Thursday, 12 September 2013

Skin-in-the-game principle as a justification for conscription/draft military service

Nassim Taleb asks for applications of the skin-in-the-game principle across domains.

So, here's my take on an issue, in few coarse notes.

I've been thinking about skin-in-the-game as a justification for conscription/draft military service vs. voluntary/mercenary army.

I'll go there in a moment, but first an aside note. Sometimes it seems to me hearing Taleb striking some libertarian-ish notes. It's sort of a consequentialist libertarianism (arriving at libertarian attitude by evaluating the consequences of actions and policies, like the fragilising effects of centralisation and all that), which is different from categorical libertarians (starting from some fundamental moral prior, say the principle of self-possession, and constructing from there a libertarian theory, no matter the consequences). So it's kind of funny to see how skin-in-the-game may actually support something – conscription/draft military service – which sounds so un-libertarian.

But let me cut the crap, here's the argument.

Taleb's skin-in-the-game is a lot about getting right who is the agent and who bears the consequences of agent's actions. So how should we think about war and national defence? Who should be thought of as the agent, who ultimately goes to war, and who should be responsible for it?

I can't see any sensible answer other than ... the political/territorial community as a whole. This is even technically so: war and defence are ultimate public goods, it can't get more non-excludable and non-rivalrous than that.

So if community-as-a-whole is the agent, the skin-in-the-game principle would impose that it, as a whole, also bears the consequences. This logic to me makes incoherent the argument that there may still be allowed to transfer or trade risks (of dying or being wounded), like in the professional army or in a draft system with the possibility of hiring a substitute, as in the Union's draft system at a certain point during the American Civil War. It looks more coherent to me to frame the whole thing as a compulsory civil service for qualified individuals, similar to the jury system.

Let's look at the consequences. The point here is to see how the attitudes towards war of decision-makers would change, and more importantly, how the attitude of the public and the perception of the collective responsibility would change if we had a draft system instead of the current "voluntary" professionalised army. (This is possibly a big part of the explanation why there was such a greater public concern and outrage for the Vietnam war than for the wars the USA have been involved in in the last two decades).

At some point in his book "Antifragile", Taleb suggests that leaders deciding and handling the war should have their skin-in-the-game ("You want war? First in battle!", as was often the case in the past, from Alexander, Caesar, Hannibal to Napoleon roaming the battlefields). But the point of my communitarian twist of the skin-in-the-game principle is not so much that the POTUS and the congresspeople should have their skins in the game when dealing with war, but that in some way we all should.

Sunday, 2 June 2013

This IS about a park

A slogan circulates on social networks about the protests in Istanbul: "This is not about a park, this is about democracy".

I understand why it may appear important to whoever invented the slogan to show their demands fit into a greater scheme of things. Their intuition is right on one point: it certainly works better for drawing the attention of the world's public if you characterise your struggle as that for democracy other than just for "some stupid park".

These other things – being heard, condemnation of the abuse of state power, freedom of expression and of the press, respect of minorities' rights – are of course all valuable, and don't misunderstand me, I am all for it: fully, unconditionally, with no cynicism, and for those who are genuinely advancing this more general democratic agenda.

However, there is nothing wrong had it all been only about a park. It's perfectly ok, even more than that. And I will tell you why.

Cases like this are a boringly eternal return of the same. They are attempts of appropriation of the common goods through forms of modern enclosures where public spaces, places, the environment are taken away from the sphere of the public and are subjected to the logic of private profit-making. These operations bare no collective benefit, especially to the local residents who should be the primary holders of the right to the city. This is not only the right to have the city work also for them, but foremost the right to take part in the planning process about how their city should be built and organised.

Let's demystify one thing. We are not talking about The Common Good, but about the common goods. The debate about what is the general common good is a complicated one, and the term can easily be (has been) appropriated and mystified. Instead, the common goods are, well, goods: very concrete things such as land, places, squares, and public parks.

As long as they are commons, they provide some public service and are by definition under some societal jurisdiction. Indeed, the commons are societal at a more fundamental level than any other modern right or welfare state service. Even historically, before we had the latter, the political sphere has emerged as a question about how and what it means to govern the commons.

