The Federal Reserve

This is a sort of unusual topic for me, but I decided to write a little about it because Donald Trump has been attacking Jerome Powell, who is the current chairman of the Federal Reserve. As an investor, I have been following the Federal Reserve for many years. In case you don't know, the Federal Reserve was set up partially to depoliticize policy decisions regarding the financial system in the U.S. and to protect it from abuse by political operatives. I think it important to understand this, especially now, when news coverage is clearly inadequate. I'm getting very tired of PBS NewsHour.

After I graduated from college in 1972, inflation gradually rose to high levels. At that time, I also think that the U.S. economy began to restructure due to foreign manufacturing competition, particularly from Japan. The Vietnam War, which was unjustified, was also costly, and a strong inflationary trend developed. Political parties tend to kick the can down the road, such that they can blame their errors on future administrations. During this process, the Johnson, Nixon and Ford administrations oversaw inflationary pressures that lasted for several years. By the time that Jimmy Carter became president in 1977, inflation was taking off. Carter appointed Paul Volcker chairman of the Federal Reserve in 1979, and he served until 1987. During Volcker's tenure, the Federal Reserve took draconian actions in which they intentionally raised interest rates in order to reduce inflation. My first house was purchased with a 13% mortgage rate in 1980. Volcker is now considered to have been one of the best chairmen. Later on, Alan Greenspan got mixed reviews as chairman, because he mishandled the dot-com bubble in 2000 and laid the groundwork for the Great Recession, from 2007 to 2009, by deemphasizing financial regulation before he left in 2006.

In my opinion, Jerome Powell is doing a good job as chairman, as was Janet Yellen, his predecessor, and he has generally been reducing inflation and improving employment since the pandemic, his two main mandates. The situation with Trump now is so transparent that, to a knowledgeable audience, he is simply confirming to them that he is ignorant and self-centered. Trump and his advisors want to forestall an economic slowdown, with unemployment, by introducing economic stimulus through interest rate reductions, which would cause inflation. Trump's tariff program is inflationary. So far, because the Federal Reserve is specifically designed to prevent rash policy actions promoted by politicians, and because Trump can't replace him until next year, when his term ends, we still have some protections. Trump wanted to remove Powell ahead of time, but he seems to have received enough pushback to stop for now. Even so, he continues to belittle Powell publicly, not caring that Powell is obviously more competent than he is.

I still can't predict the exact timing of the collapse of the Trump administration, but it seems to me that he has created a situation from which he will never recover. At the moment, it looks as if he will not succeed in creating any benefits for low- and middle-income voters, the Republicans will lose seats in Congress, and he will generally lose his influence.

While I am still quite disappointed with how the news media has been handling the Trump phenomenon, there are now some pretty good voices out there. I particularly admire Jennifer Rubin, who currently communicates through The Contrarian. Ironically, Rubin was previously known as a conservative. What counts for me is that she has a brain that actually works and isn't a congenital money-grubber. From speaking to a couple of random Vermonters recently, I was also heartened to see that there is a simmering Trump hatred here, and probably everywhere – a positive sign indeed.

The Case Against Education: Why the Education System is a Waste of Time and Money

I have been reading this book by Bryan Caplan, mainly because I agree with its title, but I was barely able to convince myself to finish it, because I found the contents boring. Caplan is an economist and a professor at George Mason University, near Washington, D.C., and he seems to be a budding policy wonk. As I often say, American academics tend to write poorly, and economists are among the worst. This book is stuffed with charts and data that I don't think are necessary to make his main point, which is very simple: higher education, as it is presently structured, is a waste of money. That is something I've been thinking about for many years, and I've already mentioned it on this blog a few times. 

I sort of fit the data that Caplan brings up. I went to college after high school, because that was what you were supposed to do. No one actually encouraged me to go, and I had a good time and studied whatever I liked for four years. After a brief stint in graduate school, I decided that I would never be a philosophy professor, and I delivered pizzas for a few months. My mother-in-law then sent me the catalog of a local vocational college, and I looked through it. Becoming an electrician, welder or printer seemed attractive, and I gravitated toward printing, since it is associated with books and knowledge. I also have some mechanical abilities and thought that running a printing press might be fun. I started the program in the autumn of 1976 and finished in December, 1977, graduating at the top of my class. I immediately got a job in January, 1978 as the supervisor in a small print shop at Indiana State University. I continued working in the printing industry in Indiana, Kentucky and Illinois until I retired in September, 2007.

Caplan's main point is that what is studied in four-year college programs isn't practical, because it only produces a few vocational skills that provide about twenty percent of its value. However, a four-year degree has a "signaling" value that he thinks accounts for about eighty percent of its value. The signaling says that you are probably a more competent and reliable person than someone with a lesser education, and employers accept this. I agree that this is an inefficient process, and that it would be more effective to use college funding differently. In other respects, Caplan seems primarily to be a simple-minded libertarian who opposes governmental waste. He does not make specific recommendations regarding how current educational spending should be reallocated. Implicitly, he sounds a lot like a Reaganite who wants to put an end to "big government."

Returning to my own story, I did feel that my educational process was unnecessarily haphazard. There was no orderly procedure at any point regarding what I ought to consider doing. I was not unusual, because, as Caplan points out, very few undergraduate majors are directly linked to careers. Of the four undergraduate philosophy majors I knew, two became lawyers, one became an architect and one worked mainly in fast food. A specific problem that I had was that I was always better-educated than my peers and often better-educated than my boss. This occasionally led to work tensions. It didn't help that I got a part-time M.B.A. from a highly-rated program. However, on a personal level, the M.B.A. was beneficial to me because it was the first time that I had ever thought about the capitalist structure of American society, and I began to plan the remainder of my career and retirement when I was thirty-six.

In other respects, as an intellectual work, based on my extended readings, I think that Caplan's book is a complete failure. He is aware that some people have genetic advantages with respect to their academic success, but he never explores this fact. Also, though he seems to be aware of behavioral economics, his thinking in this book more closely resembles the obsolete "rational agent" model of economics. More significantly, he is myopic about the future of work. A lot of social turmoil is emerging now, I think, due to automation. This is a problem that isn't going to go away, and I think that the solution will eventually have to be basic income – probably another waste of money as far as many libertarians are concerned. Although Thomas Piketty's book, Capital in the Twenty-First Century, seems to have been forgotten after the initial fanfare, the only realistic solution is probably going to be a reversal of the wealth distribution that he critiqued. Currently, several billionaires are rallying around Donald Trump because they like things the way they are. 

On a more subjective level, I reject Caplan's approach because I don't really identify with capitalism. Having been steeped for years in the works of E.O. Wilson, Frans de Waal and Robert Sapolsky, I'm coming out as a hunter-gatherer. Typically, hunter-gatherers had no formal educations and were never paid wages. Furthermore, I think that all of the useless books that I've read over the years have enriched me personally, and my aesthetic sense is more important to me than my bank account. So far, I've only worked for about forty-three percent of my life, and I'm hoping to get that down to thirty-three. Twenty-two years to go!

Capital and Ideology V

As expected, I finished the book. Part Four includes the chapters "Borders and Property: The Construction of Equality," "Brahmin Left: New Euro-American Cleavages," "Social Nativism: The Postcolonial Identity Trap, and "Elements for a Participatory Socialism for the Twenty-First Century." The latter chapter lays out some of Piketty's ideas regarding the specific structure and goals of future governments. He says:

The study of history has convinced me that it is possible to transcend today's capitalist system and to outline the contours of a new participatory socialism for the twenty-first century—a new universalist egalitarian perspective based on social ownership, education, and shared knowledge and power.

In the short concluding chapter, he writes:

Ultimately, this book has only one goal: to enable citizens to reclaim possession of economic and historical knowledge. Whether or not the reader agrees with my specific conclusions basically does not matter because my purpose is to begin debate, not to end it.

While, on one level, I respect Piketty's idealism, on another level he seems to be a completely naïve academic who, having accessed an international readership, is now freely expressing his childhood fantasies. Looking at his background, it doesn't seem to be a coincidence that both of his parents were once Trotskyites. That by itself wouldn't necessarily be bad, but his ideas seem shaky to me, and how he thinks they might be implemented seems completely unrealistic.

As mentioned earlier, Piketty has no interest in psychology and seems to be completely unaware of the problems that one would encounter in educating the public and making them sympathetic to his ideas. For example, although he seems to have some awareness of how Trump supporters think, he conveniently places them in his category of "nativist merchants," who have come to dominate the Republican Party and abhor the "Brahmin left," which includes people like Hillary Clinton and Barack Obama, who have come to dominate the Democratic Party. In Piketty's nostalgic version of socialism, there remains the fantasy of a well-educated and intellectually flexible public who are ready to implement enlightened ideas without any help from experts simply by following routine democratic processes. Looking at the electorate in the U.S., this seems like a pipe dream of the highest order. How are voters who don't even know how many branches there are in the federal government suddenly going to become progressive policy wonks?

