Economics

Question Public Domain Day

Published by Anonymous (not verified) on Sat, 02/01/2016 - 6:59pm in

I forgot last year to re-affirm (2014; includes links to previous years’ public domain day posts):

Unless stated otherwise, everything by me, Mike Linksvayer, published anywhere, is hereby placed in the public domain.

With that out of the way, I want to question the public domain of works that were subject to copyright upon publication but no longer are due to expiration of the term of copyright. Public Domain Day celebrates such works no longer subject to the private censorship regime as of January 1 each year, and mourns the lack of such work in some jurisdictions such as the United States (none 1999-2019, unless another retroactive extension pushes the date back further).

  1. Copyright is unjust. Works created under that regime are tainted. Extreme position: the disappearing of works subject to copyright is a good, for those works are toxic for having been created under the unjust regime. Compare with born free works, initially released under a free/open license (i.e., creators substantially opted out of regime). Even born free works were created in the context of an unjust regime but we have to start somewhere.
  2. Born free works are a start at re-shaping the knowledge economy away from dependence on the unjust regime, a re-shaping which is necessary to transfer prestige and power away from industries and works dependent upon the unjust regime and towards commons-based production. Works falling out of copyright due to expiration do not tilt the knowledge economy toward commons-based production. Worse, copyright-expired works distract from the urgent need to produce cultural relevance for born free works.
  3. Celebrating works falling out of copyright celebrates the terrible “bargain” of subjecting knowledge to property regimes (harming freedom, equality, and security) in order to incent the over-production of spectacle. Compare with born free works, which provide evidence of the non-necessity of subjecting knowledge to freedom infringing regimes.

Note the title of this post starts with “question” rather than “against” — my aim is not really to claim that copyright mitigation through measures such as limited terms of restriction is bad (as noted above, such a claim really would be extreme, in the sense of being very difficult to justify) but to encourage prioritization of systematic repair through commons-based production. There are many (but not nearly enough) people with commitments to copyright mitigations, limited terms in particular, and use of term expired works even more particularly. Further, there presumably will be some attempt at further retroactive extension in the U.S. before 2019, and though I will probably complain about non-visionary rear guard actions, I don’t doubt that stopping bad developments such as further retroactive extension is in the short term relatively easy and should be done.

Thus this “questioning” leads me to merely want:

  • Copyright mitigations to be useful for commons-based production (limited terms are such; contrast with many mitigations which make using works possibly subject to copyright somewhat less costly but not in a way which is useful for commons-based production).
  • Commons-based production efforts to actually take advantage of newly unrestricted works to a greater extent than freedom infringing industries do. Wikimedia projects (especially Wikisource and Wikimedia Commons, with cultural relevance via Wikipedia) do an excellent job, but meeting this very tall order probably requires many additional hugely successful initiatives that are able to create cultural relevance for free works, including works falling into the public domain and works building on such.
  • Making repair part of knowledge policy discourse, at least on the part of liberalizing reformers: a debate about mitigation or opposition to expansion is always an opportunity to position and advocate for repair; that is favoring commons-based production. This could lead to contemplation of what I’d consider a genuine political bargain: allow works subject to copyright to remain so but favor commons-based production for new works.

Happy GNU Year & Public Domain Days

Bonus: Help create 2016/2017 holiday greetings that build free cultural relevance.

Research Ideas, Inputs, Impacts and Outcomes, Outputs

Published by Anonymous (not verified) on Sun, 27/12/2015 - 7:18am in

I’ve previously cheered Daniel Mietchen’s efforts to promote open access research proposals. Mietchen, with fellow researcher/OA activist Ross Mounce and ecologist/academic publisher Lyubomir Penev have recently launched Research Ideas and Outcomes (I sometimes misremember the name; title of this post may help others afflicted find RIO), a new open access mega journal that provides a venue for publishing the entire research cycle for almost any field of research.

The Wikidata for Research proposal that Mietchen also spearheaded and I again cheered is one of the first artifacts published in RIO.

I encourage everyone to read RIO’s opening editorial, Publishing the research process. I want to especially highlight the “highlighting social impact” section by making a copy:

Given that much of research is publicly funded and that public funding is limited, there is a growing interest in assessing the impact that research has on society beyond academia and in having this criterion influence decisions on whether and how public funds are to be spent on specific lines or fields of research (Roy 1985, Bornmann 2012, Reich and Myhrvold 2013).

