mbk mbk
    24. March 2010 at 09:09

    Scott, you are monetary man and I suppose it’s foolish to argue strictly monetary points with you when one isn’t a monetary man… but let me do it anyway. Whether gold (in its monetary function) or paper money – I don’t see how any money can have intrinsic worth without the expected future exchange of it against something else. And this I call a kind of liability that must back the money asset. I am not talking about the narrow case of a gold liability against a paper asset. I am making the case that any money is viable as an asset only if a liability against it in the shape of a real present or future product or service exists.

    To me the difference between gold or gold standard monies and pure fiat monies just lies in the difficulty to inflate money supply in the former. But without the corresponding symmetrical liabilities to be exchanged against gold – the expectation that this gold can be exchanged in a market against something other than gold – it is just as intrinsically worthless as any other money. Practical example, immediately post-WWII in Europe, no food, no shelter, and a bag of gold went for a bag of potatoes. It was a store of wealth alright, but it hugely lost its value at the point when it was most needed, and that is because what was most needed was food, not gold. The net “wealth” in this gold, its asset value, was drastically shown to be just as dependent on the existence of something to exchange it for, as any other money: a liability.

    Wisdom of the crowds: yes of course – diversity makes markets so powerful (specifically, distributed information, to give credit where it’s due, Polanyi, Hayek come to mind again). But my point was that markets too can synchronize themselves for the various reasons I pointed out. Those are then genuine market failures, as opposed to the fashion to declare markets a failure just because they give prices that government doesn’t like.

    Singapore’s pension system has the huge advantage that each person’s savings are truly personal. Save for variation in interest rates and inflation, you know how much they’re going to be worth. That can be a problem though when people are living longer than planned for. There is talk now to complement the system with a longevity insurance just in case you outlive your funds. In terms of incentive I don’t see how it is much different from a 401k or even regular pay as you go systems – all these scale with income, and all these incl. the Singapore system, have contribution ceilings. In practice people just work and contribute without thinking of it as an investment. There’s not much personal discretion in the investment of the mandatory savings anyway – there is basic interest from government, some enhanced investment schemes, and of course you can do what is the most popular thing, and take money out to buy real estate, usually government housing project flats. The servicing of the loan counts as alternative to ongoing contributions. It’s as if you could use your social security contributions to pay off your home loan instead of contributing to social security. Of course if you want liquid money in retirement at some point you’ll eventually have to convert that home to cash.

  50. Gravatar of ssumner ssumner
    25. March 2010 at 05:29

    John, Again, I don’t see a problem with people hoarding cash, as long as the central bank accommodates this increased demand.

    Yes, more saving will raise asset values, but I don’t see any problem with this.

    mbk, You said;

    “Scott, you are monetary man and I suppose it’s foolish to argue strictly monetary points with you when one isn’t a monetary man… but let me do it anyway. Whether gold (in its monetary function) or paper money – I don’t see how any money can have intrinsic worth without the expected future exchange of it against something else.”

    Do you also feel this way about zinc and copper? I don’t, and for the same reason zinc and copper have value even if not used to purchase other goods, so does gold.

    I don’t believe the story about gold and potatoes. After WWII gold was worth exactly $35 dollars an ounce.

    You said;

    “Wisdom of the crowds: yes of course – diversity makes markets so powerful (specifically, distributed information, to give credit where it’s due, Polanyi, Hayek come to mind again). But my point was that markets too can synchronize themselves for the various reasons I pointed out. Those are then genuine market failures, as opposed to the fashion to declare markets a failure just because they give prices that government doesn’t like.”

    Sure markets make mistakes, but it’s not a market failure unless there is an alternative policy that is better. But there is no outside group that is less biased than markets. So free markets are usually best.

