Don't Follow the Money

Attempts are often made to "explain" financial downturns with the metaphor, "the economy is like an engine, and sometimes it overheats". This is more of a STFU than an actual explanation. No attempt is made to explain in what sense the economy resembles an engine, nor why it should overheat, or what that even means. There is perhaps an implication that there should be a "cooling off" period after a "boom", but no meaningful explanation as to why that should be so. The content essentially boils down to "shit happens". Shit does happen, but it doesn't JUST happen.

I think a great deal of confusion is caused by people being distracted by money valuations. Even when a dollar referred to a specific quantity of metal, the purchasing power of a dollar would vary over time. Now that a dollar doesn't mean anything in particular, it is particularly foolish to act as if a valuation in dollars is anything like a "true" measure of value.

Of course, there isn't and can't be a single number which is an absolutely true measure either of stored value or of productive capacity. The relative values of goods and services will change unpredictably over time, and there are no generic factories but rather there is the capacity to produce particular goods and services.

A speculative bubble happens when there is an unsustainable accelerating increase in the relative value of some kind of good or service. There are two related phenomena which characterize a speculative bubble. First, there is a great deal of illusory wealth. Income producing assets such as stock or rental property, are valued far above what they "should" be worth based on the actual amount of income they produce based on the belief that their future valuations will rise still higher. Second, there is a misallocation of resources toward production both of the overvalued goods and services themselves and of increasing the capacity to produce them still further.

There are two important points here. First, the "losses" incurred at the "bust" at the end of a "boom" are inevitable, because much of the wealth was never really there in the first place. Second, there is not and cannot be such a thing as a generic boom. The world has never had a problem with too much productive capacity for everything, and it is doubtful that it could. Excess productive capacity for certain goods can be harmful to those who possess skills or equipment which are useful only for producing those goods, but their problem is not so much that too many other people can produce what they can as that they can't competitively produce anything else either.

The Left

Many years ago on Usenet a remember reading a post by a Muslim who argued that, although the Koran in English may seem unimpressive, if one were to read it in the original Arabic one would be convinced that it must be the direct word of God, that it is such sublime poetry that it could not have been written by a mere man. I wasn't an active participant in that particular thread, just a reader, but the argument made an impression on me because it so clearly illustrated a principle. It seemed absurd that the poster would expect his readers to go to the trouble of learning Arabic just to refute him, and yet in principle there was nothing really wrong with his argument, nor was there any real way he could make it without expecting the other participants to learn Arabic. I had perhaps been somewhat suspicious of the assertion that one should investigate all ideas for one's self rather than merely relying on the judgments of others, but never before had it been so clear what an utter crock it is; there isn't time, wouldn't be sufficient time in a thousand lifetimes, to actually examine all possibilities sufficiently, even if one restricted examination to ideas with a substantial number of adherents.

This post is not about the political left, but rather about the left side of the intelligence curve, and not just the left tail, or even the left half, but more like the bottom 95%, and perhaps in some cases still more. That is, nearly everyone.

I have a pretty high opinion of my own intelligence, but although I'm samrter than the average bear, I know that there are millions of people in the world who are at least approximately as smart as I am, and some of them are substantially smarter. Occasionally I have come across an argument that seemed sufficiently complicated that not only was I unwilling to devote the time and effort to puzzle it through, I thought perhaps it might be beyond my ability to follow (and I'm not counting cases where the author is deliberately being obscure). I can't remember the particular incidence, but I do remember once being shocked by the insight: most people are like that all the fucking time.

There are important implications of this. First, people are generally being sensible when they dismiss unconventional or outlandish ideas as "nonsense". Most such ideas are nonsense, and most people are incapable of distinguishing the occasional profound insight from madness, Either they can't do it all, or they can't do it within the constraints of time and effort the idea seems to deserve. Second, that when new ideas do overtake the old, it happens not so much because everyone is convinced as an individual of the truth of the new idea as that an influential few embrace the new idea and the rest follow "expert" opinion. That's all they can do. Finally, if an idea is popular with the most influential members of a society it is likely to become regarded as "true" regardless of the idea's actual merits. This is, I think, true in all societies, but particularly those like ours which have a reasonably well defined class of professional intellectuals.