Despite past criticisms of similar initiatives (e.g. Wright 2002), some researchers have called for support from the scientific community for the United Nations’ Sustainable Development Goals, seeing their role in “help[ing] to integrate monitoring and evaluation mechanisms into policy-making at all levels and ensure that information about our planet is easily available to all.” (Lu et al. 2015)

RIO addresses societal impact in several ways: (i) it is free to read, so that anyone interested can actually access it, (ii) it is openly licensed (CC BY 4.0 by default, with an option for CC0/Public Domain), so as to encourage the dissemination and reuse of its materials in other contexts, (iii) it is available in XML, which facilitates reuse by automated tools and integration with other platforms, (iv) it encourages authors to map their research to societal challenges it helps to address (and allows users to search and browse the journal by societal challenges they are interested in).

While the first three of these publishing practices are on the way to becoming standard in a growing range of disciplines, we are not aware of other journals to engage in the fourth one, but we encourage them to do so.

As another way to achieve societal impact, it has been suggested that researchers engage more in writing overview papers that summarize the state of knowledge in their field in a way that is accessible (in multiple senses of the word) to a broader audience, and that research evaluators should take such activities into account (Bornmann and Marx 2013). With that in mind, RIO offers the possibility to publish such overview papers as Policy Briefs.

When thinking of impact outside academia, another useful strategy is to bring research to places where non-academics might look for information. RIO will thus facilitate the creation of Wikipedia articles (Butler 2008, Logan et al. 2010), both on topics that have just been created through advances of scholarship (i.e. new methods or objects of study; e.g. RNA families, as in Daub et al. 2008) or on topics that have been studied for a while but not yet found decent coverage on the English Wikipedia (as pioneered for computational biology; Wodak et al. 2012).

Finally, RIO’s policies have been written with societal benefits in mind: they default to open sharing of all data and code underlying the research reported here and require public justification for exceptions to the open default. The primary effect of such an open default is an increase in the reproducibility and replicability and thus the reliability of research: the more of research workflows is being shared and the earlier the sharing occurs, the harder it will be for mistakes, systematic errors or fraud to go unnoticed. A welcome side effect of this is an increased educational value of the research and its documentation, and over time, we expect learners and educators, practitioners, journalists, artists, makers and others to engage with the research reported in RIO and with the associated data, code and materials.

RIO has a blog post on emphasizing research contribution to, e.g., the UN Sustainable Development Goals. I wholly endorse this emphasis, but the above excerpt is far richer, as it additionally tackles the social impact of academic publishing, which affects the social impact of all research. Not only does the secton cover the (should be) obvious open (free access, free permission, to/for forms suitable for modification) dimensions, but the huge opportunity to make research more accessible through summarization and cooperation with Wikipedians.

The only way the section could be improved would be for it to also mention macro impacts of commoning the knowledge economy, e.g., on equality and security. But I can’t blame the authors as I don’t know of great citations on these topics. I love Copyright and Inequality but it isn’t about research publications. I’ve got nothing on academic publishing and security, though recently widely discussed The Moral Character of Cryptographic Work is related. Please help correct my ignorance by pointing me at more on-point citations for these topics or by creating ones…why not start by publishing a proposal for such research in RIO?

Well, there is one other way the section could be improved: a mention of commoning academic publishing infrastructure. But, the software that runs RIO is not open source. I’d love to see a proposal published in RIO for funding whatever work would be needed to make the RIO platform open source.

If you’re interested in getting involved in RIO, you can apply to be a subject editor or editorial apprentice (see links on the RIO home page). If you’re working on any of the research or proposals mentioned in the two previous paragraphs and there’s any way I might be able to help, feel free to get in touch. I’m not an academic but am very keen to see progress in these areas!

Software Freedom Conservancy 2015

Published by Anonymous (not verified) on Fri, 25/12/2015 - 11:25am in

Software Freedom Conservancy is running its 2nd annual (last year) individual supporter campaign. We need 750 supporters (at US$120 each) to keep the lights on (continue serving as a non-profit charitable home for free/open source software projects…assuming we manage to stay alive, some exciting new member projects will be joining in 2016) and 2500 to take on new GPL enforcement work. See the Conservancy news item and blog post announcing the campaign last month.

Conservancy supporter Sumana Harihareswara made a great video explaining why you should also support Conservancy. [Added 20151228: blog post with transcript]

The news item above includes a list of 2015 accomplishments. My second favorite is Outreachy (“helps people from groups underrepresented in free and open source software get involved”) joining as the first member project that isn’t strictly a software development project. My favorite is a link away from the main list. The list notes that Conservancy joined a one-page comment urging the FCC to not restrict wireless devices to manufacturer-provided software. That’s good, but the blog post about the comment notes that Conservancy leaders Karen Sandler and Bradley Kuhn also signed a much more interesting and extensive comment proposing an alternate regulatory regime of requiring fully auditable software and ongoing security updates, almost mandating supported free software (but not quite, for the comment doesn’t call for mandating free copyright licensing) for approved devices. This is by far the most important document on software freedom produced this year and I urge everyone to read it. I’ve copied most of the alternative proposal below (it starts on page 12, and is followed by many pages of endorsers):

In place of these regulations, we suggest that the Commission adopt rules to foster innovation and improve security and usage of the Wi-Fi spectrum for everybody.