    You said;

    “In terms of incentive I don’t see how it is much different from a 401k or even regular pay as you go systems -‘

    I agree about 401ks, but I think people do pay attention to 401ks. I do. When my 401k hits $2 million I’ll retire. Social Security is different. I regard my contributions as a tax. I will get back the maximum regardless of how much I put in from this point forward

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. March 2010 at 09:00

    Scott,
    I’m a little late in commenting. Your post made me think back on books that have had great influence on me.

    First, let me share the fact that I almost applied to St. John’s College of MD because they had a Great Books of the Western World curriculum. I ended up applying to ten very competitive schools but was only admitted to Chicago (and the Univeristy of Delaware Honors program). I didn’t know anything about the Core Curriculum until they sent me a course catalog the summer before I entered. I was absolutely thrilled to discover I had achieved a “twofer”.

    I spent three years at Chicago, never graduated (my degrees are all from Delaware), but I like to think that I took the best of Chicago away with me. The Core has served me well.

    And I expanded on what I learned formally by buying used paperback editions of Great Books at O’Gara’s Bookstore and the 57th Street Bookstore in Hyde Park. I like to think I have the greatest, albeit cheapest, collection of Great Western Books on the Delmarva Peninsula.

    That being said, I wanted to mention one book that had a great influence on me that I’m sure no one has ever heard of. I found it in my high school’s library when I was in high school (1978-1982). The book is “The American Challenge” by Jean Jacques Servan-Schreiber.

    Servan-Schreiber was a French journalist and politician. He co-founded L’Express in 1953 with Françoise Giroud, and then went on to become president of the Radical Party in 1971. He oversaw its transition to the center-right, the party being thereafter known as Parti radical valoisien. He tried to found in 1972 the Reforming Movement with Christian Democrat Jean Lecanuet, with whom he supported Valéry Giscard d’Estaing’s conservative candidacy to the 1974 presidential election.

    In the 1960s, Servan-Schreiber found himself in the position of a press lord, a political editorialist in search of new ideas. His writings drew some of the best French minds of his generation to him. He was growing more and more disenchanted with Gaullist policies, and was no longer willing to settle for an observer’s role.

    He found a collaborator in Michel Albert, who provided him with extensive documentation to inform his editorials. One of Albert’s reports struck him particularly. It presented the United States and Europe as engaged in a silent economic war, in which Europe appeared to be completely outclassed on all fronts: management techniques, technological tools, and research capacity. Servan-Schreiber saw in this thesis the potential for a seminal book. He fleshed it out with reading keys and concrete proposals for a counter-offensive. The result was his international best-seller “Le Défi Américain” (The American Challenge, 1967). It sold 600,000 copies in France, unprecedented for a political essay, and was translated into 15 languages. This book was instrumental in creating a resurgence of French nationalism and drawing attention to the importance of transnational cooperation in Europe.

    Building on the book’s success, he traveled throughout Europe, speaking to packed lecture halls, touting the advantages of a federal Europe with a common currency and of a decentralized France.

    Now, I used to be a high school mathematics teacher, but I’ve always had an interest in economics and politics. Finally in 2005 I returned to school to study economics. As an all but dissertation economist my research interests have focussed exclusively on the European Union. I don’t think it’s too hard to see how “The American Challenge” probably planted some seeds many years ago that are only just beginning to take root now. I consider it to be the most interesting book on European politics and economics of the 1960s that nobody’s ever heard of.

  52. Gravatar of John Merryman John Merryman
    25. March 2010 at 09:31

    Scott,

    If people simply hoarded cash, ie, stuffed it under the mattress and the bank keeps issuing more to service the demand, eventually a point is reached where the value of these trading rights to community productivity are perceived to be losing value. That would be when it is understood there are far more units of currency than production to exchange for them. At this point there would be a mad rush to exchange them and the system crashes.

    If the price of a loaf of bread doubles, that’s called inflation. It isn’t that the value of the bread increases, but the value of the currency decreases. When the price of a company increases faster than its growth potential, that’s asset inflation and it also is not an increase in the value of the asset, but a decrease in the value of the currency.