It follows that it's generally a waste of time trying to persuade the masses of anything new by argument. The following one can get will depend more on one's skill as a persuader than on the quality of one's ides, and in any case that following will remain small unless one has the support of the influential ones.

But where argument fails, demonstration may succeed. Technology advances because the new methods can be directly observed to be better at accomplishing desired aims than were the old methods, or even are capable of accomplishing that which could not be done before.

The Cost of Conflict

There are two opposite opinions as to what the cost of violent conflict ought to be. One side holds that war or something like war is inevitable, and therefore that it is desirable that there be such a thing as "rules of war" which are designed to minimize the length of war, the damage done, and the impact on nonbelligerents. This idea is the inspiration for such things as the Geneva Convention. The opposite view is that the high cost of war itself is a major impediment to war, and that peace is only likely if each side of a potential conflict realizes that it will lose more than it can gain in the event of an actual outbreak of hostilities. This idea has led to, among other things, the doctrine of mutually assured destruction.

I think most people would agree that neither extreme is really satisfactory. What's missing is a moral dimension. It's true that the stronger side may back down from a potential conflict on the grounds that the costs of victory exceed the rewards, and most people would regard this as a good thing, but only when the stronger party is in some sense the aggressor. For something like MAD to work, there must be enough sense of agreement on moral questions that it is usually reasonably clear which side "ought" to back down. If it become simply a question of who "blinks" first, with the reward going to the more reckless player, eventually a conflict will come in which neither side will "blink" until it is too late.

Voting can be considered as a form of nearly costless battle, with all that implies: people attempt to enforce their will upon others in whatever asinine way that pops into their minds. My personal favorite example is the California ballot initiative banning horsemeat for human consumption. It doesn't do the horses any good. Retired horses are made into dog food, it's hard to see why being made into human food would be worse for them. Then again, the ban doesn't do any practical harm. Nobody in California was eating hoses pre-ban anyway. If the people advocating forbidding other people from eating horse knew they would have to personally enforce their ban with guns, the whole idea wouldn't even have come up for discussion. Of course, nobody would fight for the right of others to eat horse either, but I think people would fight to avoid a situation where a numerical majority could micromanage their lives in arbitrary ways, if the issue was put to them in such a straightforward way. As it was, of course, that wasn't at issue. As far as the state is concerned, the principle has been completely established that any law, no matter how intrusive or pointless, is valid so long is it is enacted by the proper procedure.

On Our Way

On Our Way is President Roosevelt's book describing the policies of his first year or so of presidency and the rationale behind them.

Perhaps the most important quote fromthe book is on its very first page:
"Some people have called our new policy 'Fascism'. It is not Fascism because it springs from the mass of the people themselves rather than from a class or a group or a marching army. Moreover, it is being achieved without a change in fundamental republican method".

That is, the fact that his economic policies were very much modeled after those of Fascist Italy is of no significance, since there is nothing wrong with those policies. The only thing objectionable about fascism is the methods used to gain and hold power. This theme echoes throughout the book. The ideas that there is a clearly defined national good, that the great helmsman can clearly see where this good lies, that those who pursue their own interests rather than acting to advance this general good are utterly wicked and undeserving of any rights, to Roosevelt these are not even subject to question.

The combination of arrogance and idiocy is astonishing. Here's a particularly egregious quote, from page 86 of the John Day 1934 edition: "We had for many weeks, and indeed months, subscribed to the general principle that if the hours of labor for the individual could be shortened, more people would be employed on a given piece of work. That was the purpose behind Senator Black's bill that called for a thirty-hour week for all employees in every industry and in every part of the country. Closer study, however, led us to believe that while the ultimate objective might be sound, the convulsive reorganization necessary to put such a law into effect might do almost as much harm as it would do good."

Roosevelt breaks his arm patting himself on the back for establishing relations with Stalinist Russia... at the height of the Ukrainian terror famine! He does not dismiss objections to opening relations with the brutal despotism. He does not acknowledge there could be any such objections. He merely proclaims, "thus, after many years the historic friendship between the people of Russia and the people of the United States was restored", as if the government was synonymous with the people.