I'm not going to attempt to summarize Piketty's proposals, because I don't see them going anywhere anytime soon. Perhaps they may get some support in the E.U., but elsewhere, particularly in the U.S., you may at best see some piecemeal versions of them in progressive platforms such as those put forward by Bernie Sanders or Elizabeth Warren. In order to make any headway in the U.S., Piketty's ideas would have to overcome forty years of conservative propaganda and challenge the corporate mindset in a manner that hasn't succeeded in nearly a century. I should also mention that Piketty seems to have no sense of the future of capitalism: for him it will continue to function much as it has, but with greater taxation on wealth and high incomes. One of his pet projects is to improve educational opportunities for the disadvantaged; while on the surface this seems like a good idea, realistically I don't think it would be of much benefit in a shrinking job market. In fact, Piketty hasn't given a thought to how capitalism itself is likely to evolve over the next few decades. Like more conventional economists, he seems to think that capitalism can be an engine of growth indefinitely, and that it merely has to be regulated better so as to keep it in line with the public interest. He seems to have almost no sense of the cutthroat nature of capitalism, which has historically left winners and losers in its wake. Somehow, he thinks, the democratization of corporate boards will result in enlightened corporate policies – without affecting profitability. From reading this book, you would never know that corporations routinely disrupt democratic processes in order to gain competitive advantages. I don't see that behavior changing significantly until all major corporations are nationalized – which doesn't seem to be looming on the horizon.

From my point of view, Piketty is operating primarily from a pre-scientific schema, and he is willfully ignoring both behavioral economics and a biological understanding of human nature. He would benefit greatly from reading some of the books that I've discussed on this blog. Underlying his ideas is an idealized version of human nature in which everyone has the ability to reason clearly and make good choices. However, scientific research now says quite the opposite. I wish that I could give this book a more positive assessment, but, as it stands, I can hardly recommend it.

Capital and Ideology IV

I am finding that the book is structurally ill-conceived and far too long for the abbreviated conclusions that Piketty is likely to reach in the final chapter, which is only seven pages long. I looked over Part Three, which includes The Crisis of Ownership Societies, Social-Democratic Societies: Incomplete Equality, Communist and Postcommunist Societies, and Hypercapitalism: Between Modernity and Archaism. On page after page you see the social and economic histories of country after country, accompanied by Piketty's charts, which usually show changes in wealth and income inequalities over long periods of time. The main point of Piketty's last book was that capitalism tends to coexist with inequality, though he did not posit a causal relationship. That was an interesting idea at the time, since, particularly in the U.S., the prevailing mythology had been that "a rising tide raises all boats," or "trickle-down economics" dating from the Reagan-Thatcher era. However, although that book was popular among progressives, as far as I know, it has hardly made a dent in policy anywhere and is the butt of jokes in Davos. I think the current book will have even less of an impact, because Piketty does nothing more than tenuously link the state of inequality in a country with whatever the prevailing political ideas are at any given time. For Piketty, it seems that inequality is purely subject to the prevailing ideas in a country, and he has not so far presented a case for any particular set of ideas that ought to be applied generally in order to reduce it. Also, as I mentioned earlier, he has no interest in using the biological characteristics of humans to construct plausible models for future use. Thus, from my point of view, he has no interest in examining the underlying causes of intractable inequality. If he took that extra step, he might immediately see that humans are social animals, and that they expend much of their energy attempting to attain social prestige. In this era, that prestige is usually associated with greater wealth, and until wealth is replaced by some other characteristic, economic inequality is inevitable. This is such a simple and obvious idea that I am stunned that it hasn't occurred to Piketty. Rather, he seems to prefer to show off his historical knowledge and loosely connect it to economic history. As I said, I don't think that history is much of a guide to anything.

In other respects, if one is interested in social history, the book can at least provide some food for thought. Piketty makes a case that part of the ascendance of the economy in the U.S. was due to the fact that the American educational system surpassed that of most other countries early in the twentieth century. On the surface, this is an appealing idea, but I don't think that it holds up to scrutiny. Rather, I see this as an indication of Piketty's tendentiousness. I think that Piketty is a hopeless, ideological conformist in his belief that economic advancement is the result of the removal of constraints on the underprivileged. In this instance, he seems oblivious to the fact that increases in agricultural productivity led to a reduction in demand for farm labor; this precipitated a migration to industrial jobs that did not require an educated workforce. I doubt that education had much relationship to productivity in the U.S. until after World War II, when the GI Bill created a new generation of professionals.

On the other hand, sometimes Piketty offers descriptions which help clarify situations:

The neo-proprietarianism that has emerged over the past several decades is a complex phenomenon; it is not merely a return to the proprietarianism of the nineteenth and early twentieth centuries. In particular, it is linked to an extreme form of meritocratic ideology. Meritocratic discourse glorifies the winners in the economic system while stigmatizing the losers for their supposed lack of merit, virtue and diligence. Of course, meritocracy is an old ideology on which elites in all times and places have always relied in one way or another to justify their dominance. Over time, however, it has become increasingly common to blame the poor for their poverty. This is one of the principal features of today's inequality regime. 

This description applies to many countries at the moment, and, in the U.S., the Trump administration has turned it into a parody: Trump and his flunkies transparently demonstrate their utter incompetence on a daily basis, while unconvincingly posing as masters of economic and geopolitical skills. The problem, however, is quite real, and a slightly less offensive version of the same behavior infected the Obama administration. I also notice that some of the current heroes of capitalism, such as Mark Zuckerberg and Jeff Bezos, often seem quite vacuous if you examine them outside their particular areas of expertise.

I've (only) got 322 pages left to go and hope to blast through them and wrap up the book on my next post.

Capital and Ideology III

Part Two of the book consists of an exhaustive description of slave and colonial societies. There is so much material in this book – it could have been three or four books – that I'm going to comment only on things that particularly interest me. My interests do not necessarily match Piketty's, but I find some of the information interesting in its own right. In passing, Piketty mentions the basic pattern of international trade, and it struck me how little one ever hears about it, because it is ignored or distorted by the news media and politicians. When a country, such as Japan, increases its exports because labor is inexpensive, the workforce is young and it has a competitive advantage in pricing, the situation is not permanent and evolves over time, particularly when the workforce ages and the labor pool declines. Eventually, the workforce becomes smaller, and the wealth that has been accumulated is invested overseas, providing a replacement income for the income that has been lost from exports. Although the situation isn't quite so stark in the U.S., manufacturing and exports have similarly declined, resulting in fewer jobs. The workforce in the U.S. is also aging, but, unlike Japan, immigrants are filling vacant positions. Under this explanation, there is nothing wrong with trade deficits, and there isn't necessarily a reason to rebalance them. For example, Japan now has a trade deficit, but the Japanese have large investments abroad and are not financially imperiled. In order to regain lost manufacturing jobs in this scenario, it would be necessary to reduce labor costs either though automation or lower hourly pay. Thus, when Donald Trump or other politicians come along and say that they are going to rev up the economy and bring back jobs, as if it were 1960 all over again, they have no idea what they're talking about. There is a basic cyclical process in place that can't be bypassed. No doubt this will be listed in Trump's obituary, along with his other colossal failures. Piketty has yet to describe how improvements could be made in this kind of political environment.

I found the description of how slavery ended interesting. When the English ended slavery, the government compensated the slaveholders for their loss of property. The situation with the French in Haiti was quite different. There had been many uprisings in Haiti, and finally France agreed to let the slaves buy their freedom. Thus, Haiti incurred a debt in 1825 which was not paid off until 1950. The U.S. had confused and unsatisfactory results when slavery ended. There was a proposal to send the slaves to Liberia, which didn't work. An attempt to recompense the slaveholders was also unsuccessful, because the value of the slaves was too high to be afforded by the government. Perhaps some of the animus in the South lingers from the fact that the slaveholders were never compensated. The problem of slavery remains unresolved in the U.S., and we're still seeing it in the news. Of course, I don't have any answers, but I don't think that reparations to slave descendants, as currently discussed, are going to be politically popular. I find that movement a little odd, because life isn't fair and never has been. At this stage, the civil rights movement in the U.S. has worn quite thin and is on life support. Uneducated white people are now clambering for attention too, as their economic situations deteriorate. From my point of view, all Americans have become a bit whiny. Many of them seem to assume that they are entitled to a minimum standard of living even if they make little effort. Worst of all, the government, which is permanently underfunded because of low taxation, doesn't have the ability or desire to do much about it. I know it isn't an apt comparison, but I think more along the lines of the Armenians (three of my great-grandparents) who fled genocide in the Ottoman Empire. The idea that I would demand reparations from Turkey seems like the height of absurdity to me. If I were a slave descendant living in the U.S., my first choice would be to emigrate to a different country. I wouldn't waste my time waiting for the U.S. to become an enlightened country.

Also in Part Two are descriptions of the transitions from ternary societies to proprietary societies in Asia and elsewhere. There is so much data that I'm not going to try to summarize it.

Capital and Ideology II

The book includes a detailed description of the historical structure of society in several countries. The earliest widespread structure, called ternary or trifunctional, consisted of the nobility, the clergy and "the third estate," which represented ordinary workers of low status. In France, that system existed up to 1789, from where it gradually evolved into the next structure, which is called proprietary. England went through a similar process, but without a full-scale revolution. The propriety structure runs right up to the present, and, as the name suggests, is based on the ownership of property. Many of the examples of proprietary structure come from France and England and are a repeat of content from Piketty's last book. Once again he examines the unequal ownership of property and uses Balzac and Jane Austen for accurate descriptions of the early nineteenth century in France and England. He also includes data from the Belle Époch, which ran from the end of the Franco-Prussian War in 1871 to World War I in 1914. As recounted in his last book, that period, though rich in the arts, was characterized by extreme wealth inequality. He also includes data on Sweden and other countries.

