EconomyBeat.org » economic philosophy

What really went wrong…

Jon Brooks — Wed, 14 Apr 2010 17:15:01 +0000

A new paper that will be published in the Journal of Investment Management posits the theory that economists suffer from “physics envy,” aspiring to create economic models “as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics,” says the abstract, “‘physics envy’ has also created a false sense of mathematical precision in some cases.”

Here is the complete paper, titled “WARNING: Physics Envy May Be Hazardous to Your Health,” by Andrew W. Lo and Mark T. Mueller. From the introduction:

The Financial Crisis of 2007–2009 has re-invigorated the longstanding debate regarding the effectiveness of quantitative methods in economics and finance. Are markets and investors driven primarily by fear and greed that cannot be modeled, or is there a method to the market’s madness that can be understood through mathematical means? Those who rail against the quants and blame them for the crisis believe that market behavior cannot be quantified and financial decisions are best left to individuals with experience and discretion. Those who defend quants insist that markets are efficient and the actions of arbitrageurs impose certain mathematical relationships among prices that can be modeled, measured, and managed. Is finance a science or an art?

In this paper, we attempt to reconcile the two sides of this debate by taking a somewhat circuitous path through the sociology of economics and finance to trace the intellectual origins of this conflict—which we refer to as “physics envy”—and show by way of example that “the fault lies not in our models but in ourselves”. By reflecting on the similarities and differences between economic phenomena and those of other scientific disciplines such as psychology and physics, we conclude that economic logic goes awry when we forget that human behavior is not nearly as stable and predictable as physical phenomena. However, this observation does not invalidate economic logic altogether, as some have argued.

In particular, if, like other scientific endeavors, economics is an attempt to understand, predict, and control the unknown through quantitative analysis, the kind of uncertainty affecting economic interactions is critical in determining its successes and failures… Fully reducible uncertainty is the kind of randomness that can be reduced to pure risk given sufficient data, computing power, and other resources… (O)ur taxonomy is reflected in the totality of human intellectual pursuits, which can be classified along a continuous spectrum according to the type of uncertainty involved, with religion at one extreme (irreducible uncertainty), economics and psychology in the middle (partially reducible uncertainty) and mathematics and physics at the other extreme (certainty).

However, our more modest and practical goal is to provide a framework for investors, portfolio managers, regulators, and policymakers in which the efficacy and limitations of economics and finance can be more readily understood. In fact, we hope to show through a series of examples drawn from both physics and finance that the failure of quantitative models in economics is almost always the result of a mismatch between the type of uncertainty in effect and the methods used to manage it. Moreover, the process of scientific discovery may be viewed as the means by which we transition from one level of uncertainty to the next….

The theory of erotic capital

Jon Brooks — Mon, 12 Apr 2010 18:41:08 +0000

Some academic research is obviously very dry, but boy, some isn’t. From the March 19, 2010 issue of European Sociological Review:
:

Erotic Capital

by Catherine Hakim, Department of Sociology, London School of Economic

Introduction

We present a new theory of erotic capital as a fourth personal asset, an important addition to economic, cultural, and social capital. Erotic capital has six, or possibly seven, distinct elements, one of which has been characterized as ‘emotional labour’. Erotic capital is increasingly important in the sexualized culture of affluent modern societies. Erotic capital is not only a major asset in mating and marriage markets, but can also be important in labour markets, the media, politics, advertising, sports, the arts, and in everyday social interaction. Women generally have more erotic capital than men because they work harder at it. Given the large imbalance between men and women in sexual interest over the life course, women are well placed to exploit their erotic capital. A central feature of patriarchy has been the construction of ‘moral’ ideologies that inhibit women from exploiting their erotic capital to achieve economic and social benefits. Feminist theory has been unable to extricate itself from this patriarchal perspective and reinforces ‘moral’ prohibitions on women’s sexual, social, and economic activities and women’s exploitation of their erotic capital.

Madonna flaunted it in her Sex book, and still has it at 50. Jesus Luz, her toyboy lover, clearly has it, but it is rather easier at 22 years. Pierce Brosnan has it, even as he ages, long after dropping the James Bond role. Catherine Deneuve still has it, remaining sexually attractive after she reached 60. The sexy, energetic singer Tina Turner, with her fabulous legs and erotic voice, still had it at in her 50s. The commodity is erotic capital, to which sociological and economic theory have been blind, despite its palpable importance in all spheres of social life. Writers and artists are very sensitive to it. Shakespeare captured it nicely when describing Cleopatra: ‘Age cannot wither her, nor custom dull her infinite variety.’ The expanding importance of self-service mating and marriage markets, speed dating, and Internet dating contributes to the increasing value of erotic capital in the 21st century. Sociology must rise to the challenge of incorporating erotic capital into theory and empirical research.