    It’s all relative.

  53. Gravatar of scott sumner scott sumner
    26. March 2010 at 04:35

    Mark, Thanks for the info. I’ve certainly heard of the book, but I’ve never read it.

    Mark, If the Fed targets NGDP, which is what they should be doing, then none of the problems you describe will occur, even if people do hoard currency.

    Growth potential is not the only factor affecting stock prices, discount rates also matter.

  54. Gravatar of mbk mbk
    26. March 2010 at 08:54

    Scott,

    your “Do you also feel this way about zinc and copper? I don’t, and for the same reason zinc and copper have value even if not used to purchase other goods, so does gold.” :

    I meant the monetary function of gold, which relies on the trust that someone will exchange gold against other goods in the future. Without this imaginary future backing, hoarding of cash, or gold, or copper, is unreasonable once it goes beyond personal utility needs (the true residual “intrinsic” value, and even that varies from person to person).

    But fair enough: I’d say that in terms of wealth accumulation (the function normally assumed by cash or gold), even the “utilitarian” copper or zinc or real estate have no intrinsic value once personal copper, zinc, or real estate use in plumbing, battery building, and housing are satisfied. They acquire their “value”, once again strictly in terms of wealth accumulation, only through the hope of existence of someone accepting that hoarded surplus in the future.

    What I am trying to say is this: wealth is only possible in a world that has an economy to trade it for. The gold for potatoes story is first-hand from destroyed Europe post WWII w/o a functioning economy, markets, or opportunity to exchange hoarded gold for those mythical $35/ounce. You want to eat now, you go to that farmer with your hoarded jewelery and gold coins and you trade. Once there is a real crisis, not some 10 or 20% “collapse” in GDP but a 95% collapse, annihilation of government, currency, stability, and trust, all those “store of wealth” fantasies reveal that “wealth” of any kind of thing hoarded, only exists if it can be traded against something else. A hammer has intrinsic value to me, but a thousand hammers? No more intrinsic value than a single one.

  55. Gravatar of John Merryman John Merryman
    26. March 2010 at 16:10

    Scott,

    Discount rates only serve to increase or decrease the supply of credit and therefore relative value of the currency.

    One of the original observations that started my consideration of the financial system was trying to figure out how Paul Volcker cured inflation by raising interest rates. Yes, loose money causes inflation, but higher rates reduce the demand for capital and slow the economy. So how would reducing the demand for capital be very effective in curing an oversupply?
    It just so happened that at around the same time, early eighties, Reagan was running up the deficit. It was 200 billion by 82 and that was real money in those days. So what is the difference between the Fed selling debt it is holding and the Treasury issuing fresh debt? The Treasury spends what it gets back into the economy in ways which support economic growth, further increasing demand for capital. The fact is, by the Fed’s very own logic of selling debt to bondholders and retiring the money collected, if there is a surplus of money in the system, it is in the hands of those with a surplus of money. Of course, it was blamed on the workers wanting more money, so income became expendable and capital became sacred. Now we have had thirty years of exploding capital growth and declining incomes, leading us to where we are now. Huge storm clouds of capital hanging over a parched economy and little trickling down. Growth is bottom up, not top down.

  56. Gravatar of ssumner ssumner
    27. March 2010 at 10:22

    mbk, It just seems a very strange use of the term “liability.” Part of the value of any object is its potential exchange value. Think of a nice oil painting you have on your wall. Or your house. But I just don’t see how that relates to liabilities for financial assets, where there is a specific person or institution that is obligated to pay X dollars.

    I still think the gold for potato story is apocryphal, or maybe it happened on one odd occasion. But I don’t think that happened at all frequently. You could probably get much more than potatoes from a US officer stationed in Europe after the war. If course it might have been a very small bag of gold for a very big bag of potatoes.

    John, We haven’t had 30 years of declining incomes. And monetary policy only has real effects in the short run, so any 30 year trends will be due to non-monetary factors.