Specifically, we advocate that rather than denying users the ability to make any changes to the router whatsoever, router vendors be required to open access to their code (especially code that controls RF parameters) to describe and document the safe operating bounds for the software defined radios within the Wi-Fi router.

In this alternative approach, the FCC could mandate that:

  1. Any vendor of SDR, wireless, or Wi-Fi radio must make public the full and maintained source code for the device driver and radio firmware in order to maintain FCC compliance. The source code should be in a buildable, change controlled source code repository on the Internet, available for review and improvement by all.
  2. The vendor must assure that secure update of firmware be working at shipment, and that update streams be under ultimate control of the owner of the equipment. Problems with compliance can then be fixed going forward by the person legally responsible for the router being in compliance.
  3. The vendor must supply a continuous stream of source and binary updates that must respond to regulatory transgressions and Common Vulnerability and Exposure reports (CVEs) within 45 days of disclosure, for the warranted lifetime of the product, the business lifetime of the vendor, or until five years after the last customer shipment, whichever is longer.
  4. Failure to comply with these regulations should result in FCC decertification of the existing product and, in severe cases, bar new products from that vendor from being considered for certification.
  5. Additionally, we ask the FCC to review and rescind any rules for anything that conflict with open source best practices, produce unmaintainable hardware, or cause vendors to believe they must only shipundocumented “binary blobs” of compiled code or use lockdown mechanisms that forbid user patching. This is an ongoing problem for the Internet community committed to best practice change control and error correction on safety-critical systems.

This path has the following advantages:

  • Inspectability – Skilled developers can verify the correctness of software drivers that are now hidden in binary “blobs”.
  • Opportunity for innovation – Many experiments can be performed to make the network “work better” without affecting compliance.
  • Improved spectrum utilization – A number of techniques to improve the use of Wi-Fi bands remain theoretical possibilities. Field trials with these proposed algorithms could prove (or disprove) their utility, and advance the science of networking.
  • Fulfillment of legal (GPL) obligations -Allowing router vendors to publish their RF-controlling source code in compliance with the license under which they obtained it will free them from the legal risk of being forced to cease shipping code for which they no longer have a license.

Requiring all manufacturers of Wi-Fi devices to make their source code publicly available and regularly maintained, levels the playing field as no one can behave badly. The recent Volkswagen scandal with uninspected computer code that cheated emissions testing demonstrates that this is a real concern.

Why is this so important?

  • It isn’t purely a rear-guard action aiming to stop a bad regulation.
  • It proposes a commons-favoring regulatory regime.
  • It does so in an extremely powerful public regulatory context.
  • It makes a coherent argument for the advantages of its approach; it tries to win a policy argument.
  • The advantages are compelling.

Yes, the last three points are in contrast with relying on an extremely weak and resource poor private regulatory hack which substitutes developer caprice for a public policy argument. But not entirely: the last advantage mentions this hack. I doubt we’ll reach the 2500 supporters required to pursue new hack (GPL) enforcement, but please prove me wrong. Whether you love, hate, or exploit the GPL, enforcement works for you.

Please join Sumana Harihareswara, me, and a who’s who of free/open source software in supporting Conservancy’s work. The next $50,000 in donations are being matched by Private Internet Access.

Yes: Concentrated Wealth and Inequality Crushes Economic Growth

Published by Anonymous (not verified) on Wed, 16/12/2015 - 12:20am in

Like it or not, if countries want to join the “rich country-club,” they need to redistribute wealth. What has not been studied much — at least partially because the data is hard to come by — is the distribution of wealth within countries, and how that relates to economic growth.

My devoted readers will undoubtedly remember my 2008 research into rich countries’ wealth inequality and economic growth. (In case you haven’t heard, wealth inequality utterly dwarfs income inequality.) Here’s the bottom line:

Correlations Between Rich Countries’ Wealth Concentration/Inequality and:

GDP per capita growth from 1970 to 2005 (35 years)
-.67

…from 1975 (30 years)
-.58

…from 1980 (25)
.11

…from 1985 (20)
.22

…from 1990 (15)
.68

…from 1995 (10)
.38

…from 2000 (5)
.44

This analysis suggests that in rich countries, greater wealth inequality/concentration goes with faster economic growth over the shorter term, but over the long term it’s associated with much weaker growth. In the long run, trickle-down fails badly. (Viz, the increasing wealth concentration and moribund growth in the U.S. post-Reagan.)

There are numerous problems with this analysis, discussed in that previous post. Not much data was available back then, and the statistical correlation analysis is decidedly sophomoric.