This paper presents a theory of erotic capital and its applications in studies of social mobility, the labour market, mating, and other topics. We argue that erotic capital is just as important as economic, cultural, and social capital for understanding social and economic processes, social interaction, and social mobility. It is essential for analysing sexuality and sexual relationships. There are difficulties of measurement, but these are no greater than for social capital. In sexualized individualized modern societies, erotic capital becomes more important and more valorized, for both men and women. However, women have a longer tradition of developing and exploiting it, and studies regularly find women to have greater erotic appeal than men. We ask why erotic capital has been overlooked as an asset in sociological theory. The oblivion of the social sciences to this factor suggests that a patriarchal bias still remains in these disciplines. As women generally have more erotic capital than men, so men deny it exists or has value, and have taken steps to ensure that women cannot legitimately exploit their relative advantage. Feminists have reinforced ‘moral’ objections to the deployment of erotic capital….

Read the full paper here.

Broadband for all!

Jon Brooks — Mon, 29 Mar 2010 16:00:28 +0000

On Cafe Hayek, George Mason economics professor Russ Roberts dissects from a libertarian perspective a CNN story about the government’s recently announced National Broadband Plan. The initiative is aimed at providing every American “affordable access to robust broadband service,” among other goals.

Says it all

Here’s an amazing story from CNN because it’s so ordinary. It’s about a top-down government initiative that sounds good – giving more broadband access to Americans. Who’s against more Americans getting broadband? The FCC has a plan to get it done. Go Broadband!

So here’s the story.

Like a photographer without a camera, or a mechanic who doesn’t own a car, Kelli Fields is a webmaster without high-speed Internet access. By day, the 42-year-old uses a broadband connection at work to update a university’s Web site, which she built and codes from scratch. But when she goes home at night, the rural Oklahoman struggles with a dial-up Internet connection so slow, she does chores to pass the time while Web sites load. Her high school-age son is so fed up with the glacial pace of their Internet connection that he asks his mom to update his Facebook page from the office.

That sounds frustrating. But is this a serious social problem the government needs to fix?

“It’s pretty sad that he has to ask me to accept his friends when I get to work,” said Fields, who rarely uses the home computer for anything but word processing.

On Tuesday, the U.S. Federal Communications commission will unveil its much-awaited “broadband plan,” which, among other things, will explain how the government plans to get nine out of 10 Americans online by 2020. That’s no easy task, considering less than two-thirds of people in the country have high-speed Internet access at home today, according to a 5,005-person survey published by the FCC in February (PDF). The Obama administration’s 2009 American Recovery and Reinvestment Act has put $7.2 billion toward high-speed Internet expansion and has required the FCC to develop a broadband plan. Taking a personal look at unwired America, however, reveals just how complicated getting people online can be. That’s partly because there are so many reasons people still don’t have high-speed Internet access at home.

I’m sure it’s complicated but somehow, almost 2/3 of the American people have managed it. And it must be tough in rural Oklahoma to get broadband so no wonder this story illustrates the need for a national broadband effort, right?

Some, like Fields, don’t have money for the connections, or they live in parts of the country where broadband hookups are not available. Fields lives outside of Catoosa, Oklahoma. Neighbors less than a mile away have high-speed Internet access, but the fiber-optic cables that connect homes and apartments to the high-speed Web haven’t reached her house.

Yes, it would be nice to get broadband via a fiber optic cable. And so close. Less than a mile away. Is there another way to get broadband? Yes there is:

She could install a satellite and connect to the high-speed Internet, but the installation fee is $300, and she said she can’t afford that right now. She’s been waiting for wired broadband to come to her home for five years, and she holds out some hope that the network will get to her eventually.

She’s awfully patient. And poor, I guess. For a mere $300 she can make her son happy and she can have broadband for herself. But she doesn’t have the money. Keep reading:

About 4 percent to 5 percent of American households similarly are in places that aren’t reached by broadband cables. And 36 percent of the unwired population cites cost as the main reason for not connecting to the Web, according to the FCC survey. Other unwired people are afraid of the Internet, or they simply don’t understand why it might be important to bring broadband into their lives.
Cue the violins:

Florence Pearson, a 62-year-old from New York City, said she was afraid of computers. If she touched one, she thought she would break it. “I was embarrassed, not knowing anything at all about computers and not having an e-mail address,” she said during a presentation at an FCC event last week.

Wish I’d have been there. Dogs and ponies everywhere.

“I knew I was missing out on so much, but I could not get over this fear.”

Pearson’s daughter convinced her to take a computer class, she said, and that helped her realize that she could work more efficiently with the help of computers and the Internet.

“It was like an entirely new world for me,” she said at the event.