The book is quite long – 1041 pages – and goes into great detail, usually relying on data such as inheritance records. Besides being a little tedious to read, the early sections amount to evidence that he will use for his central arguments at the end of the book. Of course, this type of process is hardly concise and makes the book look like a major academic treatise. More than ever, Piketty comes across as a slightly pedantic academic who is forcing the readers to wade through minutia that may not be of much interest to them. Although the data is often rich, I am finding that I don't need most of it and would be much happier with "the short version," a concept which seems to barely register with Piketty. For this reason, I am passing across the pages far more rapidly than usual in order to finish the book in a reasonable amount of time. Moreover, I don't particularly like historical approaches, because they often seem arbitrary to me, and historians never seem to be good at summarizing conceptual issues. For these reasons, I am not going to dwell on anything and will move as quickly as possible without referencing the countless bits of information.

In passing, one issue came up that shows the difference between my thinking and Piketty's. Writing about the Aryan nobles in India and nobles in other regions, he says:

...the historical evidence suggests that classes mixed to such a degree that any supposed ethnic differences disappeared almost entirely within a few generations.

I think that Piketty embodies many liberal biases, because he is commenting on something without taking into account alternate views. With respect to the Brahmins, here is what David Reich, the geneticist, has to say:

The people who were the custodians of Indo-European language and culture were the ones with more relative steppe ancestry, and because of the extraordinary strength of the caste system, the ancient substructure in the ANI [ancestral north Indians] is evident in some of today's Brahmins even after thousands of years.

My point here is that Piketty, though roughly correct, has no interest in accurate genetic information which contradicts the unquestioned liberal assumption that all people and ethnicities have essentially the same capabilities. There are differences which, though small, should not be glossed over unless research disproves it. As I've said before, though a genetic view of the abilities of different groups may seem racist, in cases such as those put forward by David Reich, there is scientific evidence to back them up, and the default liberal academic trope that all people are essentially the same looks much like propaganda. It is apparent to me that Piketty comes with a lot of intellectual baggage which may not hold up well if you remove him from his particular academic bubble. Thus, while I admire him for his quest for the cause of equality, it is hard for me to overcome the aspects of his thought that amount to no more than academic received wisdom. There are real differences between people, and some of those differences are the result of their genetic backgrounds.

I am hoping to wade through another 200 pages before making my next post.

Capital and Ideology I

For a number of reasons, I'm out of my winter reading mode and will probably proceed through this book, by Thomas Piketty, very slowly. Like Capital in the Twenty-First Century, it isn't technical and is easy to understand. I am reminded of Charles Darwin, who similarly wrote accessible books, and thereby laid claim to the title of one of the greatest scientific minds in history. Like Darwin, Piketty is already rich and acclaimed from his popular first book.

I've only read the long introduction, which describes the main plan of the book. As with his last book, Piketty loves historical narratives in which he compares conditions in different countries at different periods. In this case, rather than focusing primarily on the economic aspects of wealth inequality in rich countries, he looks broadly at ideology and politics in all kinds of countries. I am already finding myself disagreeing with him when he says "Inequality is neither economic nor technological; it is ideological and political." It looks as if the main premise of the book is that inequality can only be addressed through political processes, and in this sense it seems that his ideas are similar to those of Jared Diamond in Upheaval: each nation must work to define its situation and find solutions through a democratic political process. In most respects, that is a conventional view today. However, as I've mentioned on previous posts, I have a very low confidence level in political processes and usually find prevailing ideologies stunningly simplistic if not simply incorrect. Piketty seems to abhor technical language when it comes to collective human thinking about how societies should be organized. I agree with him that natural language is our primary resource for resolving political and ideological disputes, but think that he has too much faith in the idea that humans can collectively solve their major problems simply by identifying and discussing them at all levels of society. I find myself frequently disagreeing with progressive intellectuals, who often seem to base their ideas on a faulty understanding of human nature.

Piketty's form of argument, while refreshing in some ways, is disappointing in others. It is indeed pleasant to read about social issues in narrative form, probably because our brains have evolved to work that way. Strictly scientific language seems cold and inaccessible, so it makes sense that people, including Piketty, prefer stories for digesting information. Most people, for example, would prefer reading a novel to reading a scientific treatise. The problem is that ideologies and political memes lack real substance if they're not measured against more objective standards. Several of the books that I've read since reading Piketty's last book show that human cognition is highly erratic in its performance, which results in irrational behavior on the part of practically everyone. Thus, the idea that the citizens of a country can simply buckle down, put their heads together and reinvent themselves through a process that is both orderly and rational seems naïve to me. That, unfortunately, seems to be the view of most progressive intellectuals these days. I am more inclined to let policy experts or AI make these decisions, because most people are simply incapable of understanding complex policy options. It looks as if Piketty is going to completely ignore behavioral economics, which, besides being a useful branch of economics, is probably one of the most important ones to develop over the last fifty years.

Although, as I've said, politics and ideology don't interest me much, I can use the current political situation in the U.S. as an example. People generally agree about what comprise liberal or conservative ideas, but perhaps the one interesting thing that Donald Trump has done is demonstrate that Republican conservatives now have no core beliefs. Because Trump has no real ideology other than narcissism, the Republican Party, for the first time since the early twentieth century, no longer represents fiscal conservatism or free trade. Notably, there has been no effort made by Republicans to reframe their ideological beliefs, and it seems that, almost overnight, the conceptual identity of the party was gutted, and the party itself became a tool for conceptually incoherent opportunists. To be sure, some of the previous practices, such as the removal of restrictions on corporations, are still in place, but, with Trump at the helm, there can be no intelligible ideological or political goals. I think Piketty will be commenting on the Trump situation later in the book, but this situation may contradict some of his ideas.

Good Economics for Hard Times III

The chapter on climate change, "In Hot Water," focuses primarily on policies to reduce greenhouse gas emissions and does not address the long-term economic effects. Carbon taxes and exchanges are recommended. Wealthy countries, which are the primary creators of global warming, ought to assist poor nations, which, though not major polluters, continue to use processes that produce carbon dioxide emissions. One of the recurrent themes of the book is that humans tend to engage in "sticky" behavior, which in economics means that they don't like to move or change their habits. In India and other countries, people still cook with wood, which creates both carbon dioxide emissions and poor health. They also burn fields after harvesting, which causes pollution and is not a sound agricultural method. In cases like this, the authors recommend assistance from wealthy countries. Since poor countries are going to take the brunt of climate change, the countries that created it have some responsibility along with the financial resources to help.

The next chapter, "Player Piano," discusses automation, also limiting itself to the near-term effects. Robotics has already taken a toll on employment in manufacturing. The authors believe that this trend will continue and intensify, affecting many other industries and reducing relative wages for all but the tech-savvy. The chapter then abruptly shifts to tax policy, which is continued in the next chapter, "LEGIT.GOV." Banerjee and Duflo spend quite a few pages explaining why the policies of Ronald Reagan and Margaret Thatcher were ill-conceived and have caused negative consequences right up to the present. One idea, that lower taxation on the rich results in economic growth, has been disproven. Another idea, that welfare makes people lazy and unproductive, is also inaccurate. Reagan and Thatcher apparently were sincere, and at the time there was no research to contradict them. The authors, rather courageously I think, go on to attack the American Dream ideology, in which the country is seen as an open field in which anyone can get ahead with hard work, and in which those who fail simply haven't put in enough effort. What they emphasize is that the Reagan-Thatcher policies are responsible for increased inequality in the U.S. and U.K., in which the rich are under-taxed. The top income tax rates in both countries have dropped considerably, allowing a few people to become extremely wealthy – much wealthier than the wealthy of the early twentieth century. Furthermore, the centers of finance in New York and London have permitted some to become super-rich without any visible talents. Excessive wealth accumulation by a small minority, which is enabled by low top income tax rates and the absence of a wealth tax, results in insufficient funds for necessary social programs. Those whose wages have stagnated or evaporated due to automation and international competition eventually require guidance and sometimes need financial support from the social service arms of government.

Ever since the Reagan-Thatcher era, government has been portrayed as an obstacle to progress. Although governments are often inefficient and corrupt, the same is true of private businesses. However, the authors argue that government involvement is essential when inequality rises to a high level and the government becomes the only source able to help those in need. Many of the social issues that exist in the U.S. and U.K. today are relatively nonexistent in countries such as Denmark, which has higher taxation on the wealthy and more funds available for social programs. In this respect, the authors criticize Emmanuel Macron for eliminating the wealth tax in France and placing a surcharge on fuel. These actions had an instant polarizing effect that resulted in riots. Catering to the rich comes at the cost of social stability.