But now we (finally!) have some more sophisticated work on this correlation from professional economists Sutirtha Bagchia and Jan Svejnar: “Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty.” (Gated; a much earlier and different ungated 2013 version is here. A two-page descriptive policy research brief published by the right/libertarian Cato Institute is here.)

Bagchia and  Svejnar’s (robust) top-line conclusion:

wealth inequality has a negative relationship with economic growth

(So much for “incentives.”) B&S attempt to distinguish between “politically connected” and unconnected (market-driven) wealth inequality, and conclude that only politically connected wealth inequality — “cronyism” — has a negative association with growth.

I don’t have access to the latest gated paper, but @NinjaEconomics has posted the key table (click for larger):

CWE8LFGU8AEPCAs

Key points:

• B&S are looking at growth rates over ensuing five years (average annual change in GDP/capita). Interestingly, their negative correlations for this short lag period contradict mine for rich countries, which only showed negative correlation over decades. (It infuriates me, by the way, that every growth-correlation study doesn’t look at multiple time lags, where possible. They should all look like this.)

• Their sample set is a complete grab-bag of countries* — from tiny to large, developed, less-developed, emerging, etc. This gives higher N so greater statistical significance, but makes the true significance of the findings…questionable. We’ve known for decades that predictors and causes of growth are very different in developed and less-developed countries. I’d personally love to see their results for prosperous countries only.

• Such an analysis of similar, prosperous countries would allow them to use the narrower but more reputable Luxembourg Wealth Study data, rather than the data set they constructed based on spottier and far less rigorous Forbes 400 billionaire lists. (Their data and analysis files have not been made available for public vetting.)

• The rather tortuously constructed classification of “politically connected” versus market-driven wealth is, in their own words, “somewhat subjective.” It could not really be otherwise — wildly so, in fact. That they are “fully up-front about how we carry out the classification” does not obviate that reality.

• As Brad DeLong has pointed out, even with that subjectively constructed data set, B&S:

…failed to find a statistically significant difference between the effect on growth of politically-connected wealth inequality and the effect on growth of politically-unconnected wealth inequality. That would be a more accurate description of what the data say.

They trumpet their non-statistically significant finding, in what surely looks like an attempt to downplay their significant main finding.

But perhaps to their chagrin, their main finding holds: wealth concentration, inequality, kills economic growth.

* From the 2013 paper: Australia, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Republic of Korea, Singapore, Spain, Sri Lanka, Sweden, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Kingdom, United States, and Venezuela.

Cross-posted at Evonomics.

Related posts:

  1. Socialism and Prosperity: Does One Cause the Other?
  2. An Open Letter to Robert Barro
  3. Equality and Prosperity: Can We Have Both?
  4. Wealth Equality and Prosperity
  5. An Important New Book on Income and Wealth Inequality


Did Money Evolve? You Might (Not) Be Surprised

Published by Anonymous (not verified) on Thu, 26/11/2015 - 1:27am in

Tags 

Economics

You probably won’t be surprised to know that exchange, trade, reciprocity, tit for tat, and associated notions of “fairness” and “just deserts” have deep roots in humans’ evolutionary origins. We see expressions of these traits in capuchin monkeys and chimps (researchers created a “cash economy” where chimps were trained to exchange inedible tokens for food, then their trading behaviors were studied), in human children as young as two, in domestic dogs, and even in corvids — ravens and crows.

But humans are unique in this as in many other things. We use a socially-constructed mechanism to effect and mediate that trade — a thing we call “money.” What is this thing? What does it mean to say that it’s “socially constructed”? What are the specifics of that social construct? How does it work?

Money has lots of different meanings when you hear it in the vernacular. A physical one- or five-dollar bill is “money,” for instance (“Hands up and gimme all your money!”). But so is a person’s net worth, or wealth (“How much money do you have?”), even though dead presidents on paper or even checking-account balances are often insignificant or ignored in tallies of net worth (think: stocks, bonds, real estate, etc.).

You might think you could turn to economists for an understanding of the term. Not so. They don’t have an agreed-upon definition of “money.” The closest they come is a tripartite “it’s used as” description that completely begs the question of what money is: It’s used as a medium of account, as a medium of exchange, and as a medium of storage. I and many others have pointed out the myriad problems with this tripartite non-definition. Start by asking yourself: what in the heck do they mean by “medium” in each of those three? You’ll often hear economists speak of (undefined) “monetary assets,” “monetary commodities,” and similar, attempting to communicate in absence of a definition.

When economists speak of the “money supply” (a stock measure, not a flow measure as suggested by “supply”), they are gesturing toward a body of financial securities that are somewhat currency-like. Primarily: they’re used in exchanges for real-world goods and services, and have fixed values relative to the unit of account — e.g. “the dollar” (think: “the inch”). They assemble various “monetary aggregates” of these currency-like things — MB (the “monetary base”), M0, M1, M2, M3, and MZM (“money of zero maturity”). Here’s a handy chart on Wikipedia.