OK. Her daughter took care of her. So why do we need a national program?

It will take more than an improved broadband infrastructure to get people who aren’t familiar with computers to go online, said John Horrigan, director of consumer research at the FCC. The federal government on Tuesday will propose programs to help educate people about the Internet and increase Web access in public libraries, he said, but he cautioned that none of those will be a quick fix. “Nonadoption [of broadband] is not the kind of problem that lends itself to overnight solutions,” he said, “because you’re trying to train people. You’re trying to get them to change their behavior.”

In the recent FCC survey, which Horrigan authored, 22 percent of people without broadband access said fears of the Internet and a lack of understanding of computers were the main reasons they didn’t have broadband at home. Nineteen percent said they viewed the Internet as a “waste of time” or didn’t see its relevance to their lives. And a 2009 survey, from the Pew Internet & American Life Project, found the majority of Americans who don’t have broadband at home don’t want it. But broadband is becoming essential for modern life, Horrigan said.

Ah, he knows best. Some people think the internet is a waste of time or not worth the money. We’ll give it to them anyway.

Many job applications, for instance, are not available on paper anymore. And health records and information are increasingly moving online. Those who don’t have access are at increasing risk of being left behind.

“Giving its growing importance as a necessity, that creates an even more isolating effect for those who are offline,” he said.

The FCC’s chairman, Julius Genachowski, has written online that the nation’s broadband plan will include programs aimed at “making sure that every child in America is digitally literate by the time he or she leaves high school.” The idea is to teach kids why they need the Internet.

Funny, I just have a feeling kids are pretty on top of that one. But let’s get an ad campaign going.

At first, it may be easy to write off Fields’ situation in Oklahoma as insignificant because she does have dial-up Internet access at home.

Oh, right, she does have internet. It’s just slow. That’s like so 1996.

But the speed difference between dial-up connections, which use telephone wires to transmit signals, and those that travel through fiber-optic broadband cables is significant, Horrigan said. That’s because the Web is increasingly designed for broadband connections. Photos and videos are everywhere. So are Flash animations. The result is that dial-up connections have actually gotten slower over time, according to Horrigan.

“If you were a contented dial-up user five years ago because you liked to check e-mail and get some headlines, that’s probably a slower process today, given that sites are optimized for broadband,” he said.

Fields says her slow connection at home is particularly a problem for her kids, who need fast Web connections to keep up in school. Her daughter, for example, sends text messages to her mom while she’s in the office, asking her to conduct Google searches that she’s required to complete for her homework.

Get it? It’s for the children. Those poor kids aren’t going to get a good education. The next thing you know, the Chinese are going to pass us. Gotta have a broadband plan. Top-down, baby. For the children! We’ve got to keep America competitive!

The slow connection may affect family finances. Fields said she has turned down Web development projects because she simply couldn’t do them from home.

“It would just take me forever,” she said.

We need broadband to keep America prosperous!

Her dial-up connection also has caused some issues with her current job as the webmaster for Rogers State University, in Claremore, Oklahoma.

When classes are canceled because of bad weather, for instance, Fields has to ask another employee to update the Web site to tell students not to come to class. She can’t do so from home.

“It is ironic,” she said of the fact that she’s a Web site manager who doesn’t have high-speed Web access. “It’s very strange, and people like you are like, ‘What? I don’t understand?’ They kind of laugh at it.” Fields is considering scraping together the money to get satellite Internet at her house.

It does seem like a good idea. Her job is suffering, she’s losing money, and her kid is falling behind in school. But I guess she just can’t afford it. Who wouldn’t want to help her?

But she doesn’t want to give up services like TV to free up money for an expensive Internet connection.

We’re about 1000 words into the article at this point. There really is not story here. And no national crisis. Evidently Kelli Fields thinks TV is more important than broadband. Evidently watching TV is more important than doing her job well, finding outside income opportunities and keeping her kid current with homework. Or maybe, just maybe, the hardship of a life without broadband is being exaggerated for the story. And the country.

The weirdest thing is that if we really think this is a problem we don’t need a national plan. We could just subsidize rural folks purchases of satellites. But that wouldn’t help whoever the bootleggers are in the national plan.

The story concludes:

She realizes that without broadband, her family is missing out on a lot.

“It really has just become a way of life, like you have to be connected all the time,” she said. “And I don’t feel that need to be connected through Facebook or news stories. I don’t feel that need to be connected all the time, but when I need [Internet access,] it would be nice to have it.”

Yes it would be nice. It’s especially nice when someone else pays for it. Government thrives by handing out free lunches. The problem is that the bills keep coming and we don’t have enough money to give out all that free food. Someone needs to make choices and trade0ffs. Kelli Fields made her choice. Maybe that tells us something about the relative urgency of the problem.