So, the question of the commons is the question about the quality of our democracy. Unless we want our democracy to be only a debate about gay rights, biological testaments, and the likes (again, I'm all for it), we need the commons, for they are one important thing what democracy is all about. In a way, the commons are the fundamental material basis of the democracy and so their defence and extension is also the defence and extension of the democracy.

I'm not all that well informed to know all the demands boiling in the pot nor do I know what sorts of heterogony of ends has culminated in the Gezi Park protests. All I want to say is that there would have been nothing belittling had this Istanbul thing been "only about a park", because for that specific reason it would've very much also been about democracy. So, the slogan could've well been: "This is about a park, therefore this is about democracy."

Long live Gezi Park.

Friday, 24 May 2013

On the impossibility of Paul Krugman

OK, I've been told my previous two posts were too long and the final line on the impossibility of Krugman was obscure. So let me clarify.

What do I mean by the impossibility of an European Paul Krugman? Look, it's not that, say, Wolfgang Munchau isn't convincing enough, it's not that we don’t have as smart, inventive and competent progressive thinkers, it's not that we really miss economists awarded some obscure medal from the Bank of Sweden. Rather, it is that we don't have The New Paris Times.

So, to pick a point from that previous post, as long as we don’t have a proper political (which also mean a moral) community on the European level, we cannot for all the practical purposes have public intellectuals like the guy.

Again, not because Europe don't have Krugmans, rather it didn't have one of Krugman's heroes: U.S. Grant.

Thursday, 16 May 2013

Fight, Game and Debate Europe

The tragedy of Europe is that its economic policy is decided at a level where political and public debate is irrelevant. And the reason, I was saying, is that Europe is not the kind of moral community where a true public debate would matter. Rather, in the last five years it has proven just to be a shaky alliance.

This reminded me of a wonderful Anatol Rapoport's book, "Fights, Games and Debates" which, Rapoport was claiming, are three basic modes of interaction among people.

In a fight your objective is to destroy, annihilate the enemy. In a game, you stick to your interests and beliefs and try to outwit your opponents. In debate you, well, debate, and try to convince counterparts by your arguments, or you get convinced by theirs. In a political community there is space for public reasoning through debate, but in an alliance you "just" play the game while your interests are fixed and independent of others. You form an alliance when your interests are (or you, sometimes wrongly, believe them to be) aligned with those of your allies.

By these standards, Europe has indeed shown to be nothing more than an alliance (and a shaky one, being as of lately the interests misaligned), and that is why no public debate exists nor can matter.

That is also why Europe doesn't have Krugmans. Yes of course, Wolfgang Munchau is smart and mordant enough, but you know, there is a famous sketch by the Italian comedian Maurizio Crozza, impersonating Silvio Berlusconi who comments and makes fun of the Financial Times's criticism: "What's the FT? Who cares! How many Italians read that? I own newspapers read by millions, you dickheads!"

And you know what, Berlusconi is exactly right (you dickheads!) The only debate that seems to count is that, largely off the sight of the general public, among a thin euroelite and officials subject to foggy democratic control. So, don't put too much hope into it, for there's the impossibility of an European Paul Krugman.

(You get that Crozza's bite at around 0:50.)

Monday, 13 May 2013

Why the intellectual debate (and the R&R debacle) can't change Europe

There has rightly been much ado about the Reinhart-Rogoff affaire, an academic and intellectual debacle of two prominent economists who provided gunpowder to austerians' claim that terrible things happen when a country's debt-to-GDP ratio rises above the imaginary tipping point of 90%. The notorious R&R's paper where this was suggested, it turns out, was based on fuzzy math, buggy Excel coding and data cherry picking.

This was a huge thing, possibly a tipping point, because the debate that followed helped to unveil the simple truth that behind the austerian claims there were class interests, for actually austerity is good for the 1%.

Dean Bakers nicely spelled out why in few broad strokes:
"High unemployment weakens workers' bargaining power allowing employers to get the vast majority of the gains from productivity growth over the last 5 years. While the rise in profit shares may not always offset the loss in profits due to weaker growth, this is likely true today in many countries. From this vantage point, austerity is just great for those on top. The pressure for austerity also opens the door for lowering tax rates on the wealthy in the future, for example by cutting back programs like Medicare and Social Security in the United States, and their equivalents overseas. If these sorts of social commitments can be reduced, then the wealthy can look forward to being able to keep more of their income 10-20 years in the future. And if we think there is nothing that the government can do about unemployment because of the demands of the austerity gods, then we can blame workers' problems on their lack of skills and inability to deal with the technological advances of a global economy.
In short, austerity serves some very useful purposes for the rich and powerful. […] It is extremely useful to have ostensibly reputable studies like Reinhart and Rogoff that can be used to make the case that austerity serves the general good and not just the rich."