    I don’t follow your monetary arguments.

  57. Gravatar of John Merryman John Merryman
    28. March 2010 at 03:08

    Scott,

    Yes, there have been alot of factors and influences ever the last thirty years.

    The point has been an expansion of capital at the top of the income scale and and increase of debt in order to keep up throughout much of the rest of the population. So now we are at a point where most people can’t afford to take on more debt, so those with lots of capital are mostly lending it to the government, because much of the private economy is saturated in debt. In the long run, it will do no one any good, as those who think the government will pay it back will be disappointed.
    Essentially there has to be some convection cycle of wealth throughout the larger economy and not just a predatory group siphoning off as much as they can, because the ultimate value of the currency is based on the total economic productivity and if this total productivity is debased so that a few can profit, it starts a negative feedback cycle of declining wealth throughout the entire economy, including those at the top.

  58. Gravatar of ssumner ssumner
    28. March 2010 at 06:39

    John, You act like it is the poor doing the borrowing. The vast bulk of the debt is incurred by the upper middle class, I’d guess well over 75% of it. It’s not clear to me who they intend to “keep up” with. The rich?

  59. Gravatar of John Merryman John Merryman
    28. March 2010 at 15:45

    Scott,

    Everyone has their own reasons for borrowing. I don’t see it as some sort of class conflict between those with capital and those borrowing it. I do see it as a group denial about the process and the results. Frankly a great deal of the savings is by the middle class in terms of large pension plans, personal savings, insurance, etc. The problem is finding ways to invest this wealth. The function of investing is to extract/leverage more wealth/energy out of the process than is put in. Obviously this doesn’t work for everyone, or indefinitely. If I was to put up a simplistic culprit, I would say it’s baby boomer self-centeredness. Speaking as a baby boomer. As we have been educated from an early age to think of ourselves as individuals, as opposed to those zombie communists, we don’t recognize the ways we do function as a collective and thus do not consider the effects. Specifically we are all trying to save for retirement through various forms of individual methods, but which are actually based on the same monetary system. Thus we are trying to save up enormous amounts of wealth by bidding against each other for the same assets and driving up their prices, as well as being ripped off by being sold worthless bonds, derivatives, etc. The reason the stock market dropped so far when the sub-prime market collapsed was because as the bubble popped, investors had to sell the things that still had value, since no one would buy the junk and it was a buyers market. Well, what’s going to happen when baby boomers are all trying to sell the assets in their retirement funds when they really need the money to live on? At the same time the government is trying to raise taxes to pay for all the Social Security, Medicare, Medicaid, interest on the debt, etc. from that same cohort of workers the boomers are trying to sell their investments. It would have been no different had we privatized Social Security, because the money would have just been used to drive up assets further.
    So we are a generational wave, driving a wave of savings along with us and it’s going to crash. Alot of the young people think they are going to get jobs in the health care sector, taking care of all the old folks. Where is the larger productivity in that? Where is the payback on the hundreds of billions we spent on wars in the Middle East? Right now, we have the government spending every penny of credit it can find to keep the bubble semi-inflated. What happens when it can’t anymore? Warren Buffet is getting better rates than Uncle Sam.
    So. My point is that after this bubble pops, we are going to have to seriously start looking in the mirror and quit deluding ourselves. Money is drawing rights on productivity. We need to understand that productivity is what is important, not the financial bubble of illusionary value. Finance is a utility, not a god.

  60. Gravatar of ssumner ssumner
    29. March 2010 at 11:42

    John, You seem to suggest that we save too much. In fact Americans save far too like. I wish we were more like Singaporeans, who save 30% to 40% of their incomes.

    Stocks crashed in late 2008 because of very tight money, not because of the subprime crisis.

  61. Gravatar of John Merryman John Merryman
    29. March 2010 at 18:22

    Steve,

    Stocks crashed because of tight credit, so those needing to cover their positions had to sell their most solid assets into a market where lots of other people were having to do the same thing.