Debate on worker co-ops

Jon Brooks — Wed, 17 Feb 2010 16:39:38 +0000

An interesting debate on the discussion web site Plastic about the viability of worker cooperatives (a business model that Michael Moore touted in Capitalism: A Love Story) encompasses economics, philosophy, and business ethics.

The initial post…

Not a Mere Factor of Production

There is this bookshop on 57th Street, South Side. Finding your way through the store is like a discovery in itself: secretly unfolding, a series of forking, book-lined paths winding around, crossing room after room after room (yellow Philosophy Room, blue Asia Room, blue History Room, back through the Table Room into the Green Corridor towards the Green Downstairs and further) filled with books, books, books: and the occasional, simple, wooden chair.

Tacitus’ Annales in Latin, Love All the People by Bill Hicks, Steinsaltz’ Talmud translation, A Gate at the Stairs by Lorrie Moore, a Hittite dictionary, all five volumes of Michael Spivak’s ‘Differential Geometry’, George F. Kennan’s memoirs, Carl Sandburg’s Life of Lincoln, Sara Paretsky’s essays, The Irony of American History (Reinhold Niebuhr): they’re all there.

If you ask the customers why they like coming here, some of them will politely mention that, by the way, this is the bookstore where Barack Obama is a member too. Yes, a member: for the most remarkable thing about this bookstore is that it represents an alternative economic model: it is a co-op, a cooperative business, with clients taking a direct share (and voting rights with that) in the company they’re buying from.

Cooperatives are more common than you might think.

The biggest bank in the Netherlands, Rabobank, is a cooperative, managing 1112 local offices. Another cooperative bank, Credit Agricole SA is the largest retail banking group in France, the second largest in Europe and the eighth largest in the world by Tier 1 capital. Austria’s Raiffeisen Zentralbank’s 55,400 full-time employees serve over 11.7 million clients in Central and Eastern Europe.

Both the largest (84,000 employees) and the second largest supermarket chains in Switzerland are run by cooperatives. The UK-based Co-operative Group, now managing the Somerfield supermarkets chain, has over 4.5 million members and 123,000 employees across all its businesses (which, among others, are active in funeral care and legal services). It is easily beaten by Italy’s Legacoop, with its 7,736,210 members and 414,383 employees.

Phoenix-based Best Western International, the world’s biggest hotel group, is a cooperative with over 4,000 hotels in nearly 80 countries. REI (Recreational Equipment Inc.), employing over 9,500 people, ranked as number 14 on the list of Top 100 Companies to Work for by Fortune Magazine in 2009; it has been on the list since 1998. Its Canadian counterpart, Mountain Equipment Co-op (MEC), is Canada’s largest supplier of outdoor equipment; it has over 2.9 million members (share holders).

I could go on with examples (engineering companies in Spain’s Basque Region, renewable energy cooperatives in Germany and Belgium), but I think you get the point: companies where both the producers and clients are direct stakeholders can be a viable economic model.

There is a twist though: while both a cooperative and an ordinary company issue shares, corporate shareholders expect the value of their shares to increase over time. This is not true with cooperatives: shares can be sold back, but at the original buying prize. The end result is that while corporations are managed with the goal of maximizing annual profits to pay increasing dividends year over year, a cooperative’s reason for existence is not to make profit, but to provide benefits to its members.

I could go on with examples (engineering companies in Spain’s Basque Region, renewable energy cooperatives in Germany and Belgium), but I think you get the point: companies where both the producers and clients are direct stakeholders can be a viable economic model.

There is a twist though: while both a cooperative and an ordinary company issue shares, corporate shareholders expect the value of their shares to increase over time. This is not true with cooperatives: shares can be sold back, but at the original buying prize. The end result is that while corporations are managed with the goal of maximizing annual profits to pay increasing dividends year over year, a cooperative’s reason for existence is not to make profit, but to provide benefits to its members.

Proponents believe this is the way forward for a more sustainable, as well as dynamic and social economy: do you?

Some responses…

To answer the final question, no. Some meld of cooperative and income trust will eventually replace corporations, but cooperatives aren’t attractive to investment.
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That depends on how aggressive an investor you are.

My own cooperative offers a yearly six percent rent (capped by law) — which is better than a savings account over here. The problem with using it as an investment tool is that the number of shares a single person can own is limited; end result being that if you want a decent return on your money, and invest in your community, you’ll have to spread your money over several co-ops. But it is possible to use co-ops as an alternative to a savings account (people used to think that was riskier, but that was before our little 2008 recession).
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I’m actually looking at it from the other angle.. that without investment you can’t easily grow the business, but as we’ve seen an over-reliance on investment leads to business that’s primary goal is to inflate stock prices.