Being the interests thus disposed, can a change in the intellectual debate change policies? I'm not a cynic, ideas do change the world, if not otherwise then at least by unveiling particular interests behind the claims of the general good, which is always salutary.

So, you'd expect all this would be beneficial for the debate in Europe on austerity. After all, eurocrats like Olli Rehn and José Barroso were blatantly using R&R findings to support their austerity shrieks, so you'd at least expect their stances to be now shaken.

But not so soon, for there are good reasons why all this debate around R&R is raising much less dust and shaking much less the austerians in Europe than in the USA. Why? Because if you want even to imagine the possibility of a serious debate about what's the general good of a country, well, you first actually need to have a country. That is, a moral community where people feel and are held responsible for the good of other peoples, a community where they care for each other on a higher degree that just on that of the universal human piety.

Sadly, The European Union proved to be no such community. Indeed, the effects of the European austerity are very different among European countries. And it economically favours – at least for the moment – the countries of the northern economic core, led by Germany.  So in Europe, you don't have just 1% vs. 99%, but also some countries vs. other countries. 

That it is not only an interplay of conflicting class interests, but also among countries, is demonstrated by a curious observable fact. While in the USA and in the UK, the right is austerian and the left is pro-stimulus, this is not the scheme of things on the Continental Europe. Here the southern European right is openly antiausterian (take for example Berlusconi and Rajoy), while the left in the north is austerian (take German Spd).

Being things as they are in Europe, what effect may possibly have an intellectual debate, if any?

Which brings me to the question: what then can end the austerity in Europe? Some say Germany will change position when things get so bad it starts to feel the bites of the depression (say, from the plunge of the demand from its European commercial partners). I wouldn't be so sure that's enough, for there would be further and more prosaic political obstacles: German politicians have told their voters that it's a morality play, that PIIGS must suffer for their past sins, and that Germany should not pay the bills for their past irresponsible behaviour (which, by the way, is at most a half-truth, it may hold for Greece, but pre-slump Spain was actually very responsible, with low debt and running budget surpluses).

So if and when the situation on the field changes for Germany, their politicians will be reluctant to change their moral posturing, and will probably stick to their positions far beyond the tipping point of depression starting to seriously harm Germany. Things will have to go far beyond that tipping point. As the Player from "Rosencrantz and Guildersten are Dead" would have put it: "Generally speaking, things have gone about as far as they can possibly go, when things have gotten about as bad as they can reasonably get."

To see this reluctance at work, don't look far away, but just cross the channel. It is now clear by all the reasonable standards that Cameron's economic policy was self-defeating and has double-dipped the UK economy. But notwithstanding all that evidence, the Chancellor of the Exchequer Ms. Osborn's faith in austerity seems unshaken. Even when the historically austerity-maddened IMF is telling him to back off and soften.

So, no, I'm much more a sceptic on this, the fact the keynesians are winning the intellectual debate will change little things in Europe, and if it does, it will be slowly and painfully. And the reason is that Europe has proven not to be a moral community and a political space where a true public debate matters.

Sunday, 12 May 2013

Poundering Italy

19 years after Pulp Fiction, in Italy McRoyal becomes Quarter Pounder.

It's the progress, stupid!

Friday, 10 May 2013

The Italian Stockholm Syndrome

I wrote in a previous post that the willingness of the ECB to act as the lender of last resort has tamed the spreads, and has also shown in the process their surge was more due to the perceived risks of liquidity crises than to the problems of solvency.

Now Joe Weisenthal e Paul Krugman are out with two simple charts telling this basic story.

As Joe Weisenthal concludes: "So this is not about markets. This is about ECB actions. When the ECB stepped up and performed the role of other big central banks (Bank of England, the Fed, Bank of Japan) and started backstopping the system, the debt crisis went away. Cutting spending had nothing to do with it."