This conflation of “money” with currency-like financial securities reveals a basic misunderstanding of money that pervades the economics profession. That misunderstanding is based on a fairly tale.

In the golden days of yore, it is told, all exchange was barter. Think: Adam Smith’s imagined bucolic butcher and baker village. This worked fine, except that your milk wasn’t necessarily ready and to hand when my corn came ripe. And moving all those physical commodities around was arduous. This inserted large quantities of sand and mud into the gears and wheels of trade.

But then some innovator came up with a great invention — physical currency! Coins. “Money.” This invention launched humanity forward into its manifest destiny of friction-free exchange and the glories of market capitalism.

Except, that’s not how it happened. No known economy was ever based on barter. And coins were a very late arrival.

The best efforts at understanding the nature and origins of money have come from anthropologists, archaeologists, and historians who actually study early human commerce and trade, and from various associated (“heterodox”) fringes of economic thinking. David Graeber recounts much of this history (though unevenly) in Debt: The First 5,000 Years. Randall Wray, a leading proponent of the insurgent and increasingly influential Modern Monetary Theory (MMT) school of economics, has offered up some great explications. (Though even he is reduced, at times, to talking about “money things.”) If you’re after a gentle introduction, Planet Money has a great segment on money’s rather vexed history and odder incarnations.

The main finding from all this: the earliest uses of money in recorded civilization were not coins, or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.) Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of “money.”

These tally systems give us our first clue to the nature of this elusive “social construct” called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting.* So the need for social accounting may even explain the invention of writing.

This “accounting” invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships. It’s even been suggested that the arduous work of social accounting — keeping track of all those social relationships with all those people — may have been the primary impetus for the rapid evolutionary expansion of the human brain. “Money” allowed humans to outsource some of that arduous mental recording onto tally sheets.

None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by “gift economies” based on unquantified exchanges. And even in modern societies, much or most of the “value” we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.

Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.

This is of course contrary to everyday usage. A dollar bill is “money,” right? But that is often true of technical terms of art. This confusion of physical tokens and other currency-like things (viz, economists’ monetary aggregates, and Wray’s “money things”) with money itself make it difficult or impossible to discuss money coherently.

What may surprise you: all of this historical and anthropological information and understanding is esoteric, rare knowledge among economists. It’s pretty much absent from Econ 101 teaching, and beyond. Economists’ discomfort with the discipline’s status as a true “social science,” employing the methodologies and epistemological constructs of social science — their “physics envy” — ironically leaves them bereft of a definition for what is arguably the most fundamental construct in their discipline. Likewise for other crucial and constantly-employed economic terms: assets, capital, savings, wealth, and others.

Now to be fair: a definition of money will never be simple and straightforward. Physicists’ definition of “energy” certainly isn’t. But physicists don’t completely talk past each other when they use the word and its associated concepts. Economists do when they talk about money. Constantly.

Physicists’ definition of energy is useful because it’s part of a mutually coherent complex of other carefully defined terms and understandings — things like “work,” “force,” “inertia,” and “momentum.” Money, as a (necessarily “social”) accounting construct, requires a similar complex of carefully defined, associated accounting terms — all of which themselves are about social-accounting relationships.

At this point you’re probably drumming your fingers impatiently: “So give: what is money?” Here, a bloodless and technical term-of-art definition:

The value of assets, as designated in a unit of account.

Which raises the obvious questions: What do you mean by “assets” and “unit of account”? Those are the kind of associated definitions that are necessary to any useful definition of money. Hint: assets are pure accounting, balance-sheet entities, numeric representations of the value of goods (or of claims on goods, or claims on claims on…). That’s where I’ll go in my next post.

Sneak preview: we’ll start by thinking carefully about another (evolved?) human social construct without which assets don’t, can’t, exist — ownership.

* Some scholars believe repeated symbolic patterns going back much further, in cave paintings for instance, embodied early “writing,” but that is widely contested, and nobody knows what the symbols — if they are symbols — represented.

Cross-posted at Evonomics.

Related posts:

  1. A Definition of Money Is Not Sufficient, But it Is Necessary to Understand Economies
  2. Currency is Equity, Equity is Currency
  3. All Currency is “Fiat” Currency
  4. The Fed Is not Printing Money: Two Updates
  5. Platinum Currency: What’s The Fed’s End Game?


Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Published by Anonymous (not verified) on Tue, 17/11/2015 - 4:19am in

Tags 

Economics

In a recent post Tyler Cowen makes an admirable effort to lay out his overarching approach to thinking about macroeconomics, revealing the assumptions underlying his understanding of how economies work. (Even more salutary, this has prompted others to do likewise: Nick Rowe, Ryan Avent.)