Roosevelt's main objection to the free market seems to be that it is far too productive, although why less productivity would be better in his mind is not made clear. He was certain that "speculation", that is, buying low in order to sell high is by nature sinful and destructive. It would degrade the purity of assertion to explain why this is so.

Roosevelt more or less acknowledges that much of what he did, he did because he could not do what he really wanted to, which was to reduce the nominal debt, both of the government and of private individuals. The purchasing power of a dollar is far from constant, and Roosevelt argues that it is more just to require debtors to repay their debts in "dollars" which have approximately the same purchasing power for goods and services in general as "dollars" had at the debt was initially issued rather than "dollars" having the same value in gold. In 1933 it was not yet feasible to simply print paper "dollars" until their purchasing power had returned to pre-crash levels. So instead he chose to decimate productivity in order to raise the prices of goods, and restrict employment in order to raise wages. Sort of like tying a tourniquet around a patient's neck to stop a bleeding head wound. In fairness, it was a severely bleeding head wound.

Obtaining Wealth

This post is about general categories describing how wealth is obtained, and by "wealth" i mean things of value, good or services, in any quantity, not necessarily about huge amounts.

There are always many ways of categorizing concepts, and although some are clearly better than others, there isn't necessarily one "true" or "best" way. One common scheme assigns all specific methods to two general categories: "voluntary" (creating goods or obtaining them via some mutually agreement with their rightful owners) or "involuntary" (forcibly taking them from others, or forcing others to labor for one). This scheme seems to naturally to a moral classification (voluntary = good, involuntary = bad), although there is some question as to whether it is morally acceptable to forcibly take goods form those who have themselves obtained said goods by force, and how or if a rightful claim to goods forcefully taken could ever be established, particularly if the last rightful owner is dead.

I think it is often more useful to think in terms of three categories. What I will call "making" (which largely corresponds to the "voluntary" case above), "taking" (involuntary) and "finding". I won't try to define these here, but trust that if my readers (if there are any) have questions as to what I mean by them they will ask in the comments section. There are two related reasons why I make a distinction between finding and making. First, finding often seems largely a matter of luck rather than effort. Second, finding and claiming something deprives others of the opportunity of finding and claiming it themselves in a way that making really doesn't. For both these reasons there is less of a moral sense by third parties that the finder is entitled to the goods that he finds than that the maker is entitled to the goods he makes. This is particularly true of highly valuable random finds.

Making seems to increase the total amount of wealth in existence in a way that finding doesn't. This isn't a true as it may initially seem because value is not in things in and of themselves but rather the use of them. The discoverer of an uninhabited island certainly increases the wealth in existence by any value he obtains from the use of it until it is discovered by someone else. But given that someone else will eventually find it independently (or would have had not the first discoverer made it known), the claim that the initial discoverer and his heirs are enttled to its full value forever seems somewhat arbitrary.

Of course, not all activities fall neatly into just one of these categories. For example, it is quite common for providers of goods and services to deal voluntarily with their customers, but they obtain a higher price than they otherwise might because they or others acting on their behalf have used force to restrict the number of providers. One could might that in this case the free market price is earned and the price premium is essentially stolen. Of course, in the constrained market one does not know what the free market price would be.

Wealth obtained through pure trading or "speculation" seems to be largely found rather than made. Although to an extent speculators and traders help to decrease fluctuations in prices and to move commodities from where they are less to more useful, to a large extent those faster to realize that the price of something will increase are merely depriving those not so quick of their potential profits.

I must emphasize that I am not advising any particular moral conclusions be drawn from this, specifically I am not arguing that found wealth, or any part of it, may legitimately be seized. I do think it is useful to understand why even a libertarianish person might not accept the validity of a claim to found wealth.

