Month: May 2016

A friend sent me a link to a blog published by a reporter (Udo Gollub) who attended the Singularity University summit recently held at Messe Berlin “scary/exciting,” specially for those of us “in mid career or are only entering the world of (non) work now.”

“Scary/exciting”? Maybe. According to Gollub, much sooner than any of us hope (or fear) we will inhabit a world with endless supplies of water, clean (solar) energy, featuring driverless cars (no clogged streets), AI lawyers and doctors, where those of us who do work do so from the relaxed venue of networked cottages in the verdant countryside. I summarize.

All of this assumes, however, that the motivating force behind production is some combination of wealth and leisure. Whenever I read such reports, I am reminded of Adam Smith’s observations over two and a quarter centuries ago which describe the 1776 version of wealth and leisure:

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labourwhich it enableshim to purchase or command.  Labour, therefore, is the real measure of the exchangeable value of all commodities (Wealth of Nations, Bk. 1, Chapter 5).

As I remind my students, this luxury of spending a week day considering the fine points of economic theory is afforded by the efficiencies that are being produced elsewhere; which is not to say that my brilliant students will not create many efficiencies over their lifetimes, but only that (1) efficiencies are not distributed equally; and (2) our leisure is evidence that we command the efficiencies produced by others.

The other passage that such forecasts bring to my mind is Adam Smith’s story about he fire engine boy:

In the first fire-engines, a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended. One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve, which opened this communication, to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play- fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour (Bk. 1, Chapter 1).

The story is almost surely fabulous, but, quite apart from its authenticity, it displays a profound failure to grasp the truth that, four chapters later, Smith shows that he understands only too well: namely that my reason for being “in the game” so to speak is not simply to accumulate efficiencies, but to spend them. So, our fire-engine boy, who doubtless would love to play with his companions, alternately opened and shut the communication between boiler and cylinder not because he felt a special calling to perform this service, but because absent his wage he and his family would go hungry. Nor was he the beneficiary of the efficiency generated by his fabulous invention. Rather, just as A Smith would point out four chapters later, were the owner of the private fire fighting service along with its shareholders the beneficiaries of this efficiency.

A Smith’s propensity to isolate these two moments in his analysis — one devoted to invention and creativity, the other devoted to economic analysis — is far from unique. Evidently the folks at Singularity University share this propensity.

Efficiencies such as those enumerated at the Singularity University event  are generated only under the condition that they produce sufficient returns for shareholders. Absent these returns, they do not move forward. Such returns, however, are predicated on the secure transfer of efficiencies to investors. It is to this secure transfer that value is pegged. Thus, when we consider Adam Smith’s fire-engine boy, were the lower factor costs and hence the efficiencies generated by his innovation actually enjoyed by him and not by shareholders, it is certain that the innovation would never have been adopted. Value returned to shareholders dictates the rate of return and, as a consequence, draw for investors: i.e., the capital stock. Value is thus not a zero-sum game. Innovation by itself yields nothing. Yes. I may be able to purify water at next to no expense. Yet, if the return is only pure water, you will have a hard time attracting investors. Moreover, insofar as water is not unlimited, the reduced cost for its purification cannot help but significantly increase its demand until the demand for water once again drives up its price to a new equilibrium level. Indeed, were this not the case — for example, were value actually tied to some material attribute of a good or to the satisfaction of some need — we would have to scrap a century and a quarter of economic modeling, according to which the value of any specific good is relative to the opportunity costs born by investors who select that good over others. Which means that efficiencies arise only where they produce value to shareholders.

This, in fact, is the insight underlying Book 1, Chapter 5 of Smith’s Wealth of Nations. The value I enjoy is precisely not a factor of my own labor, but rather is a factor of the labor of others that I command.

Doubtless the efficiencies identified at the Singularity University event will be adopted. But it would be foolish to suppose that they will lead to the Shangri-La imagined (or in any case marketed) by its promoters. The good news is that those of us who do command the labor of others, whose efficiencies account for our relative leisure, wealth, and knowledge, will no doubt be those who further benefit from cleaner water, driverless transportation, near flawless legal defense and medical care, while those who generated the efficiencies — the fire-engine boy for example — who commands no other labor than his own (and even then not all of it) will be left to fight over the scraps thrown from our tables: less pure water, more precarious transportation, more flawed legal defense and medical care.

It would be nice if science and technological innovation offered the fail-safe key to future happiness. Unfortunately, however, this happiness is predicated not on innovation, but upon how evenly the efficiencies generated by innovation are spread socially. No doubt someone will object: but if the efficiencies are spread more evenly, then where is the incentive to innovate? Precisely my point.

 

The news that wasn’t: Donald Trump the presumptive Republican nominee for President.