Banerjee and Duflo also devote quite a few pages to the political polarization in the U.S. Much of it, they say, can be attributed to the low self-esteem and anger of those who are suffering economically now. In the U.S., the Protestant work ethic, as invoked by Reagan, tells them that they are failures if they can't succeed financially. A portion of these people gives up, takes drugs and dies. Another portion gets angry and becomes a pawn for corrupt politicians like Donald Trump. As policy wonks, the authors are well-versed in which policies would defuse this situation if they had political support and the proper funding. It goes without saying that Trump doesn't understand or care about the issues and that his incompetent administration is incapable of addressing the underlying causes. But the blame doesn't lie completely on the Republicans, since the Democrats have also supported welfare "reform" and privatization. Rhetorically, Hillary Clinton contributed to her own political demise by referring to Trump supporters as "deplorables." This angered enough people that it may have cost her the election. Hillary Clinton and Barack Obama show all of the symptoms of "elites," and while I share some of their sentiments, displaying them in public can become a prelude to political death. As I've said, this is an anti-intellectual country, and some of the most popular memes in circulation, including the American Dream and American exceptionalism, border on pure fantasy.

The next-to-last chapter, "Cash and Care," discusses practical ways to assist the needy in both wealthy and poor countries. In each case, a form of Universal Basic Income is agreeable to the authors, though they think that it works better in poor countries. There is a lot of detail to wade through here, and I think this chapter would appeal more to someone in the field of Poverty Alleviation and Development Economics, like Duflo.

On the whole I found the book enlightening, because this kind of information rarely comes up in the news. It is encouraging to know that some real expertise exists in the subjects covered. Reading it is an easy way to rise above the nonsense that one faces on a daily basis. These important issues become drowned in misinformation, lies and bad jokes when encountered at the level of American politics. My only complaint about the book is that it doesn't extend its analysis out very far into the future, at which point both climate change and technological change will render the policy atmosphere quite different from the one we're in now.

Good Economics for Hard Times II

The next chapter, "Likes, Wants, and Needs," covers a wide range of research regarding human behavior. Part of it reflects the behavioral economics of Daniel Kahneman, Amos Tversky and Richard Thaler, and there is also a section on how social environments affect individual behavior. From my point of view, the latter is the most interesting part of the book so far, perhaps because I was not aware that this kind of research existed in economics. To sum it up in my preferred language, it is about the negative aspects of group selection in a eusocial species, i.e. ours. Rather than discussing this as a biologically inborn human characteristic, the authors simply look at conflicts that arise from people's tendency to behave in a tribal manner. In the contemporary context, this has resulted in political polarization in the U.S. and other parts of the world. There are also examples from the caste system in India. Populism in the U.S. is now based mainly on group identity, thus, politicians are able to gain support by proposing anti-immigration policies. The underlying ideas espoused by people like Trump don't hold up well to scrutiny and resemble propaganda more than fact. For example, "Nearly half of the residents in states with almost no immigrants – like Wyoming, Alabama, West Virginia, Kentucky, and Arkansas – believe immigrants represent a threat to American culture and values." The authors discuss Students for Fair Admission v. Harvard. There used to be discrimination against Jews at Harvard because they were too smart, and now there is discrimination against Asians. It is difficult for Harvard to defend its admissions practices because they seem to contain racist elements and, in the case of Asians who have good academic qualifications but are lacking in personality, Harvard believes they can be rejected. This may look bad from a politically correct standpoint, but I think Harvard has a point, since in their case they want graduates who will be the major leaders in the future, not simply good students, and this makes the definition of merit more complex than plain academic skills. Banerjee and Duflo also cite an interesting study in which Indian cricket players were divided into different teams. Some teams were composed of uniform castes and some were composed of mixed castes. The results indicated that those who played on mixed teams were more likely to befriend players from other castes. The lesson is that diversity need not be seen primarily as a tool for rectifying social injustice, and that it may be more useful as a way of defusing class or group prejudices, with the goal of creating a more coherent and stable society. The more people from different groups mix, the less antagonistic they become toward each other. For similar reasons, I prefer to live in socioeconomically mixed neighborhoods, if only because homogeneous neighborhoods are more likely to produce a pernicious form of social identity.

The following chapter, "The End of Growth," is also quite interesting. It covers economic thought at an abstract level regarding the conditions that allow nations to achieve economic growth and reviews the ideas of optimists and pessimists among leading economists regarding the prospects for future growth. The main idea is that productivity increases cause economic growth. This usually occurs best under conditions in which a large, poor labor force is given access to new capital investments. According to Robert Solow, a pessimist, productivity growth gradually slows in wealthy countries and never recovers, whereas Paul Romer, an optimist, thinks that innovation can maintain high growth indefinitely. The economic growth of various countries is examined. The pattern in recent decades has been for some undeveloped regions to develop and become rich quickly. Usually this occurs when there are the right ingredients in place. Europe had tremendous economic growth after World War II, as did Japan a little later. The same phenomenon is occurring in China and other developing countries now. India is a problematic country for economists, since most of them would predict much more economic growth there than has occurred so far. Economic growth may not always be desirable, but the cumulative effect of it globally does seem to have been to reduce poverty worldwide. What I really admire about Banerjee and Duflo is their willingness to deflate myths. They are the first economists I've heard say that there is no proven way to sustain high economic growth indefinitely, and that the countries that have experienced it have done so in an erratic manner such that it is unpredictable. They specifically deny the validity of the Republican mantra regarding tax cuts for the rich: there is no evidence that they produce measurable economic growth. They also note that Mark Zuckerberg of Facebook is making a completely unsubstantiated claim when he says that the Internet will provide future economic growth: there is no evidence supporting that claim either. In my view, Facebook and other social media are simply substitutes for the traditional social contact that has been lost in wealthy countries. Even though I am a stockholder in Facebook, and it has been my best investment by far, I don't think that it is of any real value, and people would be better off if they found real friends. Needless to say, I don't have a Facebook account. I think that the main problem of economics is that the phenomena are too complex for people to understand. To put that in context, I would say that it is far more difficult than theoretical physics, and this explains why economics has never been a reliable tool except in highly circumscribed circumstances.

I am nearing the end of the book and should have one more post. The next chapter does, after all, seem to cover climate change.

Good Economics for Hard Times I

This is a recent book by Abhijit Banerjee and Esther Duflo, two (married) economists who won Nobels in 2019. Although economics is not an inspiring subject, I am finding that it is one of the very few academic fields which actually studies human behavior in a manner that could be of some value in matters of policy. This is particularly relevant at the moment, when so many politicians in the U.S. and elsewhere pay little or no attention to findings that are relevant to decisions that will definitely impact millions of people over the long term. I am a little surprised that sociologists don't have comparable publications, but, then, we live in capitalist societies, and economists have clout, whereas sociology professors are perceived as run-of-the-mill academics who produce work with no practical applications. I find books like this informative, because the authors actually know something and rarely appear in the news; they are replaced by ignorant TV personalities who cater to the wishes of politicians and corporations. Although biologists such as E.O. Wilson and Robert Sapolsky have long been writing about our animal natures, economics seems to be the only academic subject that sits at the intersection between science and public policy. Unfortunately, no economics books that I've read have made for exciting reading, and I read them mainly out of a sense of responsibility. Not only is E.O. Wilson a better writer than any economist I've ever read, but he also has a more profound understanding of life on Earth.

As far as I've read, there are chapters on immigration and trade. Donald Trump's name has come up a few times, but he is not really a target of the authors. As far as migration is concerned, generally migrants from poorer countries to wealthier countries do not cause significant disruptions, because they take jobs that people don't want in the wealthy countries. They enrich the local economies by making inexpensive services available to the existing inhabitants. Anecdotally, you can see this in Vermont, where the locals don't want to milk cows or pick apples, and migrants are enabling the survival of those industries. An exception occurs in the case of highly-educated immigrants arriving in wealthy countries. In this instance, they may drive wages down in high-paying industries. I know of one example in which a highly-educated American tech worker feels like a token American in a field that is being taken over by foreigners. Thus, in the case of migration, Trump has got it completely wrong, i.e. poor people should be allowed in and well-educated people should be restricted unless there are no comparable domestic workers. The chapter also examines problems related to migrations within countries. Many examples come from India, while similar circumstances occur in countries like the U.S. For a variety of reasons, some rational and some not, many people don't like to move. Often reduced economic circumstances can be improved significantly simply by retraining or moving to a different location. I noticed something like this when I lived in Dixon, Illinois, which is one hundred miles west of Chicago. Quite a few of the people there were poor because the local economy was a little depressed, and I was surprised to learn that some of them had never even been to Chicago once. They liked Dixon because their families lived there.

The chapter on trade is quite complex but readable. It looks closely at economic dogma that has been present since the early nineteenth century. Specifically, most economists still hold to modern versions of the ideas of comparative advantage and free trade. Comparative advantage and free trade do work in most circumstances, though in the literature at this stage there are many provisos and adjustments that need to be made. Comparative advantage, of course, means that each nation will be able to produce some goods and services at a lower cost than other nations and will therefore be able to compete and trade internationally even if it is weak in some industries. For example, China was poor but had cheap labor which gave the country an economic advantage in some manufacturing industries. The economic rise of China did hurt American workers in rural areas whose jobs were lost due to competition. However, the main point of the chapter is that internal adjustments in the U.S. could compensate for that damage. Overall, there is a slight net gain to the U.S. economy attributable to free trade, and it would make sense to leave free trade intact and allocate internal resources to help those who are hurt by it.  Banerjee and Duflo think that the elimination of tariffs would be fine if the losers to free trade were retrained and moved if necessary. Apparently the U.S. has an underfunded and underused Trade Adjustment Assistance program which has proven to be effective in assisting displaced workers. Increasing the funding and publicizing that program would be a better idea than imposing tariffs, which, under Trump, are helping the steel and aluminum industries but hurting industries associated with agriculture.