Just to confirm, if someone still has doubts, that Italy under Monti was a hostage, with too many afflicted by the Stockholm Syndrome.

Friday, 3 May 2013

Letta the Ideologue

The new Italian Prime Minister Mr. Enrico Letta declared in his press conference yesterday that we ought to "put aside the ideological debate at the European level on austerity and budget rigour, and concentrate instead to do concrete things". But that – I'm sorry to say – is exactly the debate we need to have, also and foremost in order to actually do concrete things.

Without easing the paneuropean hysteria of budget rigour and a more easing monetary policy, it will be a long and painful way out of the economic crisis gripping the continent, especially southern Europe. On the monetary policy, the ECB's gradual change of course brought by the governor Mario Draghi is giving its fruits: the willingness of the ECB to act as the lender of last resort has tamed the spreads, and has also shown in the process they were more due to the perceived risks of liquidity crises than to the problems of solvency (indeed, the interests on national debt have declined both for Spain which has a comparatively lower debt-to-GDP ratio, and for Italy with much a higher ratio which, by the way, has actually increased during the last year).

The easing of the budget rigour, especially through a fiscal stimulus by the northern European core, together with higher inflation targets, would therefore be a possible receipt for a way out of the Europe's economic stagnation and the depression in the south.

For political and economic reasons (on which more in a future post), the European core led by the Chancellor Merkel of Germany has erected barricades and put up a barrage fire against such a possible course of action. Even if it is a policy which, in light of the experiences of the last five years, is receiving a growing support in the circuits of the economic debate (on this too more details maybe another time).

Even Mr. Letta seemed fully aware that much, if not all, of the Italian space of manoeuvre for national economic policy depends on the route taken by the economic policy at the European level. He seemed, for that is what he way implying in his inaugural address before the Italian Parliament.

But then, instead of kindling this debate, instead of credibly signalling his willingness to act for this change of course, now Mr. Letta informs us that these ideas are off the table, that it's unnecessary to have that discussion because it would only be a sterile ideological debate.

And here is the bigger story in all this. To call to abandon "ideological" debates and to concentrate instead on "concrete things" is so very often a way to anaesthetise if not debar the possibility of discussion on things that really matter; and such debars are by their nature hyper-ideological: behind the call for concreteness is hiding the idea that nothing can be done, that we should just turn to homoeopathy, for no change of course is possible, and there is no alternative.

"There is no alternative" was Margareth Thatcher's famous motto, and it was a wonderful example of ideology at its purest. And now, stepping in her shoes, here comes Mr. Letta the Ideologue, dubbing as "sterile ideological discussion" the only right debate on economic policy we never really had, and should at last be having in Europe.


Wednesday, 1 May 2013

A Minimalist's Monetary Economy – Excel Edition (and one way in which capitalism will not end)

I've tried to recreate an embryonic monetary economy in an Excel, inspired by Steve Keen's basic model of endogenous-money economy.

The guy does it with all the bells and whistles, differential equations and system dynamics modelling, so if you're after that sorts of stuff, go and read his paper.

But I thought the whole thing may be simplified in an Excel spreadsheet without lost of the essential. Heck, isn't Excel an economist's best friend these days?

This is a minimalistic approach, even sort of a suprematism of economic modelling, but it nonetheless hints at answers to few questions which seem to puzzle so many people, such as: 
  1. If the firms have to repay loans with interests, where is that extra money supposed to come from? 
  2. How are profits possible, if the loans have to be repaid with interests and there is only that much money in the economy? Are further loans the only possible source of money to repay the interests on the existing loans? 
  3. Is a steady state possible? Or the only way to keep the show running is to keep expanding the amount of outstanding loans (the debt) ad libitum
So, the model. It is a highly simplified representation of a closed economy: there's only one bank borrowing money (yes, out of thin air), a capitalist who owns a firm producing MacGuffins, and a bunch of workers.

The story goes like this:
  1. at start, the firm borrows the money from the bank, to start the production of MacGuffins; 
  2. each month the firm pays a wage to workers, a profit to the capitalist and an interest on loan to the bank; 
  3. each month the workers, the capitalist and the banker consume MacGuffins, buying it from the firm. 
There are just a handful of parameters in the model:
  • the value of the initial loan 
  • the monthly interest rate on the loan 
  • the monthly aggregate wages paid to workers 
  • the monthly profit paid to the capitalist 
  • workers', capitalist's and banker's consumption rates (the fraction of savings they spend on consumption) 
  • the rate of loan repayment (how much of the loan's principal is repaid each month). 
So this is how our workers, capitalist and banker are faring after 36 months (the values of parameters in yellow):

(Here's the Excel file if you want to play with it yourself.)