Cowen’s first assertion:

In world history, 99% of all business cycles are real business cycles.

This may be true, but it is almost certainly immaterial to the operations of modern, financialized monetary economies. He acknowledges as much in his second assertion:

In the more recent segment of world history, a lot of cycles have been caused by negative nominal shocks. I consider the Christina and David Romer “shock identification” paper (pdf, and note the name order) to be one of the very best pieces of research in all of macroeconomics.

That paper, which revisits and revises Friedman and Schwartz’s Monetary History, is clearly foundational to Cowen’s understanding of how economies work, so it bears examination — in particular, its foundational assumptions. The Romers state one of those assumptions explicitly on page 134 (emphasis mine):

…an assumption that trend inflation by itself does not affect the dynamics of real output. We find this assumption reasonable: there appears to be no plausible channel other than policy through which trend inflation could cause large short-run output swings.

This will (or should) raise many eyebrows; it certainly did mine. Because: it completely ignores the effects of inflation on debt relationships.

It’s as if Irving Fisher and Hyman Minsky had never written.

Assuming “inflation” means roughly equivalent wage and price increases, at least over the medium/long term (yes, an iffy assumption given recent decades, but…), inflation increases nominal incomes without increasing nominal expenditures for existing debt service. (Yes, with some exceptions for inflation-indexed debt contracts.) Deflation, the reverse. Nominal debt-service expenditures are (very) sticky. Or described differently: inflation constitutes a massive ongoing transfer of real buying power from creditors to debtors — and again, deflation the reverse.

“No plausible channel”?

Excepting one passing and immaterial mention of government debt, the the words “debt” and “liability” do not appear in the Romer and Romer paper, and it has only two passing mentions of “assets.” It’s as if balance sheets did not exist — which in fact they do not in the national accounting constructs then existing, that the Romers, Friedman, Schwartz, and presumably Cowen today are using in their mental economic models and in the “narrative” approach to explaining economies that Friedman, Schwartz, and the Romers explicitly champion.

If you go further and allow that wages and prices can inflate at different rates (which you must, given recent decades), you have extremely large and changing differentials between price inflation, wage inflation, and (especially) asset-price inflation.

All of these inflation dynamics are assumed away, made invisible and immaterial, in Romer and Romer — hence largely, at least presumably so, in Cowen’s understanding of economies. It is explicitly assumed (hence concluded) that those dynamics have no “real” effect. As in Romer and Romer, the words “debt,” “liability,” and “asset” are absent from Cowen’s “macroeconomic framework.” (Though he does give a polite if content-free nod to Minsky in his ninth statement.)

This explains much, in my opinion, about Cowen’s — and many other mainstream economists’ — flawed understanding of how economies work.

Cross-posted at Angry Bear.

Related posts:

  1. Ryan Avent Agrees: Demand Inflation Now!
  2. Scott Sumner: “The 2009 stimulus was sabotaged.” By the Fed.
  3. Swimming in the Stream: How Economic Forces Force Household Indebtedness
  4. Where’s the High Point on the Laffer Curve? And Where Are We?
  5. Weimar, Zimbabwe, Here We Come


Wait: Maybe Europeans are as Rich as Americans

Published by Anonymous (not verified) on Sat, 07/11/2015 - 1:54am in

I’ve pointed out multiple times that despite Europe’s big, supposedly growth-strangling governments, Europe and the U.S. have grown at the same rate over the last 45 years. Here’s the latest data from the OECD, through 2014 (click for larger):

Screen shot 2015-11-06 at 5.19.42 PM

And here’s the spreadsheet. Have your way with it. More discussion and explanation in a previous post.

You can cherry-pick brief periods along the bottom diagonal to support any argument you like. But between 1970 and 2014, U.S. real GDP per capita grew 117%. The EU15 grew 115%. (Rounding explains the 1% difference shown above.) Statistically, we call that “the same.”

Which brought me back to a question that’s been nagging me for years: why hasn’t Europe caught up? Basic growth theory tells us it should (convergence, Solow, all that). And it did, very impressively, in the thirty years after World War II (interestingly, this during a period when the world lay in tatters, and the U.S. utterly dominated global manufacturing, trade, and commerce).

But then in the mid 70s Europe stopped catching up. U.S. GDP per capita today (2014) is $50,620. For Europe it’s $38,870 — only 77% of the U.S. figure, roughly what it’s been since the 70s. What’s with that?

Small-government advocates will suggest that the big European governments built after World War II are the culprit; they finally started to bite in the 70s. But then, again: why has Europe grown just as fast as the U.S. since the 70s? It’s a conundrum.

I’m thinking the small-government types might be right: it’s about government. But they’ve got the wrong explanation.