    I’m not saying we are saving too much. I’m saying we are wasting our savings chasing bubbles. The Singaporeans have a centrally planned investment process, where this pool of wealth can be efficiently and substantively directed towards concrete productivity, not our method of having lots of individuals and money managers chasing numbers. What’s our fallback position? Everyone buying guns, gold and beans? How does that serve the long term interests of a modern economy?

    We have sold off our manufacturing base to the highest bidder with the lowest labor costs, our infrastructure from transportation to healthcare and education is crumbling, our politicians are more interested in scoring political points then have any long term vision, we are spending untold sums of wars that will have no long term return in global prosperity. Yes, there are many ways we could be investing our savings for the future, but we are not. We are chasing imaginary gains in the casino that Wall street has become. Do you think the Singaporeans would entrust their national savings to a bunch of people running only slightly more complex Ponzi schemes than Bernie Madoff?

  62. Gravatar of Books, Books, Books at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics Books, Books, Books at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics
    30. March 2010 at 03:40

    […] Jenny Davidson, Will Wilkinson, Matt Continetti, Ross Douthat, Mike Konczal, Kieran Healy, Scott Sumner, and no doubt others. I’m late to the party, but here’s my […]

  63. Gravatar of ssumner ssumner
    30. March 2010 at 05:57

    John, I recall a study by Barro that showed investment returns were much higher in Hong Kong, which is not centrally planned, as compared to Singapore. I don’t think central planning helps. Investment will be more productive if allocated by the market. Of course the housing bubble wasn’t the free market, government planning pushed lots of investment into housing.

  64. Gravatar of Dr. Liberty Dr. Liberty
    30. March 2010 at 08:06

    John, Your position seems to contradict itself. You said:

    “I’m saying we are wasting our savings chasing bubbles. The Singaporeans have a centrally planned investment process, where this pool of wealth can be efficiently and substantively directed towards concrete productivity, not our method of having lots of individuals and money managers chasing numbers.”

    Ok, so it seems that you would much prefer that the government chose where to invest. But, then you say:

    “our infrastructure from transportation to healthcare and education is crumbling, our politicians are more interested in scoring political points then have any long term vision, we are spending untold sums of wars that will have no long term return in global prosperity. Yes, there are many ways we could be investing our savings for the future, but we are not.”

    Wait a sec, now it looks like the whole centrally-planned idea has been a failure. So who is to blame for our government failing us with a crumbling infrastructure? Your answer:

    “We are chasing imaginary gains in the casino that Wall street has become. Do you think the Singaporeans would entrust their national savings to a bunch of people running only slightly more complex Ponzi schemes than Bernie Madoff?”

    Wall Street??? Your logic seems to flow like this:
    1. Private investors chase bubbles
    2. This is undesirable
    3. Centrally planned investment is better
    4. All of the problems in U.S. investment are due to evil central planners.
    5. Private investors are bad.

    Am I missing something?

  65. Gravatar of John Merryman John Merryman
    30. March 2010 at 08:34

    Scott,

    I’m certainly not a personal advocate for government influence. Personally I own part of a horse farm I rent back to my sister and ride horses for her, as well as help my ex with her riding school to support my daughter, so that I don’t have to deal with all the myriad frustrations of dealing with an economic reality I didn’t have alot of initial advantages in and preferred to ignore anyway. So my approach is through an understanding of how nature functions and how it manifests in human behavior, as opposed to any particular school of economic or political thought.
    That said, there are advantages and disadvantages to the various sides of the argument between personal freedom and civil order. You might say that Somalia and North Korea represent the two extremes, so the preference is a moderate cycling in the middle.
    Now obviously Hong Kong is a far more economically dynamic situation and returns are going to be greater than Singapore, but it does raise the issue of whether some of those gains are froth. There is nothing inherently wrong with bubbles. It is a fact of physics that structure is mostly empty space. We don’t build buildings for the walls, but the rooms formed. It’s the same with the economy. It wouldn’t function if there were no spaces for activity within the framework. In biology, most of the cells within your body are the equivalent of independent contractors. The problems start when these structures are not built strong enough to withstand the forces applied to them and the bubble/building collapses. As when those independent contractors overwhelm the immune systems in your body and you succumb to sepsis, cancer, etc. Then again the immune system could start attacking healthy tissue and you die of the equivalent a police state run amok.
    So we could have this discussion of counterexamples forever, because there will always be one to prove every point, but the problem is that in the current situation our system of cycling conserved wealth into ever greater gains for the larger society has started to break down, as individuals focus on their specific needs and desires, without some significantly larger consideration of how this process will play out over the long run.

