Reason for a New Age

Archive for the ‘Theory’ Category

How Racism Saved the World

Posted by publius2point0 on 2011/01/01


Mankind is, by nature, a pack animal. When we are among just our pack, we are naturally friendly and giving.

What this has meant on a historical, economical level is that the earliest tribes of people shared nearly everything. You had your hut with a wide-open door and if someone needed something, he might just walk right in and (without asking) take whatever it is that he needs at that moment. There was no particular need or reason to keep things private to yourself. The pack was small enough that you knew everyone and everything that was happening in the village. If you needed the whatever again, you’d know where to find it.

When your life is in constant threat from starvation, wild beasts, flash floods, or other disasters, this method of sharing is probably a wise idea. It’s very efficient.

If you walked down the street of some average, modern day suburb, you could probably go into each house and find a box of tools. We all need tools, but 99% of the time, that box sits closed with everything in it, tucked away on a shelf in the garage. If it’s only being used 1% of the time, 100 different households could be adequately served by the one box and it’s simply wasteful to force everyone in the village to go out and work enough to be able to earn their own toolbox, just to have it sit unused most of the time. And when simply surviving is difficult enough as it is, wasting labor on luxuries is simply not an option. A wise chieftan would pick some people to each work towards creating one tool, until a full box-worth’s have been created, and then everyone would share that set of tools. This gives nearly everyone time to do nothing but hunt for food, and keep the village alive.

The closest equivalent to this sort of economy in modern day is the family household. If I need the cellophane tape, I take it. If someone else in the family needs it, they find out where it is and take it when I’m done. We don’t each have our own tape, our own toolbox, our own refrigerator, our own TV set, etc. which we keep in our own room. We have a decent number of communal items that we share.

But now imagine that some blue-colored man from another planet walks into your home and he tells you that you’re doing this all wrong. He tells you that everyone in the family must have their own tape, their own toolbox, their own television; you might nod and thank him for his advice, but you’re unlikely to actually do it. This is your family, you trust each other, it’s wasteful to gather all these extra things when you can share, and overall it’s none of his business.

Why should we listen to the blue man from Mars? Well thing is, in a village where everyone shares everything, no one is rich and no one is poor. I can’t do a better job of earning goods than others, because if I work harder to gather more things, the rest of the village will simply take them all when they need them. In a system like this the question is always, “How do I divide up this pie in the most reasonable way?” It’s never, “How do we make more pies?”

The problem is that even if the blue man is right, as said we’ll ignore him regardless. What he’s asking us to do is wasteful and it’s “selfish”.

Now obviously, we’re the Blue Man from Mars. The communal family could be considered to be Mexico, most of Africa, Communist nations, or wherever. Somehow our ancestors broke out of this tribal, communal way of doing things whereas theirs didn’t (or, in the case of Communist nations, they went back to it). How did this happen?

Going back to our example of the family home in modern day, let’s say that we have rented out a room to a lodger. In this case, we might tell him that he’s got his section of the refrigerator, we might tell him that it’s up to him to repair his own stuff in his room with his own tools, we might tell him that he has to pay to use the space he’s living in. Why are we so mean to this lodger, when there’s no particular need to do so? Well, because he’s not part of our pack. He’s an outsider.

When we take on that lodger, we might have a contract that we both sign before we let him come into our house and live. It clearly lays out what we provide, what we won’t, how he has to behave, and what we will do if he doesn’t agree to our terms. From day one, we are already taking a very hostile approach to our relationship. We’re assuming that he won’t behave as one of the pack and that he will never be one of the pack. But, we still want to profit off of him, so we figure out a compromise.

The basic history of modern economics is directly linked to this a priori distrust in dealing with the people around us. The most likely explanation for its growth is in just the sort of thing as I gave as an example. First, our ancestors began to trade with other packs — leading to the development of currency — and then eventually began to allow foreigners to come live in the midst of their towns — developing the concepts of private property and contractual obligations as they did so. My personal best-guess for who this was is the Jews. For the last 700 years, the Jews lived as a foreign people in every city of Europe, never fully integrating until the post-WWII world came into being. Europeans despised and distrusted the Jews, but still tolerated their existence in their cities. In turn, the Jews were probably fairly suspicious of all of the locals as well. Overall, this created a genesis point for writing up contracts and profiting off your neighbor. And of course it lead to fences, locked doors, and distrust of your neighbors.