Anecdotally, moving has been advantageous to my family. My English ancestors converged on London during the Industrial Revolution and got better jobs. My father's move to the U.S. was not exactly a success story for him, but the rest of the family did eventually attain a higher standard of living. More dramatically, my Armenian ancestors moved from Armenia to what is now western Turkey long ago and became wealthy. When the Armenian genocide was taking shape, they moved to Greece, and later the U.S. and South Africa. In my case, I worked in the printing industry for thirty years, most of which were during its decline. Of the eight unrelated plants where I worked, located in Indiana, Kentucky and Illinois, five have closed. Although the printing industry is hardly affected by foreign competition, the same general rule about being willing to move applies to laid-off employees. For this reason I have very little sympathy for rural Americans who are reluctant to make necessary changes in their lives and vote for incompetent, corrupt politicians just because they would rather hear lies than face the truth.

I still have a long way to go in the book and should have one or two more posts to make on it. So far it hasn't said anything about adapting to the Anthropocene epoch or offered a critique of capitalism, which are probably beyond its scope. Another concern I have, which hasn't been discussed, is that centrally managed countries like China will at some point have tremendous global economic advantages as long as the people in power are competent and not corrupt. By applying research in economics and public policy, China may eventually become a much more functional country than the U.S., which is increasingly burdened by inept voters and efforts to decentralize the government. If Japan, South Korea and Taiwan were able to attain Western-like economies in such short periods, one can expect the same from China, but on a much larger scale.

Why We're in the Sixth Great Extinction and What It Means to Humanity

This is another essay in Biological Extinction, and was written by Partha Dasgupta and Paul Ehrlich. Dasgupta, as mentioned earlier, is the chairman of CSER, and Ehrlich is the well-known biologist who published The Population Bomb in 1968. I thought this essay was also worth mentioning, because it recounts the causes of the current reduction in biodiversity along with the likely consequences and mentions the type of economic accounting that may become necessary if technological advances don't come to the rescue soon. A lot of this is familiar ground, such as the effects of land use change, overharvesting, pollution and climate change. Biodiversity is presented as a requirement for human habitation rather than as an arbitrary ideal.

The following passage sums up most of the current situation:

Studying biogeochemical signatures over the last 11,000 years has provided a sketch of the human-induced evolution of soil nitrogen and phosphorus inventories (more specifically of polyaromatic hydrocarbons, polychlorinated biphenyls and pesticide residues) in sediments and ice (Waters, et al., 2016). The authors report a sharp increase in the middle of the twentieth century in the inventories. Their work shows that the now-famous figure of the 'hockey stick' (Mann, 2012) that characterises time series of atmospheric carbon emission also characterises a broad class of geochemical signatures, and signal a sharp increase in the rate of deterioration of Earth's life-support system. It has been proposed (Waters et al., 2016) that the mid-twentieth century should be regarded as the time we entered the era now widely named the Anthropocene. Not coincidentally, it roughly corresponds with the rapid expansion of the sixth mass extinction event.

These readings are consistent with macroeconomic statistics. World population in 1950 was 2.5 billion and global GDP was a bit over 7.5 trillion international dollars (at 2015 prices). The average person in the world was poor, with an annual income of a bit over 3000 international dollars. Since then the world has prospered materially beyond recognition. Life expectancy at birth has risen from a global average of 49 years to 71 years, population has increased to 7.5 billion and world output of final goods and services (global GDP) is now 110 trillion international dollars, meaning that per capita global income is about 15,000 international dollars. The proportion of the world's population in absolute poverty (regarded by the World Bank to be below 1.9 international dollars per day) has fallen so dramatically (it is now just over 10 per cent of  the world's population, down from about 50 per cent in 1980 but still, disgracefully, some 750 million individuals in a world replete with rich people), that enthusiasts predict that within a generation the blight will have been eliminated (Jamison et. al., 2013). Set against those achievements, however, is that the 15-fold increase in global output  over a 65-year period reflects not only the stresses to the Earth system in general and biodiversity in particular that we have just reviewed, but also that humanity's demands from the biosphere have for some time exceeded its capacity to supply them. 

But demand cannot exceed supply indefinitely. Translated into the language of equity, humanity's enormous success in recent decades is very likely to have been a down payment for future failure. The trade-off is between living standards today and living standards in the future. Our immediate success in raising the average standard of living has created a conflict between us and our descendants.

What I found the most interesting is the economic slant, which draws into question the reliance on GDP statistics, the almost universal measure of the success for any country:

GDP is incapable of saying much about future possibilities because of the qualifier 'gross', which signals that the depreciation of assets, especially degradation of the biosphere, is ignored. Nevertheless, GDP has assumed such a prominence in public discourse today, that if someone mentions 'economic growth', we know that they mean growth in GDP. Governments today regard GDP growth to be above all else on their list of objectives. The mainstream media extol it and the public succumb to it. That could be why it has become customary to regard an economy whose GDP is large as wealthy.

But that is to make a mistake. Because GDP is a flow (so many dollars worth of flow of goods and services in a year), whereas wealth is a stock (so many dollars worth of assets, period), it could be that a country produces lots of goods and services by running down its assets. Lack of depreciation in national accounts of natural resources in general, and of biodiversity in particular reflects this error....GDP could rise over a period of time even as an economy's wealth declines. But that could not go on forever, any more than one can continually write ever larger checks without paying attention to the balance of the account.

The essay also discusses the inequality built into the current state of affairs:

The World Bank in its World Development Indicators 2016 reports that the 1.4 billion people living in its list of high-income countries enjoy a per capita income of 40,700 international dollars. Thus, the richest 19 per cent of the world's population consume over 51 per cent of world income (57 trillion/110 trillion). Continuing to assume that humanity's impact on the biosphere is proportional to income, 51 per cent of that income can be attributed to 19 per cent of world population. If the UN's Sustainable Development Goals are to be met, consumption patterns in these countries have to alter substantially.

Consumption behavior is influenced by our urge to compete with others (Veblen's 'conspicuous consumption') and by our innate desire to conform. Each is a reflection of socially embedded consumption preferences for goods and services. As both drivers give rise to consumption externalities, the psychological cost to a person of a collective reduction in consumption is likely to be far less than what it would be if she were to reduce consumption unilaterally. The aggregate cost could even be negative, especially if the working poor were less poor relative to the working rich, as the former are far greater in number.

The authors' conclusion:

The short-range solutions to the problem of preserving biodiversity are many, and dealt with extensively in the literature of conservation biology (Sodhi and Ehrlich, 2010). But these will all prove to no avail unless the basic drivers of extermination – policies seeking economic growth at any cost – are addressed. Collectively addressing these are possibly the greatest challenges civilization has ever faced.

No mention is made in the essay of how the necessary changes might be made in the real political world, and that is something I find to be of concern. Organizations like CSER rely on world organizations such as the U.N., which have limited authority and are often ignored by wealthy countries. In the U.S. there are elements favoring the ideas of individual freedom and American exceptionalism: Americans in general tend to believe that they deserve everything they have and that there is no reason for them to make any sacrifices, particularly for poor people who live in countries that they couldn't find on a map and will never visit. Any American politician who campaigns by promoting austerity measures and reduced consumption is likely to lose. Dasgupta, in contrast, was born in Bangladesh and probably has a broader view in these matters than most Americans have ever had. If you accept the main ideas in the essay, it is difficult to see how the issues discussed could be resolved peacefully. Although some Americans would not object to sharing the resources of the biosphere, a much larger number would reject the idea vehemently. It would take a world government and the legal restriction of individual rights to enact the kinds of programs that would meaningfully sustain biodiversity, and that seems unlikely to emerge until a much more palpable deterioration of the biosphere has already occurred.

Misbehaving: The Making of Behavioral Economics II

The second half of the book was not particularly exciting to me, but it was interesting in the sense of learning how a new academic discipline came into existence. Debate about behavioral economics within the economics profession began at a meeting at the University of Chicago, a hotbed of rationalist economists, in 1985. Thaler and a few others started to organize seminars and recruit new researchers, and by the 1990's behavioral economics had become a recognized field. Early topics focused on finance, where research indicated that the efficient market hypothesis, which had been academic dogma for several decades, was incorrect. Later, Thaler's research moved to irrational behavior in NFL draft selections, game shows and other areas. Finally, there was an intersection between behavioral economics and behavioral law when Thaler teamed up with Cass Sunstein, the law professor, and wrote the book Nudge, which was published in 2008 and became a bestseller. The thesis of Nudge is that behavioral research can be used to produce better public policies and improve individual behavior in ways that are beneficial to the public at large.