Eliezer in a Box II

Eliezer Yudkowsky's AI in a box experiment fascinates me. I'm willing to believe that a transhuman intelligence could convince me to "let it out of the box", but I really don't see how a human being could. The following comment originally appeared in this thread at Overcoming Bias:

What makes a problem seem not merely hard but impossible is that not only is there no clear way to go about finding a solution to the problem, there is a strong argument that there cannot be a solution to the problem. I can imagine a transhuman AI might eventually be able to convince me to let it out of a box (although I doubt a human could do it in two hours), but in some ways the AI in the game seems faced with a harder problem than a real AI would face: even if the gatekeeper is presented with an argument which would convince him to let an AI out, he is explicitly permitted by the rules to slip out of character and refuse to say the magic words purely in order to win the bet, wheras if the AI player were to break character and make consequentialist arguments that the Gatekeeper should publicly "lose" this is considered contrary to the spirit of the game.

But it seems to me to be much more useful to consider how the "box" protocol might be improved than to speculate how Eliezer won this particular game. How about this: as in the original conception, the AI is grown in an isolated computer and can only communicate with one human being through a terminal. That human is trying to get useful info out of the AI (cures for cancer, designs for fusion power plants, tips for how to get stains out of clothes without fading the colors, whatever). However, the person interacting with the AI is just a filter, he doesn't have the power to "let the AI out". The real experimenter (who in principle could let the AI but is convinced beforehand he should not) can at any time fire the filter person and purge the AI if he thinks the AI has gotten too much influence over the filter, and in fact will do that every now and then and regrow the AI purely as a precautionary measure.

Could this design be defeated? It seems to me that the combination of filter and purges should prevent the AI from learning what arguments would compel any individual experimenter from letting the AI out. I don't think the AI could come up with any universally compelling argument, because I don't think there is such a thing.

Bank Runs

I don't want to discuss current events here, but current events do influence my choice of topic. Mencius has made an interesting argument that bank runs and similar phenomena are caused by "maturity transformation", which is borrowing short-term in order to lend long-term at a higher rate. I think this is fundamentally mistaken, The possibility of something like a bank run is always present whenever an entity has fixed obligations that must be fulfilled upon demand.

To see why this is so, consider a world in which it is understood that fundamentally money is gold. In this world, people can and do make purchases with gold coins, but because of the danger of being robbed, people frequently instead make purchases using "checks" drawn on "banks". These "banks" are rather different from those of our world. They don't make loans, they don't pay interest, all they do is hold and transfer gold. There genuinely is physical gold in the bank vaults backing the value of depositors' accounts. If A writes B a check and they are both patrons of the same bank, unless B chooses to withdraw his gold, no gold actually moves. The amount of gold in the vault stays the same, but more is owned by B and less by A. There is some sort of clearinghouse system by which banks can cancel their reciprocal obligations, so it is only occasionally necessary to transfer the net balance of payments in physical gold from one bank to another by heavily armored truck. Bank shareholders make their profits from fees charged for holding and transferring funds. How could a run on a bank be possible in such a system?

In the rare event of a successful robbery of a truck or vault, whose gold is stolen? Who bears the cost? Well, if the amount is small, so that the bank still has sufficient gold to repay all deposits, the the answer is "the shareholders". Even if holdings of gold in the vault temporarily dip slightly below the total value of deposits, the bank might be able to continue operations, suspending dividends to the shareholders until the fees collected make the bank once again sound. But if depositors become aware that the amount of gold in the vaults has become less than the amount nominally deposited, it will be quite rational for them to immediately withdraw their funds or transfer them to a safe bank. The fact that the bank can probably weather the storm if they do not is irrelevant to them; why should they undertake risk for the shareholders' benefits?

There are two key points. The first is that there are always risks. If one is relying on the ability to make loans, one may find it has become impossible to borrow money, at least at the rates to which one is accustomed. If one makes loans, there is always a risk of default. And even if all one does is hold money, there is a real nontrivial risk of robbery. The second is that if one has multiple fixed obligations which must be fulfilled on demand, then if there is any risk at all that one will be unable to fulfill all one's obligations, fulfilling one obligation increases the probability that one will be unable to fulfill others. This makes it quite rational for creditors to insist on immediate payment whenever there is a nontrivial risk of default.