Mutual and employee-owned models of business operate with longer time-horizons, achieving higher levels of performance and customer satisfaction. They nurture greater power for individuals over their economic lives and increase the accountability of managers.
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I worked at an employee-owned company for a few years early on, and only now appreciate its finer traits having worked at other companies that are much less fairly structured.

The company I worked at required vice presidents to own 100,000 dollars worth of stock. The company helped new VPs finance the 100,000 stock buying over a long period. However, this 100,000 investment in the company meant that VPs often worked as hard or harder than others to ensure the company’s success. Also, VPs and other higher-ups didn’t over-indulge themselves with expensive company-paid dinners. Of course, that also meant that the rest of us couldn’t either.

The company also had longterm employee stability. During the 6 years I worked there, there was never a large lay-off. Employees were very occasionally fired for mishandling their work. Even now, in the recession, that company didn’t lay off a single person.

However, the trade-off was that because hardly anyone ever left the company, there was very little upward mobility. Hence, the reason why I eventually left along with many younger people at that time.
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This absolutely makes sense to me. The goal of ever-increasing profit, whatever you use to represent that profit, is cancer functionality built into the very ideology of society. It’s unsustainable, and it grinds down the people it should be elevating.

But this? I like this. Appeals to the Taoist in me. If we ever make it to The Future (TM), these will be our little villages.
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I think Capitalism is a stepping stone on financial evolution of societies. Once we embrace a more global economy, it simply won’t be able to sustain itself and some sort of cooperative with incentives plan will have to be put in place to insure all boats rise. Naturally, some will be more successful or “profitable” if you look at it like that.

“The Office” as critique of management theory

Jon Brooks — Wed, 13 Jan 2010 19:47:41 +0000

From Ribbonfarm.com, a blog about business and innovation, comes two posts on the NBC sit-com “The Office” — “The Office According to ‘The Office‘” and “Posturetalk, Powertalk, Babytalk and Gametalk.” The posts, written by Venkatesh Rao, who works at the Xerox Innovation Group, analyze the show as “an interpretation of management science.”

“The Office” is not a random series of cynical gags aimed at momentarily alleviating the existential despair of low-level grunts. It is a fully-realized theory of management that falsifies 83.8% of the business section of the bookstore…

Hugh MacLeod’s cartoon is a pitch-perfect symbol of an unorthodox school of management based on the axiom that organizations don’t suffer pathologies; they are intrinsically pathological constructs.

Idealized organizations are not perfect. They are perfectly pathological. So while most management literature is about striving relentlessly towards an ideal by executing organization theories completely, this school…would recommend that you do the bare minimum organizing to prevent chaos, and then stop…

The (“Office” co-creator Ricky) Gervais Principle is this:

Sociopaths, in their own best interests, knowingly promote over-performing losers into middle-management, groom under-performing losers into sociopaths, and leave the average bare-minimum-effort losers to fend for themselves.

The essay then goes on to illustrate how the show’s characters embody the three archetypes of “sociopath,” “clueless,” and “loser.” One example:

The Career of the Sociopath

The example of the “fast-track the under-performing” part of the principle is Ryan, the intern. He tests himself quickly and rapidly learns and accepts that he is incompetent as a salesman. But he is a born pragmatist-sociopath with the drive, ambition, daring and lack of principles to make it to the top. So rather than waste time trying to get good at sales, he slips into a wait-watch-grab opportunist mode.

But he isn’t checked out — he is engaged, but in an experimental way, probing for his opening. The difference between him and the average checked-out loser is illustrated in one scene early in his career. He suggests, during a group stacking effort in the warehouse, that they form a bucket brigade to work more efficiently. The minimum-effort loser Stanley tells him coldly, “this here is a run-out-the-clock situation.”

Stanley’s response shows both his intelligence and clear-eyed self-awareness of his loser-bargain with the company. He therefore acts according to a mix of self-preservation and minimum-effort coasting instincts. The same is true of everybody else in the loser layer with the exception of the over-performers: Dwight and Andy (and in his earlier incarnation as a salesperson, Michael).

The future sociopath must be an under-performer at the bottom. Like the average loser, he recognizes that the bargain is a really bad one. Unlike the risk-averse loser though, he does not try to make the best of a bad situation by doing enough to get by. He has no intention of just getting by. He very quickly figures out — through experiments and fast failures — that the loser game is not worth becoming good at. He then severely under-performs in order to free up energy to concentrate on maneuvering an upward exit. He knows his under-performance is not sustainable, but he has no intention of becoming a lifetime-loser employee anyway. He takes the calculated risk that he’ll find a way up before he is fired for incompetence.