    When humanity first began developing social institutions, it was natural for those with the best organizational skills to run them and this eventually led to dynastic hierarchies which became increasingly oppressive as their motivation morphed from managing society for the advantage of the group, to viewing society as a resource to be exploited for the hierarchy. Eventually the point is reached there this model had to be shed for society to survive. These have been gradually replaced over the centuries by various forms of quasi-religious ideologies as the focus of the group. Currently the dominant one is Capitalism, which is little more than a transliteration of the natural order of ecosystems as applied to economic relationships. It is very effective and resilient because it does mirror natural processes so well, but the financial circulatory system does provide a back door through which those controlling it can tax the rest of the economy. So long as the host remains healthy, this form of parasitism is tolerated, but deregulation of this financial sector is proving cancerous, as it grows uncontrollably and causes adaptive mutations throughout the rest of the economy. The reaction to this is starting to set in, as people start pulling their money out of larger banks and putting it in local banks and credit unions. States are starting to look into managing their own money, rather than storing it in private banks as well. Eventually the private banking system will go the way of the private political system and the monetary system will become another form of public trust, just as with democracy, the political system evolved into a public trust.

  66. Gravatar of John Merryman John Merryman
    30. March 2010 at 08:47

    Dr. Liberty,

    I can understand your confusion about the argument I’m making if you haven’t read some of my earlier posts. I view reality as bottom up. There is no ideal toward which we are pointed, but are simply adding layers around the source. So I am going to be making counterexamples in an effort to balance the larger discussion. There are times people work best alone and times they work best together and it isn’t always obvious until after the fact. There is an old African saying that if you want to travel fast, go alone, but if you want to travel far, go with a group. It’s as applicable today as it was ten thousand years ago.

  67. Gravatar of scott sumner scott sumner
    31. March 2010 at 06:14

    Dr. Liberty, I agree, and would add that Singapore also has a thriving stock market–it is hardly a centrally planned economy. Rather it is an intelligently planned economy in those sectors where the government is involved. I doubt our bloated federal government could do as well as a small, relatively un-corrupt, city-state.

    John, I don’t think our problems are due to deregulation of the financial system–tight regulations (capital controls) were installed after the S&L debacle. The regulations didn’t work.

  68. Gravatar of John Merryman John Merryman
    31. March 2010 at 18:58

    Scott,

    That’s why I make the point that we should examine just what money is in the first place. Yes, there will always be ways around the controls, when the regulators can be convinced that the solution is more liquidity, rather than solvency. We create the illusion of wealth and sacrifice the real economy and monetary system to support it.

    I’m not saying Singapore is top down planned, because they have a society where the cultural standards do more to keep people relatively honest than regulations do. That’s why I keep making the point that if we treat the monetary system as the public utility it is, it would work to make people understand wealth as a function of tangibles, rather than notational balances.

  69. Gravatar of The most influential books in my life « Ducks and Economics The most influential books in my life « Ducks and Economics
    7. April 2010 at 08:57

    […] Will Wilkinson, Matt Continetti, Ross Douthat, Mike Konczal, Kieran Healy, Ivar Hagendoorn, Scott Sumner, and Steve […]

Leave a Reply