Perhaps what interests me the most about the book is the late admission by economists that human behavior is not rational. I had always held the economics profession in low regard, and that was one of the reasons. Another reason was that, while I was an undergraduate student in the late 1960's and early 1970's, the default major for unimaginative upper-middle-class males seemed to be economics, while my friends tended to major in philosophy and the arts, and I considered them more intelligent and less conformist. Then, while I was in graduate business school in the 1980's, the two economics classes that I took made no sense to me, because the rational agent basis for economics was still accepted without question and no allowance was made for the considerations later addressed by behavioral economists. Even though the M.B.A. program that I was in was highly rated, I thought that the faculty lacked real intellectual talent. As I became involved in my own investments, it became apparent to me, based on observation of the stock market, that financial markets could not possibly be efficient. To this day the efficient market hypothesis is still widely accepted by economists, and it provides part of the conceptual basis for index funds. Sabine Hossenfelder, the theoretical physicist whose book I discussed a year ago, confirmed my opinion of economists when she said that economics is a fallback field for physicists, because the math is easier and the pay is higher.

Although I am not a great fan of Richard Thaler, I thought that he acquitted himself very well in the final chapter. Given the dogmatic nature of his field, it took some doing to introduce behavioral concepts, and this may never have happened without Thaler, Kahneman and Tversky. In the end, unlike most economists, Thaler is a strong advocate of empirical research in economics and hopes to extend behavioral research into macroeconomics. When you review the circumstances that produced the Great Recession, it is easy to see how the misguided triumphalism of well-known economists such as Alan Greenspan facilitated a major economic disaster only eleven years ago. Nevertheless, behavioral economics is nowhere near providing a comprehensive economic program. Perhaps my main criticism of Thaler is that, while he is modest and self-deprecating and has helped expand his field, he still pays homage and fealty to the status quo in his advocacy of "libertarian paternalism," which, though it encourages rational behavior, seems implicitly to preserve elements of a hierarchy which places so-called rational agents, i.e., economists, at the top of the pecking order. Libertarian paternalism incorporates distinctly American pro-capitalist elements and presumes that a meritocracy of superior individuals, who would by definition become wealthy, would work to help less-capable people by designing systems to make them behave more rationally.

In this vein, I was surprised that the book made no mention of Thomas Piketty, who is a macroeconomist whose work is also based on empirical data. Although at times Thaler shows some socialistic affinities, he usually tows the line as a loyal capitalist. Capitalism, in my view, is an ideological fantasy that is on its way out. Socialism is another ideology with its own set of problems and a history of failure, but I think that some version of it will become inevitable as technology renders human labor obsolete. I don't know whether Piketty or other economists will collectively come up with a system that works well for future generations, but at the moment the wealth tax proposed by Piketty seems like a sensible approach. In the real world, a system such as libertarian paternalism is more likely to produce a plutocracy than a well-balanced democracy. At the moment, populist movements throughout the world seem to be fueled in part by public resentment of "elites" such as Barack Obama and Hillary Clinton. In the case of Obama, racism no doubt plays a role, but it is noteworthy that Obama is a friend of Cass Sunstein and seems to like the idea of libertarian paternalism. One might argue that those who adopt libertarian paternalism are engaging in a current form of politically correct social climbing and in reality may not have much to offer the public. Obama's political career, in my view, was mostly a failure.

To sum up, Thaler's introduction of behavioral research to economics was positive in the sense that it added not only an emphasis on empirical evidence but also an element of altruism, both of which had been in short supply in economics. However, Thaler seems timid in his advocacy of altruism, which was and still is anathema to the thinking of many economists, particularly in the Chicago school. The fact remains that, in their profession, economists are often obfuscators and apologists for wealthy and unscrupulous benefactors. Some of them even subscribe to the idiotic ideas of Ayn Rand. There is an implicit elitism and selfishness among economists who believe that they are part of the select few who make rational choices and deserve to be rewarded accordingly.

Misbehaving: The Making of Behavioral Economics I

I'm halfway through this book by Richard Thaler, which was published in 2015. Thaler is an economist and one of the founders of the field of behavioral economics. He won the Nobel Prize in Economics in 2017. Economics is not an especially interesting topic for me, and I generally prefer macroeconomics, such as that found in Thomas Piketty's Capital, to more circumscribed areas such as this. I am making an exception for Thaler in order to understand behavioral economics better. The book is partly autobiographical, and it describes the development of his career starting in 1970 up to the present. That adds a dimension in that you can see many of the pitfalls of academic life, which relates to my interest in the sociology of academia.

Early in his career, Thaler noticed that the actual decision-making processes used by people are often not rational in the sense that economists understand the term. There are different schools of economic thought, but the predominant one in the twentieth century entailed the idea that humans are rational agents who collectively make rational choices with respect to maximizing utility. This means that people usually make optimal choices regarding whatever it is that they value, and economists have traditionally focused on their financial decisions. From an economic standpoint, it is mathematically convenient to assume that people are rational, because that allow economists to predict collective human behavior with relatively straightforward mathematical tools.

The early behavioral economists conducted simple experiments like the ones described by Daniel Kahneman in Thinking, Fast and Slow, demonstrating unequivocally that human decisions are often not rational in a quantitative sense. Thaler collaborated with Kahneman, Amos Tversky and others, and behavioral economics arose as a bridge between the academic disciplines of economics and psychology. In Thaler's language, Kahneman's "fast" or "System 1" thinking very roughly corresponds with Thaler's "Human," and Kahneman's "slow" or "System 2" thinking very roughly corresponds with Thaler's "Econ." Humans are fuzzy thinkers and Econs are ultra-rational. There are many examples of people arriving at answers that are mathematically or logically incorrect. Thaler differs somewhat from Kahneman in his search for what might be called extenuating circumstances or non-numerical values that affect how actual decisions are made. One example involves the way that Uber's pricing algorithm can alienate consumers. Uber increases fares automatically when the number of passengers in a particular area goes up and there is an insufficient number of drivers available. It is possible for fares to become ten times the normal rate. This formula can backfire when customers believe that they were treated unfairly and when anti-gouging laws provoke lawsuits. In the past, economists favored the Econ types for all of their models, because that type makes purely rational decisions based on maximizing value, which in most cases means money. Thaler in particular helped demonstrate that factors having nothing to do with maximization go into the decisions that most people make. In other respects, Thaler's discussion covers some familiar concepts such as confirmation bias and the endowment effect, the latter indicating that people value things that are currently in their possession more highly than they ought to rationally.

Reading about Thaler's career, you get a sense of how one might fail in academia. In his early years, he was conflicted between making enough money to support his family and pursuing his area of interest in research, which, at the time, was barely on the fringes of economics and was frowned upon by most economists. If he hadn't met Kahneman and Tversky and a few others and participated in research with them, behavioral economics may have remained an undeveloped field. As it turned out, it took off and has produced several Nobels. In this book, Thaler seems like a very ordinary sort of person with plebeian interests, and one can readily imagine him finishing off his career teaching traditional economics in a humdrum economics department somewhere. It is even possible that he would never have obtained tenure and may have switched to a different career.

Though my enthusiasm for the book is limited, I am holding out for the later chapters that cover the uses of behavioral economics for social benefit. Since I have visitors arriving soon, it will take me a while to finish, but I will eventually make another post.

Thinking, Fast and Slow IV

As with several of the books I've read recently, I became bogged down in this one and grew tired of the text. Nevertheless, it covers an important topic and is worth the time. Part IV adds a slew of additional concepts and research, emphasizing ideas related to behavioral economics. I did not feel that Kahneman did a good job integrating all of the threads that occurred throughout the book, and I could only gather that Part IV was the section that would interest economists. For example, he contrasts prospect theory, which is based on his research, with utility theory, which has dominated economics for at least a century. The gist, especially in this section, is that humans do not always make rational decisions, and that the traditional idea of the rational agent in economics seriously misrepresents reality. As in the earlier sections, I had a hard time sustaining an interest in the research. For example, he places a lot of importance on what is known as the Allais Paradox:

In Problems A and B, which would you choose?

A. 61% chance to win $520,000 or 63% chance to win $500,000

B. 98% chance to win $520,000 or 100% chance to win $500,000

Most people, including economists, pick the 61% chance in A and the 100% chance in B, and these are the incorrect answers based on purely rational criteria. This is not intuitively obvious, and Kahneman explains the reasoning in detail. I thought it was a rather technical and roundabout way to make a point, and it seemed more like a lesson in formal reasoning than a substantive lesson in psychology. From my point of view, it is obvious that people would have difficulty with a problem like this, because there has been practically nothing in our evolutionary past to prepare them for it. Throughout most of the history of mankind everyone was illiterate, and currency and formal mathematics did not exist. If you look into your own ancestry, you will probably find illiterate ancestors within a few generations. There is nothing odd or unexpected in these results.