Ryan’s character displays this path brilliantly. When Michael’s boss and dominatrix-lover Jan suffers a psychotic descent into madness, her boss, the uber-sociopath David Wallace, has no great hopes of a good outcome. Setting up yet another band-aid move, he calls up Michael for an interview to take up Jan’s spot. But when the rest of the office learns of Michael’s impending interview, the true sociopaths act. Jim and his sociopath girlfriend Karen instantly call up David and announce their candidacies for the same position. Unknown to them, Ryan, the intern-turned-rookie has also spotted the opportunity. The outcome is spectacular: Ryan gets the job, Michael loses, Karen gets the Utica branch, and Jim — who still has not yet completely embraced his inner sociopath — returns to Scranton. We learn later — as the Gervais principle would predict — that David Wallace never seriously considered Michael more than a temporary last resort.

Rao sees the upshot of the interactions of these types of employees as this:

(William White, author of “The Organization Man“) saw signs that in the struggle for dominance between the sociopaths (whom he admired as the ones actually making the organization effective despite itself) and the middle-management Organization Man, the latter was winning. He was wrong, but not in the way you’d think. The Sociopaths defeated the Organization Men and turned them into The Clueless not by reforming the organization, but by creating a meta-culture of Darwinism in the economy: one based on job-hopping, mergers, acquisitions, layoffs, cataclysmic reorganizations, outsourcing, unforgiving start-up ecosystems, and brutal corporate raiding. In this terrifying meta-world of the Titans, the Organization Man became the Clueless Man. Today, any time an organization grows too brittle, bureaucratic and disconnected from reality, it is simply killed, torn apart and cannibalized, rather than reformed.

Hmm. Sounds way too familiar…

I just hope Jim and Pam have their baby soon!

Who are the Gold Bugs?

Jon Brooks — Tue, 08 Sep 2009 21:58:16 +0000

The price of gold rushed past $1000 per ounce today, sending it within glittering distance of last year’s record high before profit-taking ate into gains. But the breach of the psychological $1000 barrier has put a sparkle into the eyes of those who have been accumulating the precious metal, and has them looking for more profits soon. Why? From Reuters:

Some investors also saw the spike in gold as a warning signal to stock market bulls who have the result of central banks and governments pumping billions of dollars into banking systems to boost growth.

Ah. That single wire-story paragraph stands as the world’s greatest understatement for those dubbed “Gold Bugs.” Investopedia clues us in:

Gold bugs view gold as a safe investment that will protect them from currency fluctuations or downturns in the financial markets. Although gold is widely known as a standard of value, its price – like that of any other precious metal or commodity – fluctuates widely… This is a point frequently brought up by critics, who view gold as a standard of wealth from the past.

However, while there is no consensus, the market does continue to view gold as the traditional “safe harbor” during times of economic crisis. For example, following September 11, 2001, gold prices saw sharp increases as investors sold what they believed were riskier assets.

The core belief of the gold bug: Paper currency — so-called “fiat money” like the dollar or the euro — will eventually prove, unless you’re a paper-eating termite, worthless. From the Safe Haven blog:

A genuine gold bug is a person who is emboldened by knowing that 4,000 years of continuous economic history proves that EVERY fiat currency has failed, as they will always fail, and that gold will rise, just like it always has, because people have always turned to it as a last resort against losing everything that is still denominated in the depreciating currency! It’s a 100% guarantee! How can you NOT be bullish?

From the post “Gold is a currency you can rely on“on Gold Eagle:

Paper money, we all know, is a terrible store of value. The U.S. Dollar has been losing value rapidly ever since we severed our link to a true Gold standard. Let me give you an example of the difference between Gold and paper money over the long haul. Let’s say you had $100 worth of U.S. paper Dollars in 1930 and $100 worth of Gold at 1930 prices. Today, you would still have $100 in nominal U.S. Dollars, but it would buy much, much less in actual goods than it did in 1930. The Gold, however, could be traded in for slightly more than $4800 U.S. Dollars today…

But Gold hasn’t changed over the years, hasn’t grown, hasn’t paid dividends and hasn’t increased in its intrinsic value. Gold essentially has not become more valuable, paper fiat Dollars have become less valuable.

To the Gold Bug, government’s Original Sin occurred when Nixon took the U.S. off the gold standard in 1971, and only a return to that system can redeem the country economically. Only the gold standard can defeat the bankers who pull the strings and wreak financial havoc at the expense of the populace. From a typically prolix Gold Bug post called “Gold Wars: The Return of the Gold Standard“:

The ultimate defeat of the Western banking cabal can only be accomplished by reinstating a precious metals “standard” (or backing) for the global monetary system….While 21st century bankers like to pretend that they are great “innovators”, and claim that they have created a “modern” financial system which is a necessary ingredient of our high-tech society, the reality is that they are playing the exact same game they have been playing for thousands of years.