At the beginning of every semester, at the beginning of every class, I hold a seminar titled “Gymnasium in a Box.” In the space of sixty minutes students review 2400 years of history and, more importantly, the they review the concepts out of which social scientific discourse is composed. Of course, not long ago it was impossible to receive a diploma without some rudimentary grasp of Socrates, Plato, Aristotle, Kant and Hegel, to which I have added Marx. How else could one make sense of freedom-necessity, leisure-labor, public-private, politics-economy?

Which means that nearly every economics student for the past four years knows why Donald Trump is the presumptive nominee (although, truthfully, the same would hold true for any of the Republican candidates). They have read Plato’s Gorgias and Thucydides’ Peleponnesian War and so they know how Pericles seized power and why the oligarchy was powerless to prevent him. Pericles filled public offices and extended the franchise to individuals deprived of sufficient education and financial resources by the very oligarchy that now complained bitterly against Periclean “democracy.” Now Pericles had “empowered” them and in gratitude they lent their support to his campaign for personal wealth, power, and glory. My students at least have heard this story before. 

They have also read Plato’s Republic, in which a “noble lie” allows the Guardians to differentiate between those who do not know they are being lied to (and are therefore unfit to govern), those who know they are being lied to but, like Socrates, unwisely publicize their discontent (and therefore are unfit to rule), and those who not only recognize the lie, but also wisely understand why the public is ill-prepared to handle the truth. Plato’s defense of rule by deceit forms the underlying premise of Thucydides’ account of the corruption and collapse of classical Athens.

And they have read Aristotle’s Politics, wherein the ideal of an equally healthy, wealthy, and wise public is held forth as the only sure bulwark against despotism (from δεσπότης, literally “managerialism”) and tyranny, τύραννος, literally the rule of the violent. And so they know why a public systematically deprived of health, education, and welfare might favor a modern Pericles.

Like the Agrarian and Christian Democrats in 1932, the establishment Republicans believed they could have it both ways: deprive the public the goods they have reason to value — health, education, and welfare — and yet somehow expect the basic core of the oligarchy to remain intact. They are now learning that it doesn’t work that way. A public deprived of the basic capabilities necessary for self-government will gladly abdicate to a “benevolent” dictator.

We should be throwing all our resources at creating and sustaining a people fit to self-govern. Instead we ask how close we can hug the margin without self-destructing. That’s the wrong question. But now it is too late. 

I was listening to Marketplace on Wednesday (see link) and was astonished by Tracey Samuelson’s report.

Let us assume for the moment that by “help Brazil’s economy” Ms Samuelson does not mean “help Brazil’s rent-seeking oligarchy.” Let us assume that she actually means helping attract investment to sectors other than petroleum that could produce sufficient growth in wage goods as to promote domestic consumption, exports, and sustainable growth. Since Rousseff herself is not tainted by corruption, since her principle sin was to allow the courts to expose and prosecute corruption — thereby provoking the witch-hunt that proved her undoing — it is difficult to see how her removal and replacement by the very oligarchs facing corruption charges could help Brazil’s economy. 

No one doubts the populist fervor, both against, but mostly in favor of Rousseff. Nor does anyone doubt the popular disgust with corruption. But, so far, the only tangible result from popular disgust with corruption has been the impeachment of a President whose courts had the audacity to prosecute corruption. So let’s ask some very specific questions:

1. Will Rousseff’s impeachment strengthen judicial, administrative, and legal independence? No.
2. Will her impeachment weaken “crony capitalism” in Brazil (which, measured by the percentage of GDP owned by billionaires, according to The Economist, Brazil ranks just ahead of the US)? No.
3. Will her impeachment empower consumers? No.
4. Will her impeachment reduce wage inequality? No.

One expects better, more thorough analysis from Marketplace. And, no, reporting on popular discontent does not count as reporting. Who are Rousseff’s detractors? What is their role and what are their interests in shaping the institutional, legal, and regulatory environment of Brazil? Why were the oligarchs so furious with Rousseff?

You can do better. 

So what’s all the fuss about? The Republican leadership — yes, John Boehner, Mitch McConnell, and now Paul Ryan — has worked its tail end off to make sure that white rich people govern the United States of America. So, now they got the rich, white dude. What is their problem?

I have just finished reading Jane Mayer’s Dark Money (good read). Still, I was intrigued by a passage from Dark Money regarding Donald Trump that I would like to reproduce here:

Donald Trump, the New York real estate and casino magnate whose unorthodox bid for the Republican nomination flummoxed party regulars, was also left off the Kochs’ invitation list. In August 2015, as his rivals flocked to meet the Koch donors, he tweeted, “I wish good luck to all of the Republican candidates that traveled to California to beg for money etc. from the Koch Brothers. Puppets?” Trump’s popularity suggested that voters were hungry for independent candidates who wouldn’t spout the donors’ lines. His call to close the carried-interest tax loophole, and talk of the ultrarich not paying its share, as well as his anti-immigrant rants, made his opponents appear robotically subservient, and out of touch. But few other Republican candidates could afford to ignore the Kochs.