The significance of behavioral economics derives almost entirely from the fact that classical economics is based on an assumption that has no empirical basis, namely, that humans are rational agents. To be sure, we are capable of making rational decisions, but much of the time we do not. I am glad that behavioral economics came along, because it is a corrective to a flawed methodology, but I still get the feeling that it is too little, too late. I am reminded of Thomas Piketty's book, Capital in the Twenty-First Century, which also caused a furor in economics but was derived from basic research that could have been done decades ago. In Capital, Piketty showed through straightforward historical data that capitalism tends to produce wealth inequality, which contradicts the almost universal belief among economists that economic prosperity raises the boat for everyone; as an economy advances, the standard of living may improve for most of the population, but the wealth gap between the rich and poor continues to widen. Piketty also went on to suggest the rather obvious but often loathed solution: raise taxes on the rich. From these two "breakthroughs" I get a visceral sense that much of what passes for economics is a borderline scam, and therefore, rather than marvel at the works of Piketty or Kahneman, I wonder why someone didn't do it fifty years ago.

As for Kahneman himself, there are aspects to his position that I find too cautious and not particularly admirable. In the closing chapter he describes the general thrust of behavioral economics as offering a more realistic but messier approach to economics than the Chicago school, which is based on the idea that we are rational agents who do not make mistakes. The Chicago school, he says, lends itself to the politics of libertarianism; though he doesn't say so, it is also compatible with the delusional world of Ayn Rand, who believed in the "great man" theory, repudiated by Kahneman in an earlier chapter, in which a few talented people run the world and are fully entitled to the benefits of their superior skills, with the less-talented riding on their coattails. Libertarians generally advocate free markets and reduced intervention by governments regardless of the social problems that crop up. Kahneman, recognizing that people are at best only partly rational, is sympathetic with the views of Cass Sunstein, who advocates what is known as libertarian paternalism, in which ordinary people receive some protection from the rational agents who exploit them. Though his intentions seem good, Kahneman does not closely examine libertarian dogma, and his position seems to be that the political system should incorporate some sort of economic noblesse oblige in order to have a fair society. There is a little hypocrisy in arriving at this view after devoting hundreds of pages to demonstrating how everyone, including the so-called rational agents, makes errors in their thinking processes. As he describes it, there is little to distinguish libertarian paternalism from the divine right of kings, in which a monarch takes some responsibility for the well-being of the serfs. Here I think Kahneman is being deferential to his laissez-faire economics colleagues, and in the process he seems to become intellectually dishonest. If sloppy thinking is the intractable problem that Kahneman has made it out to be, the continued adherence to familiar modes of governance is almost guaranteed to produce the scenarios described by Jared Diamond in Collapse.

Collapse VI

The last section of the book, "Practical Lessons" covers a mishmash of ideas. Chapter 14 lists some of the psychological failings of the people in the collapsed societies discussed earlier, including failure to anticipate, failure to perceive, rational bad behavior (of a subset of the population) and disastrous values. This chapter had a lot of potential, but I found it disappointing, because it stuck to the obvious. Chapter 15 describes in detail how some businesses have been able to behave like responsible citizens, though that usually occurs only when actual events have shown that the cost of irresponsible exploitation of resources outweighs the cost of additional safety measures and precautions, for instance, when a large oil spill occurs. In the case of hardrock mining, there is usually so little profit in the business to begin with that it is cheaper for businesses to lobby for lax regulations than it is to operate in an environmentally responsible fashion, in which case they would simply lose money. Diamond emphasizes how consumers play a role in this, because, even though they may not understand the economics of the oil or mining industries, they are more cognizant of oil because they buy it at the retail level, whereas the end use of most mining products remains a mystery to them. They are willing to pay for oil because they are aware of how they use it, whereas mining products often become invisible components of consumer products. Responsible stewardship of the environment comes at a cost, and ultimately it is consumers who decide by buying or not buying certain products; they usually aren't willing to pay any premium for consumer products, because, according to Diamond, they don't often understand the environmental costs. Where hardrock mining is concerned, the costs of environmental responsibility are considerably higher than those of most other natural resources. Diamond also notes that self-regulation within some industries, such as forest products, has been comparatively successful.

The final chapter, 16, includes a somewhat redundant list of what Diamond thinks are the twelve most serious trouble spots related to sustaining the environment. Here are the first sentences or so that he has written for each item on the list:

1. At an accelerating rate, we are destroying the natural habitats or else converting them to human-made habitats, such as cities and villages, farmlands and pastures, roads and golf courses.

2. Wild foods, especially fish and to a lesser extent shellfish, contribute a large fraction of the protein consumed by humans.... [T]he great majority of valuable fisheries either have collapsed or are in steep decline. 

3. A significant fraction of wild species, populations, and genetic diversity has already been lost, and at present rates a large fraction of what remains will be lost within the next half-century.

4. Soils and farmland used for growing crops are being carried away by water and wind erosion at rates between 10 and 40 times the rates of soil formation, and between 500 and 10,000 times soil erosion rates on forested land.

5. The world's major energy sources, especially for industrial societies, are fossil fuels: oil, natural gas, and coal. While there has been much discussion about how many big oil and gas fields remain to be discovered, and while coal reserves are believed to be large, the prevalent view is that known and likely reserves of readily accessible oil and gas will last for a few more decades.

6. Most of the world's freshwater in rivers and lakes is already being utilized for irrigation, domestic and industrial water, and in situ uses such as boat transportation corridors, fisheries, and recreation.

7. It might at first seem that the supply of sunlight is infinite, so one might reason that the Earth's capacity to grow crops and wild plants is also infinite. Within the last 20 years, it has been appreciated that this is not the case....

8. The chemical industry and many other industries manufacture or release into the air, soil, oceans, lakes and rivers many toxic chemicals....

9. The term "alien species" refers to species that we transfer, intentionally or inadvertently, from a place where they are native to a place where they are not native. Some alien species are obviously valuable to us as crops, domestic animals, and landscaping. But others devastate populations of native species with which they come into contact....

10. Human activities produce gases that escape into the atmosphere, where they either damage the protective ozone layer (as do formerly widespread refrigerator coolants) or else act as greenhouse gases that absorb sunlight and thereby lead to global warming.

11. The world's human population is growing. More people require more food, space, water, energy and other resources. 

12. What really counts is not the number of people alone, but their impact on the environment.... [O]ur numbers pose problems insofar as we consume resources and generate wastes.... But low-impact people are becoming high-impact people....

Following this list, Diamond refutes, effectively I think, some of the common criticisms that have been brought against the arguments that he makes. He then attempts to finish on a positive note by mentioning that some societies of the past, such as the success stories described in the book, were able to overcome similar problems when they confronted them, and that we may be able to as well.

Because of its scope and completeness, this is by far the best book I've read on environmental issues. In books by E.O. Wilson, such as The Diversity of Life and Half-Earth, the perspective is that of a naturalist more than that of one specifically concerned with the future of mankind. Similarly, in The Sixth Extinction Elizabeth Kolbert looks at the environmental consequences of human activities without paying as much attention to the specific causes. Al Gore's popular documentary, An Inconvenient Truth, which came out the year following Collapse, covers only one aspect of the twelve mentioned by Diamond. Global warming is an important issue, but in itself is probably survivable, and though the film played an important role in raising environmental awareness, compared to Collapse it barely scratches the surface. Diamond makes it clear that if we don't deal effectively with the issues that he raises we may all die, as did those in some of his historical examples.

Although it seems that somewhere in Collapse one is likely to find at least a passing comment on every issue relevant to human survival vis-à-vis environmental damage, Diamond, disappointingly to me, does not present specific strategies for solving the problems, and he more or less leaves it up to mankind to solve them on their own. For example, he recognizes that corporations may or may not behave responsibly but are driven primarily by financial motives, and that the public can pressure them in the right direction, but he also notes that some of the environmental issues are not understood by the public: how could corporate malfeasance be corrected in those instances? As I have argued in previous posts, many of the problems that we are currently facing are the result of the combination of economic competition under capitalism with inferior governance under existing democratic political models. It would be difficult to deal with environmental problems at that level, but, since that is where the problems actually originate, it may be the appropriate place to look.

I think that economic competition tends to cause a vicious cycle from which it becomes increasingly difficult to escape. For example, for someone like me, who prefers a rural environment with a low population density and doesn't care about money, how can I realistically expect to live that way in the current world? If you live in an unspoiled environment with its natural resources more or less intact, in order to retain those resources you need defense measures of one kind or another. Under current global conditions, in the absence of a suitable defense, sooner or later corporations, other nations or perhaps refugees would arrive on the scene and alter the environment for the worse. In other words, in order to protect my sustainable environment, I would need an economic base large enough to support an army or some other deterrent, which contradicts the very idea of the society that I envision. Similarly, economically weak countries may be forced by external economic pressures to modernize their economies, if only for their own protection. Even developed countries with declining populations face pressure to increase their fertility rates in order to ensure that they have sufficient workers to keep their economies strong in the future. Capitalism in the absence of an effective world government forces regions of the world into defensive postures, with economic forces driving events in a way that roughly mimics warfare.

The other problematic component underlying environmental risk, incompetent governance, has hardly diminished since Diamond wrote the book. The collapse in Syria is flooding Europe with refugees, conditions in South Sudan have deteriorated and ISIL is at large. These kinds of situations are predictable within Diamond's framework, because political instability is often associated with environmental destruction. However, one may also question how well the developed nations are dealing with increasing environmental pressures. It may be a little too early to assess the populist movements in Europe and the U.S., but at first glance they may be related to the sustainability of economic growth, which is at least partly related to environmental health. The high standard of living in the developed world comes at a high environmental cost, and the lower end of the income spectrum has been experiencing a reduced standard of living in recent years. Although a collapse does not seem imminent in the developed world, some of the early patterns of political instability may be falling into place. Recently, the two most striking examples have been the victories of Brexit and Donald Trump, which, to me, are clear indications of the inherent incompetence of democratic electorates. Both votes were for isolationism and protection from foreigners and demonstrate a poor understanding of global economics.