The modus operandi of the classic bankers’ scam is always the same. First they ingratiate themselves upon the rulers of a particular society by claiming that they provide a useful, if not essential service: they exchange paper “IOU’s” for gold and silver coins, replacing heavy, bulky coins with their near-weightless scraps of paper.

Originally, the scraps of paper are treated strictly as claim-stubs for the gold and silver of the original holders. However, as a society becomes more familiar with these scraps of paper, people begin using the scraps of paper for trade – as proxies for gold and silver.

As this practice increases in popularity, the gold and silver being held by the bankers as custodians is redeemed less and less often, because people simply keep swapping the scraps of paper between themselves….and, for over two thousand years the greed of bankers has caused them to take their “business” a step further: they begin creating more “IOU’s” for gold and silver than what was deposited with them.

Having been lured by the convenience of paper “money”, the people don’t even notice that bankers have begun “creating money out of thin air”. While nothing can dilute the original value of the gold and silver deposited (and hoarded) amongst the bankers, as the number of bankers’ notes in circulation increases – without any underlying increase in the wealth which backs the paper – the value of each note inevitably declines.

This is the true origin of “inflation”: increasing or “inflating” the money-supply devalues the currency, causing the nominal price for goods to increase.

That conspiratorial strain runs through all the Gold Bug literature. From the Safe Haven post:

I also know that there is a concerted, coordinated effort on the part of central banks, the International Monetary Fund, the Bank for International Settlements and many others to restrain the price of gold, as they have actually admitted over and over again, and thus the price of gold is artificially low.

And goldbug Howard S. Katz on the Gold Eagle site, writes:

Pretty much every newspaper, news magazine and TV news show is lying to you…screaming one word at you: “deflation.” Whether they use the words “Great Depression,” “Great Recession,” “economic crisis,” or whatever, the message is the same. Prices are going down…

The Gold Bugs do not believe that prices are going down. They believe that the pumping of so much new money into the economy by the Fed will create rampant inflation, a circumstance that has traditionally caused a flight to gold. Katz:

The only times that prices changed by any significant amount were times that government changed the money supply. When the money supply was increased, prices went up. When the money supply was decreased, prices went down….Through the autumn of 2008, the monetary base increased by a trillion dollars. As this money flows into the private banks, they will get a chance to create additional money on this base, and the regular money supply will increase by even more.

This $1 trillion represents a 70% increase on the money supply over a year ago… Unless there is a radical change in announced policy, the money supply of the U.S. will multiply by 4 times over the next 4-6 years.

What will happen to people who flew to “safety” by buying T-bills and T-bonds in the recent crisis? In 2014, they will be sitting with fixed income investments worth ¼ as much (in buying power) as they are now. What will happen to people who put their assets into gold and gold stocks? They will be ahead of the game as the investing public rushes into gold (as it did in 1979).

To the layman who watched helplessly last year as the banking system appeared to teeter on the verge of collapse, this all sounds quite plausible and impressive. More impressive than Katz’s resume, anyway, which he prominently highlights at the top of his blog:

“Howard S. Katz is a well known gold bug and author of four self-published books on money, the gold standard and politics. He also edits an investment newsletter on gold and gold stocks called The One-handed Economist.”

But that lack of institutional pedigree is no stigma for Gold Bugs, who believe the training of mainstream economists to be poisoned by the Keynesian establishment. From Katz:

This same establishment decided in September 2008 that all prices were going down. They filled the newspapers and the air waves with predictions of a dire “deflation.” …No, the problem is not that prices are going down….The problem is that prices are going up. The problem is that people believe this nonsense from these well-known sources.

Meanwhile a giant increase in commodity prices will gradually unfold, one aspect of which will be a great food shortage which will make spring 2008 look like a picnic…

So what to do? Well, you could buy some, uh…gold. From another editorial by Katz:

…the American public has no concept of how bad things are and what they need to do to protect themselves. This gives you a historical opportunity. You have the chance to buy gold while it is still cheap. People will say to you, “You bought gold under $1000? Boy, I wish I had done that.”

And this from Bob’s Gold Price Column:

Looking at how fast the US government and the Fed are creating fiat tokens (US dollars) out of thin air, it pays to measure your gains with something more related to reality like gold or silver, the classic measuring sticks for the last 5,000 years or so…

The combination of the US Treasury and the Fed have created extra dollars and made payments, extra guarantees and extra future promises of payments of over 13 trillion dollars in less than a year…Eventually, this has baked into the cake roughly 50% future devaluation of the US dollar. And, it looks like this is just for starters.

Not to worry too much (some worry is justified as a really high gold price means some bad things are going to happen on the ground) for those already properly positioned. “There is no rush like a gold rush”. Gold looks like it is a month or two away from heading on up into new high territory.