Mayer, Jane (2016-01-19). Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (Kindle Locations 7082-7088). Knopf Doubleday Publishing Group. Kindle Edition.

Then, just last week (2016-04-24) the WSJ publishes an article titled “Could Charles Koch Rally behind Hillary Clinton?” Of course, Ms. Clinton immediately repelled the overture. And no one thinks it likely that Charles would actually endorse Clinton. Nevertheless, Mr Trump’s candidacy offers valuable insights into the where and why of the mainstream Republican leadership.

The Koch brothers are, needless to say, huge backers of Paul Ryan and Mitch McConnell, neither of whom would be anywhere on the political map were it not for Koch money. Where is the Republican leadership? The Republican leadership, as I have stated many times in this blog, is single-mindedly opposed (1) to democracy; and (2) to republicanism. It was with Koch money that REDMAP (Redistricting Majority Project) was unleashed upon the states, guaranteeing that even where minorities enjoyed a serious population advantage, their districts would be so uniformly homogeneous that beyond their Republican-drawn districts, they would enjoy no power at the polls. If Republicans cannot win elections with a majority, so the reasoning goes, they will do so the old-fashioned way, through gerrymandered districts. It was also Koch money that created, identified, and then pushed Citizens United to the highest court in the land, again ensuring that, even should the popular vote lean toward more progressive candidates, the Koch network would so outspend progressive candidates that they would be buried beneath wave after wave of negative third-party advertising that no progressive candidate could survive. Finally, however, although voter fraud contributes less than 1% to voting outcomes, Koch-backed Republicans have made it their mission to place such high walls in the path of voter registration as to make it difficult for historically democratic voters, largely minorities, to cast their votes. Democracy? Not in your life.

But the Kochs and their network are also fiercely hostile to republicanism. Republicanism is the radical notion that we share our wealth in common, that we form a commonwealth, or, in Latin res publica. Radical republicanism was the fuel that fired the American and French revolutions. Radical republicanism became the model for every colonial uprising and post-colonial government in the nineteenth and twentieth centuries. In 1787, as the newly formed United States slipped into bankruptcy and anarchy, it was the radical republicans and the federalists who carried the day in Philadelphia, not the democrats and anti-federalists. And so a Constitution emerged that was strongly centralist, that gave the Supreme Court preemption over state courts, that tightly regulated interstate commerce and that created a strong central bank with a single currency. The only concession wrung from the Convention by southern landed gentry was the 3/5ths clause, which padded their representation in the House by allowing slave states to count 3/5ths of every slave, for purposes of representation, in their census. In all other respects, the 1787 Constitution was a deeply republican document.

Needless to say, sharing the wealth is not what Charles and David are about. They are fundamentally hostile to the US Constitution, or any constitution that seizes private property and makes that property public.

So much for the where. Now for the why. The Koch network is hostile to democracy and republicanism because at some point David and Charles stumbled upon the writings of Carl Menger, Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, whose idealistic notions of how economics works seemed specially crafted to ensure the unending expansion and consolidation of Koch power and wealth. In other words — the opposite of democracy and republicanism. For, unlike the framers of the 1787 Constitution, these market fundamentalists naively believe that unregulated markets come eventually to regulate themselves. That is because just as tyranny begets tyranny, so freedom begets freedom. How could a well-regulated economy issue in anything other than a regulated, that is to say, constrained marketplace? And how could a constrained marketplace yield anything other than tyranny? Similarly, any notion of freedom that includes constraints upon individual choice should not be called freedom, but “serfdom.”

As we are seeing at the polls, this message on behalf of freedom and against tyranny is wildly popular with voters. Who is the biggest tyrant? Is it not the government? Who is it that every April seizes our hard-earned private property? And what laws and regulations are they that prevent me from exercising my freedom or that “cherry pick” “winners and losers” in what ought to be, but is not, a free market place?

Donald Trump is a narcissist, a bigot, and a mysogynist of monstrous proportions. But, where the Koch brothers are Cimon, willing to lead a network of plutocrats in their dream of creating a Hayekian paradise, Trump is Pericles, whose private wealth and oratory — and so his public popularity — grant him the privilege of clearing the stage of all the other oligarchs and ruling supreme. And, one more thing: Trump is no ideologue, no Hayekian, no disciple of the Austrian School, no believer in unrestrained markets. Trump personally and viscerally hates the Republican leadership. And, of course, the feelings are mutual.

Is my enemy’s enemy my friend? Of course not. But it does help to explain why the Koch-publicans — and this includes, specially, Paul Ryan and Mitch McConnell — are so anxious over his candidacy. Still, does it not  tell us more about the current Republican leadership than it does about Donald Trump?