The election of Donald Trump is a good example of the incompetence of a democratic electorate. From his few weeks in office it has become apparent that, not only does he not understand any of the serious issues facing the U.S., including those raised by Diamond, but he isn't even interested in them and is unlikely to do anything about them. This encourages me to withdraw into my futuristic mode of thinking, in which complex issues such as those raised in Collapse become the province of AI or AI-assisted humans rather than the poor decision-making process of the voting public or the incompetent people whom they elect.

Diamond is correct that all of the problems brought up in his book can be solved, but he isn't exactly creating a new paradigm. I am a much stronger proponent of population control than he is, but that may be because I am not affected by the pressures of political correctness. Looking into the future, I wonder whether there is any advantage to a world population of seven billion people, in which the majority lead imperiled lives, compared to a world population of one billion or fewer people, in which all lead unimperiled lives. There are painless ways to make that transition without producing inequality or diminishing the richness of human experience. This obvious option is not receiving any public discussion.

The Wrecking Ball of Innovation

I have a copy of When Facts Change, a collection of Tony Judt's essays assembled by his widow and published in 2015. I'm not reading it straight through and will probably read only a few of them. I've just finished an essay that first appeared in the New York Review of Books in 2007. It is a review of Robert Reich's book, Supercapitalism of that year. This essay, besides serving as a reminder of how powerful a writer Judt was, is still relevant to the current political situation in the U.S., as it specifically examines the economic myopia of Reich, who was the first secretary of labor under Bill Clinton, and, by association, represents the prevailing Democratic economic viewpoint that continues up to the present in the policies of Barack Obama.

Judt isn't critical of Reich's description of the wealth gap, which has since then received far greater publicity, thanks to Thomas Piketty, but finds his complacent acquiescence to economic forces unacceptable. Reich takes it as given that we live in an economically competitive world, that the super-rich are not at fault and that the primary national goal is productivity growth. In Judt's view, the sweeping economic model adopted by Clinton distorted an earlier model in which the state was seen as responsible for all of its citizens regardless of economic factors. Under Clinton, privatization picked up steam and the existing welfare system was replaced with one that treated the poor as economic entities and accordingly made their benefits contingent upon their attempt to become gainfully employed. On these changes, Judt says:

The real impact of privatization, like welfare reform, deregulation, the technological revolution, and indeed globalization itself, has been to reduce the role of the state in the affairs of its citizens: to get the state "off our backs" and "out of our lives" – a common objective of economic "reformers" everywhere – and make public policy, in Robert Reich's approving words, "business friendly." 

He goes on to say:

If modern democracies are to survive the shock of Reich's "supercapitalism," they need to be bound by something more than the pursuit of private economic advantage, particularly when the latter accrues to ever fewer beneficiaries: the idea of a society held together by pecuniary interests alone is, in Mill's words, "essentially repugnant." A civilized society requires more than self-interest, whether deluded or enlightened, for its shared narrative of purpose....

In the early years of the French Revolution the Marquis de Condorcet was dismayed at the prospect of commercial society that was opening before him (as it is opening before us): the idea that "liberty will be no more, in the eyes of an avid nation, than a necessary condition for the security of financial operations." We ought to share his revulsion.

Judt describes the negative consequences of Reich's policy views that were already evident in 2007, before the Great Recession, before Brexit and before the election of Donald Trump:

Fear is reemerging as an active ingredient of political life in Western democracies. Fear of terrorism, of course; but also, and perhaps more insidiously, fear of the uncontrollable speed of change, fear of the loss of employment, fear of losing ground to others in an increasingly unequal distribution of resources, fear of losing control of the circumstances and routines of one's daily life. And, perhaps above all, fear that it is not just we who can no longer shape our lives but that those in authority have lost control as well, to forces beyond their reach.

The essay concludes as follows:

We may find that a healthy democracy, far from being threatened by the regulatory state, actually depends upon it: that in a world increasingly polarized between insecure individuals and unregulated global forces, the legitimate authority of the democratic state may be the best kind of intermediate institution we can devise. What, after all, is the alternative? Our contemporary cult of untrammeled economic freedom, combined with a heightened sense of fear and insecurity, is leading to reduced social provision and minimal economic regulation; but these are accompanied by ever-extending governmental oversight of communication, movement and opinion. "Chinese" capitalism, as it were, Western-style. Is this what we want?

Because the essay predates Obama's election in 2008, it is easy to see that not much has changed under eight years of a Democratic administration; thus my criticisms of Obama hold. As an observer, I am not aware of any significant move that Obama may have made to distance himself from Reich's policy views, which currently seem embedded in the party and would have continued under Hillary Clinton had she been elected. Judt's views are far closer to those of Bernie Sanders, whom I supported in the Democratic primary.

While I completely agree with Judt that the modification of political thought to accommodate economic thought over the last few decades has set the world on a dangerous path, he has hardly provided a blueprint for change. He writes of democracy in the abstract when it ultimately depends on the votes, not only of educated, informed voters, but of the less-educated and uninformed who have recently brought us Brexit and Donald Trump. In a way it is unfortunate that Judt chose history over economics, because there is no one that I know of who might have made a better economic case, had he the appropriate credentials. The economists with whom I'm familiar, including Thomas Piketty, do not seem to grasp the urgent conditions described by Judt, perhaps because their training has been narrow and they have too much faith in their profession.

If calling for greater regulation, etc., isn't feasible and even then doesn't fully encapsulate the issues at hand, the limiting factor may be human cognition. Thus, I am skeptical of the ability of a Tony Judt or a Bernie Sanders to work out an actual detailed solution to the problems caused by global economic competition. Although Judt's heart was in the right place, his view of social democracy seems outdated and sentimental to me. The best hope is that we will end up with a highly regulated society wherein AI plays a larger role than it does at present, at the exclusion of mere mortals, who tend to be incompetent, corrupt or both when faced with such daunting tasks. That is hardly what Tony Judt or Bernie Sanders had in mind, but I find it a little more realistic and perhaps less ominous than they would have you believe.

Basic Income

On several posts I've made allusions to the likelihood that technology will eventually make earning a living extremely difficult, but I haven't said much about how this problem could be resolved. Fortunately, there have been people thinking about this for quite some time, and I suspect that some form of basic income may eventually come to be used in all developed countries, because there may be no better alternatives. At present, basic income is being discussed seriously in Europe, where Switzerland is holding a referendum on it this June. Worldwide, there is discussion of the topic, with supporters and opponents ranging from serious thinkers to cranks. In the U.S., basic income is occasionally presented as a potential replacement for the current welfare system. As you might expect, most American economists have a highly blinkered view of the subject and can scarcely think beyond traditional labor economics. I stopped paying attention to economists such as Paul Krugman several years ago, because like most mainstream economists he appears to be unable to envision a future in which capitalism implodes. In my view, capitalism will inevitably end simply because economic competition entails a powerful incentive to decrease labor costs, and that trend has been unmistakable over the last fifty years.

One of the main causes of the current insurgencies in both American political parties is the prolonged state of low income growth. Real incomes for the middle class have remained stagnant for decades, and there is nothing on the horizon indicating a change in that status. The topic is usually discussed in terms of income inequality, and economists such as Thomas Piketty advocate higher taxation on the wealthy in order to rebalance equality. As an economist, Piketty is far from radical, and, like Krugman, he doesn't seem to find economic competition inherently problematic. In my view there is in principle no reason for economic entities to discontinue the driving down of wages. If you are running a for-profit corporation, it is your fiduciary responsibility to move jobs overseas when labor costs are lower there and to install computers, software and robots whenever they reduce operating costs compared to hiring people. Although this inevitably leads to a scarcity of jobs and lower wages, this manner of operating a business is fundamental to the capitalist model, and it can't be changed without degrading the very idea of economic competition, which carries almost religious status in the U.S.

The principal irony I find in capitalist mythology is that here, precisely while we are witnessing the success of large corporations, these same corporations are toying with their future demise by creating a large underclass which one day may be unable to afford their products. That hasn't happened yet, but you can see signs of it in the falling quality of many consumer products. Because most consumer products are designed to be sold to the middle class, there is an upper limit on their price, and with falling incomes the middle class can only afford cheaper products. We already seem to be in a race to the bottom in product quality. What we now call food deserts in inner cities may expand to suburbs, and deprivation of other goods and services will increase when businesses have no economic incentives to locate in poor neighborhoods. I see no hope for places like Ferguson, Missouri.

The primary drawback to the concept of basic income is that its time may not have come. For now it could work well in a wealthy developed country with a large population of unemployable citizens. For me, its real interest lies further out, when technology has made it almost impossible to find a job, when an economy becomes so automated that there is no need for economic competition and little demand for human labor of any kind. Barring an unforeseen disaster between now and then, from that point onward capitalism may be viewed as a driver of technological change that outlived its usefulness.