Sounds pretty simple. But what does a mainstream economist like, say, Paul Krugman think of the Gold Bugs and their theories? Well, in a nutshell, to quote the Nobel Prize winner, “the ideas of our modern gold bugs are completely crazy. Their belief in gold is…not pragmatic but mystical.”

On the other hand, if you bought gold at under $300 ounce in the early years of the decade, maybe you’re not so sure…

Who was Elbridge G. Spaulding?

Jon Brooks — Sat, 05 Sep 2009 01:30:27 +0000

You know the answer to that if you happened to catch Floyd Norris’s column in the New York Times today:

“It was he who, at the end of 1861, figured out that the American government simply needed to print money to pay for the Civil War. It was economic heresy then, but without it this country might not have survived. Such an idea was then dismissed by some as “fiat money,” money that is money not because it is backed by gold or silver, but because some government says it is money.”

While that makes Spaulding a hero to some, it may also render him the moral equivalent of Satan to those who object to the trillions of new dollars the government’s printing presses are working so hard to generate. But for our purposes, the most outstanding thing about Spaulding is that his book relating to that period in history is available for free online. Check out the complete and unpithily titled History of the legal tender paper money issued during the great rebellion, being a loan without interest and a national currency at the Internet Archive or Google Books.

And tell ‘em Ben Bernanke sent you…

What shape are we in?

Jon Brooks — Fri, 04 Sep 2009 20:07:41 +0000

Referring to the current recessionary cycle, Joseph Stiglitz says we may be in for a W-shaped recovery. Norel Roubini thinks we could go W or U. George Soros said he didn’t see a V anywhere in site.

What, exactly, are they talking about? Let us consult the Wiki.

V-shaped recession: “The economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery.”

U-shaped: “Longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth.”

W-shaped: A “double dip” recession, occurring when the economy “emerges from (a) recession with a short period of growth, but quickly falls back into recession.”

L-shaped: “The economy has a severe recession and does not return to trend line growth for many years, if ever…This is the most severe of the different shapes of recession.”

Some have also talked about a J-shaped recovery. But at this point, any recovery might just be termed “A-OK.”

The real roots of the economic crisis

Jon Brooks — Wed, 02 Sep 2009 17:49:40 +0000

If you happen to be in Cambridge, Massachussetts on October 8th, drop in on a lecture by Marc Hauser, Director of the Cognitive Evolution Lab at Harvard: How Apes and Monkeys May Help Us Understand the Economic Crisis. Hauser will argue that “many of the problems in our own economic decision-making can be traced back millions of years when our primate ancestors were small-brained quadrupeds lacking any concept of money or the stock market.” Hmm. Sounds like some financial advisors we know.

Some ideas espoused by Hauser, gleaned from here and here.

In experiments with mirrors, great apes have demonstrated self-awareness, a trait closely linked to knowledge of what others know and don’t know. Great apes and monkeys use this information to both teach and deliberately deceive.
Despite signs of empathy, cooperation, and “reciprocal altruism,” neither guilt nor shame, qualities necessary to a true morality, have yet to be scientifically observed in non-human animals.

Chimps are more patient than people.

Whereas humans are apt to punish those they consider to be unfair even at a cost to themselves, chimps will not make that choice. Extrapolating from that: Chimps do not exhibit a sense of fairness.

If you can’t make it to Cambridge, listen to this 2007 interview with Hauser on the ideas in his book “Moral Minds.”

Clunker love

Jon Brooks — Fri, 21 Aug 2009 19:46:55 +0000

The Cash for Clunkers program is ending on Monday. Although a lot of people took advantage of the government subsidy to trade in their low gas-mileage car for a more fuel efficient one, many seem to have done so with a good dose of regret and a whole lot of anthropomorphizing. Here’s a guy, for instance, who writes as an intro to his YouTube video called “The End of the Muscle Car, Goodbye Old Friend“:

got a new CAR! but have to give up an old friend to do it, Obama offered me 4500.00 for it, i feel like a cheap prostitute cause i jumped at the money.

And here’s a guy who seems to be in charge of making sure traded-in clunkers will never put rubber to road again. He has documented dozens of such mercy killings and enjoys his job as the Dr. Kevorkian of polluting vehicles about as much as any pet owner who has to accompany his sick dog or cat on that final journey to the vet. “As much as I don’t like doing this, I gotta do it,” he laments before he administers a fatal dose to the engine of a Ford Explorer. “It’s fighting,” he says of a Cadillac Deville that refuses to seize up.

Of course, there’s always the exception to the rule. The owner of this 1994 Ford Ranger hoots and hollers gleefully during the “clunker-bombing” of his car.

So here’s hoping all of your clunkers, no matter their gas mileage, rest in peace in that great big junkyard in the sky…