Think about how GDP is measured. Private-sector output is estimated by spending on final goods and services in the market. But that doesn’t work for government goods, because they aren’t sold in the market. So they’re estimated based on the cost of producing and delivering them.

Small-government advocates frequently make this point about the measurement of government production. But they then jump immediately to a foregone conclusion: that the value of government goods are services are being overestimated by this method. (You can see Tyler Cowen doing it here.)

That makes no sense to me. What would private output look like if it was measured at the cost of production? Way lower. Is government really so inefficient that its production costs are higher than its output? It’s hard to say, but that seems wildly improbable, strikes me as a pure leap of faith, completely contrary to reasonable Bayesian priors about input versus output in production.

Imagine, rather, that the cost-of-production estimation method is underestimating the value of government goods — just as it would (wildly) underestimate private goods if they were measured that way. Now do the math: EU built out governments encompassing about 40% of GDP. The U.S. is about 25%. Think: America’s insanely expensive health care and higher education, much or most of it measured at market prices for GDP purposes, not cost of production as in Europe. Add in our extraordinary spending on financial services — spending which is far lower in Europe, with its more-comprehensive government pension and retirement programs. Feel free to add to the list.

All those European government services are measured at cost of production, while equivalent U.S. services are measured at (much higher) market cost. Is it any wonder that U.S. GDP looks higher?

I’d be delighted to hear from readers about any measures or studies that have managed to quantify this difficult conundrum. What’s the value or “utility” of government services, designated in dollars (or whatever)?

Update: I can’t believe I failed to mention what’s probably the primary cause of the US/EU differential: Europeans work less. A lot less. Like four or six weeks a year less. They’ve chosen free time with their families, time to do things they love with people they love, over square footage and cubic inches.

Got family values?

I can’t believe I forgot to mention it, because I’ve written about it at least half a dozen times.

If Europeans worked as many hours as Americans, their GDP figures would still be roughly 14% below the U.S. But mis-measurement of government output, plus several other GDP-measurement discrepancies across countries, could easily explain that.

Cross-posted at Angry Bear.

 

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Why Prosperity Requires a Welfare State

Published by Anonymous (not verified) on Fri, 06/11/2015 - 6:27am in

I’ve got a new post up at a new site, Evonomics Magazine (“The next evolution of economics”). It’s an impressive offshoot with some great articles, assembled by folks involved with The Evolution Institute, which I’m a big booster for.

Screen shot 2015-11-05 at 11.17.04 AM

My readers here will find much familiar in the post, but I’m happy with how it pulls various threads together. I’ll be following comments over there, so have your way with it.

Cross-posted at Angry Bear.

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Thinking About “Assets” and Ownership

Published by Anonymous (not verified) on Wed, 21/10/2015 - 7:42am in

Tags 

Economics

My gentle readers will know that I often struggle with economic terminology, both because I find usages are so vague, various, and poorly defined, and because I’m trying to understand fundamental terms’ fundamental meanings. Today I’d like to home in on one of the most fundamental — “assets” — and something even more fundamental that underpins it: “ownership.”

I’ll start with what I think is a usefully precise, technical, term-of-art definition:

Asset. n. A labeled numeric entry on the lefthand side of a balance sheet, designating the value of a claim (necessarily, designated in a unit of account).

This thing called an “asset” only exists, only can exist, on a balance sheet. It’s purely an accounting term, and the entity only exists within an accounting construct. There’s no other meaning for the term. (Making it a usefully precise definition.)

This is contrary to the vernacular, where a house or a drill press is called an asset. (In this technical context these are more usefully called “goods” or “real goods” or “capital goods.”) Because really: how can both a house and the labeled tally of a claim on that house both be called “assets”?

“Financial assets” are distinguished in that they have related, offsetting liabilities on the righthand side of other balance sheets. That’s what defines the term. They’re claims on claims — claims against that other balance sheet’s assets/claims. That’s why there’s a liability entry over there. It’s the right side making a claim against the left side, on behalf of that other balance sheet that holds the asset. As such, financial assets only represent indirect (and variously contingent) claims on real goods, one or more claim-steps removed from claims on the goods themselves.

Purely “real” or nonfinancial assets have no such offsetting claims on other balance sheets. In theory, they represent direct claims on real goods.

That seemingly simple distinction, though, is far from simple when you start exploring it carefully.

To that end, consider the fundamental nature of “claims,” hence the nature and import of “ownership” and “property rights.” Full credit here to Matt Bruenig, who delivered the Aha! understandings for me on these topics — clear and (mutually) coherent definitions and explanations for concepts I’d been worrying at for years.

Mostly simply, ownership is an exclusionary legal claim. Ownership says you may have a picnic on your front lawn — which seems inclusionary, but that’s only meaningful because you may exclude anyone else from doing so. And you may invoke violence (farmed out to the police) to enforce that right of exclusion. As Matt has said so well, a modern ownership claim is best viewed as a violence voucher issued by government.