So, what does it show?

First off, as you can see, with those parameters a steady state is reached circa after 24 months. The firm's cash flow has never gone negative, even if there is a positive flow of profits, wages and interest payments. 

So, you can after all have a constant flow of monetary profits and wages, while still paying interests on loan to the bank. Indeed, in the steady state, the yearly sum of profits ($120) and wages ($240) is higher than the loan's principal ($100). This is not a surprise if you understand the difference between a stock and a flow. This example neatly illustrates the difference: the loan is a stock (the total amount of money present in the economy), while profits, wages and interest payments are flows the capitalist, the banker and the workers juggle back and forth among themselves month by month.

Of course, profits and wages are just monetary aggregates, and what's important here are their relative values which tell us the thing that really matters: how MacGuffins are distributed between workers and the capitalist. In our case for every 30.42 MacGuffins produced, ten are consumed by the capitalist, twenty by the workers and 0.42 by the banker.

Now, things break apart if the firm starts to repay the principal (you can test this by putting any positive value as a rate of loan repayment). All is good as long as the firm just pays the interests, but as so soon as you set a rate of principal repayment, you are basically withdrawing money from circulation and the system comes to a halt. (I know, I know, all kind of feedbacks and stabilisers kick in in the real economy, but still there is some basic story to it.)

That being said, the sustainability and the possibility of a sustainable steady state of positive profits and wages depend on how the consumption rates, wages and profits are set relative to each other.

Higher consumption rates (and hence less saving), especially from the workers who make the bulk of it, bring in more cash to the firm, and thus higher profits can be paid to the capitalists. A neat explanation of the commandment "thou shalt consume".

Actually that's slightly misleading, the cash brought in to the firm can be used both for higher profits or for higher wages (or for higher interest rate for bankers!). The relation between profits and wages depends, of course, on the class struggle between the capitalists and the working class the marginal productivity of labour and capital (if you live on a planet with competitive markets).

Now, is this too simple a model to tell us something useful about a real monetary economy? I'd say no it isn't.

Imagine what would happen is we had a more realistic situation with more than just one firm each producing a different good (and more than just one bank). Here the firms would compete for workers' money because now the workers could go out and buy all sorts of different MacGuffins from others than their employers. Firms would also compete to get better workers, and workers would compete among themselves to get better jobs. Firms would also compete for loans, trying to convince bankers that their MacGuffin is really special. Some firms would survive, some die. There would also be competition among bankers, as now the flow of interests from a loan (and eventually its repayment) is no longer guaranteed because, as we just said, some firms could go belly up.

So, the situation would be more intricate, but in the aggregate, you'd still get the general picture we had before: there would be some aggregate outstanding sum of loans (some firms might actually repay their loans, but then others would borrow) which would be our money in circulation, and as long as it's there the system can function, businesses can be ran, workers can produce and earn wages, capitalists can get their profits and banks collect their interests. So the general story is the same: there is no need in principle to increase the money supply in the system by further loans just to repay the existing ones.

Mind you, I'm not saying that in general there are no reasons ever to increase the money supply, there are many good ones (say, when a new entrepreneur convinces a banker she will produce a unique kind of MacGuffin everybody will go crazy for, and they both, the enterpreneur and the banker, believe they can profit from it). All I'm saying is that no extra loans (and thus money) is necessary in the system specifically for the purpose of paying interests on the existing ones.

Just a small final diversion: some may ask: how can the banker create money out of thin air? Well, a way could be that some guys with the monopoly of the legitimate use of physical force allow her to. Another, historically antecedent way, is to have people trust in her service of keeping in the vault some kind of tokens that happen to be a symbolic, mutually shared illusion as a storage of value.

So, is capitalism doomed? Of course it is, but it won't happen because we need to create loans indefinitely just to repay the old ones and still be able to have profits. People who say that may just happen to have another bug in their Excel spreadsheets.