This imparts a decidedly sinister aspect to the lefthand side of balance sheets — a tally sheet of violence vouchers?

So now to return, with that understanding, to the notion of real vs financial assets. In large, in aggregate, in the big national or global picture, both types of assets ultimately constitute claims on real goods. Someone holding zero real/nonfinancial assets but significant financial assets can make an immediate and successful claim on a new Maserati — a very “real” good. Everyone else is excluded from claiming that Maserati.

If this exclusionary notion is safe, in a very real sense your “real,” “nonfinancial” asset claim is actually offset by a liability — on the (EverybodyElseIn)TheWorld balance sheet. Call the entry “Stuff that we’re excluded from touching.” If all those exclusionary claims wall off AllTheGoodStuff with violence, we’re talking a very real liability indeed — even though this imaginary World Balance Sheet doesn’t, and practically probably can’t, exist.

This notional balance sheet may seem crazy and outlandish to us. But our ownership, property-rights, and “asset” structures do and have seemed equally outlandish to other cultures:

…fee-simple ownership is not the only basis for ownership and possession of land. Many eastern cultures and tribal cultures throughout the world follow the “communal property system” in which ownership of land belongs to the entire social/political unit, like the tribe, families, bands, and nations.

From the inside, ideologies always look like common sense.

 

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Thinking about Value, and the National Accounts

Published by Anonymous (not verified) on Mon, 19/10/2015 - 3:11am in

Tags 

Economics

The remarkable discussion on “national wealth” and the national accounts that is running over at Interfluidity (373 comments and counting…) in response to my last post prompts me to recount an anecdote that I think is germane.

I took exactly one accounting class in my life, at the NYU MBA school — essentially Accounting for Non-Accountants, teaching us to deconstruct corporate statements into cash flow.

There were two profs. (I don’t remember their names.) The lead was an old hand, a long-time member of the Financial Accounting Standards Board (FASB), and a real comedian. The young guy was the straight man and enforcer — assignments, testing, and nuts-and-bolts lectures.

The beginning of the very first lecture, given by the old guy, has stuck with me ever since. He started with an anecdote. (Here recounted from distant memory.)

When I was an undergrad (he said), I hung out with these economics types. I was thinking of buying a new car. They told me, “don’t do that! As soon as you drive it off the lot it’ll lose a third of its value!”

But anyway, I went ahead and did it. I went through all the paperwork with the salesman, signed on the dotted line, and he handed me the keys. “Here you go,” he said. “Drive it away.”

I looked at him like he was crazy. “I’m not gonna drive it away,” I said. “It’ll lose a third of its value!”

Ba dum ba.

Then he explained why he used that anecdote right up front, framing the whole (rather grueling) semester-long exercise to come: Accounting, he said, is an exercise in assigning value to things that are often (mostly?) deucedly difficult to e-value-ate. Whether it’s the value of that car (before and after it leaves the lot), or the “wealth of nations,” accounting is inherently a problematic exercise in estimation. We just do the best we can.

Based on a decade or so of wrestling with the national accounts, I’d extend that thinking further. Sure, estimating value can be very iffy, but that estimation is also, always, a function of the accounting constructs and architecture used to do that estimation. Simply put, the national accounts are an economic model of the national economy. The map is not the territory. The presentation is inevitably stylized, like a Mercatus or Peters projection — and the choice of presentation has similarly important rhetorical and political implications.

The implication: as with any economic model, to understand what you’re seeing, you need to look not only at the results presented within the model, but at the model itself. You need to (at least) consider not just potential errors within a model, but model error itself. To get very philosophical: National account structures are, ultimately, epistemological structures — systems for trying to “know” things.

The national accounts, by their very status and position, discourage examination of their model. The notion that they’re “just accounting,” adding and subtracting straightforward measures, reifies them, and the model they present. The assumptions underlying that model are rendered invisible, apotheosized as god-given truths.

National-accounting sages are very much aware of this reality. Check out Jorgenson, Hulten, Hall, etc. on the “zero-rent” economic model that lies (hidden) at the core of the national accounts as constructed. (They mostly argue: appropriately so.) Or spend some time in that Interfluidity comments thread. If you haven’t thought critically and carefully about the national accounts’ economic model, you don’t understand the national accounts. (I’m not, by the way, claiming that I do. Despite lengthy exertions. Necessary versus sufficient and all that.)

That old-hand FASBer imparted, I think, a profoundly important truth. I’ve been struggling with its implications ever since.

To put across exactly how important and profound that truth is, I’ll end by passing the baton to John Maynard Keynes in his essay on “National Self-Sufficiency”:

Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization.

I only got a B+ in the course, by the way.

 

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