As it turned out, this bit of racism was good. With the rise of hatred towards the Jews in Europe starting around 1300 AD due to the increasing strength of the Roman Catholic Church (that influence probably radiating out from Italy) and the idea that the Jews were to be blamed for killing Jesus, the two groups started to work towards profiting off one another. The Jews loaned money to the local people via contract, who then used that money to start factories which produced paper (first in Italy), which both then led to the Renaissance (starting, again, in Italy). When we can profit off one another and keep those proceeds to ourselves, thanks to locked doors and an idea of personal property, then people start working towards ways of producing an excess of products so that everyone can have their own set of tools or whatever else. A class of wealthy are created who then want to show off. They employ artists to decorate their homes or build grand buildings that show off the magnificence of their territory (Renaissance artists), and they hire scientists to create weapons of war so that they can show off the strength of their territory. Of course, those scientists then need a method of producing real, verifiable results so they develop or bring in the scientific method. And of course with the desire for real, reliable results and the ability to get more than your neighbor, we eventually develop meritocracy. Private property and meritocracy then lead into the idea of the idea of the natural rights of man where government is held to be beholden to its people, not to the monarch.

In its history, the worst thing that the Catholic Church ever did is almost certainly that it forbid usury. Ironically, the best thing the Church ever did was to persecute the Jews (ironic because the persecution of the Jews is what allowed mass European usury to rise in spite of the ban).

If you like the internet, airplanes, a far lower infant mortality rate than 30%, pizza delivery, and all of the other luxuries of modern life, the sad truth is that it is likely all thanks to 700 years of cruelty, persecution, and distrust. The Jewish people paid the price for our world and so — to go a bit off topic — if you’ve ever questioned the merit of the post-WWII decision to create the state of Israel in the Middle East, I think it’s reasonable to say that the next several decades of continued terrorist activity is entirely reasonable. The Jews have earned to have a place of their own. It’s our turn to pay a little (and a shame that the Israelis are suffering terrorism along with us).

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Posted in Research, Theory | Tagged: , , , , | 2 Comments »

Words – Anarchism, Libertarianism, and Communism

Posted by publius2point0 on 2010/10/24


If you have any particular image of what an Anarchist looks like in your head, I suspect that it is of some mohawk-bearing punk who seems mostly to want to go about getting into fights. You wouldn’t think that it is a fairly philosophic outlook that forms the basis for at least two major political movements in the modern world. …And no, it doesn’t have anything to do with punks nor fighting.

The core of Anarchism is the basic assumption that people are rational beings. We know well enough to enter into deals and contracts with others — or not — without needing someone else to watch over us. The Anarchist doesn’t wish for “lawlessness”, he just doesn’t see the need for government. If people want a road, they’ll get together and figure out how to make it happen; if they want a school for their children, they’ll start a school on their own.

Now, this isn’t to imply that Anarchism stops at those boundaries as a political philosophy, just that such is the primal nugget of thought that would mark anything as being a flavor of Anarchism. But that nugget really is that short and sweet so far as I can tell. And as such a basic idea, sounding fairly decent as a premise, it has formed the basis for an array of beliefs from Libertarianism to Communism.

Indeed, what you likely view as opposite ends of the spectrum are branches of the same tree. Basically, for both of these beliefs, at core they are simply trying to answer the question of how reasonable people would enter into deals and contracts with one another in the absence of government? But what that answer is depends on the speaker. The one might think that reasonable people, having freed itself of hierarchical order, would allow us to all treat each other as equals, sharing produce as needed. The other thinks that the free market supplies its own order, where market forces are able to provide whatever is needed and discourage negative behavior.

Of course, Anarchism has spawned further ideas than these two (and of course Libertarianism has grown away from Anarcho-Capitalism to accept government in a limited degree), but I will leave it to the Wikipedia to walk you through them all.

http://en.wikipedia.org/wiki/Anarchist_schools_of_thought

You might say that Communism can’t be a Anarchist theory,  as it advocated a strong centralized central government with ownership of all property and production — the very antithesis of Anarchism. But the thing is that an Anarchist society was only the end-goal for Communists (or, at least, Marxist Communists). A strong centralized government was intended as a transitional middle-ground on the road to a world free of government. No Communist state ever actually became a Communist state. For better or worse, this meant that the popular view of what “Communism” meant became perverted to mean an Authoritarian state where everything was owned by the State. There is in fact no name for that form of Authoritarianism except “Communism”. And seeing as one variant of Communism means no government and the other means lots of government, I think it’s safe to say that use of the word is bound to be confusing.

To get back to the discussion of Anarchism itself, I’d like to note that the principal flaw in the theory — so far as I see it — is that it is indeed correct.

Mankind is, indeed, a reasonably rational species — at least once we have access to paper. We are able to meet together as individuals and establish the apparatus that our society needs. But more importantly, we were that rational starting way back thousands of years ago. And as such, we realized that hierarchy is a useful tool for the protection of the individual. We aren’t kind and thoughtful creatures, we’re rather greedy and sociopathic ones. Our only protection against the other individuals is by establishing and enforcing some simple rules like that this fruit I grew and harvested for my family is mine. And we’ve discovered that we’d rather elect people that we trust to oversee that the people enforcing those rules aren’t beholden to anyone but all of us — not the richest man in town nor the one who has the most friends.

We do live in an Anarchist world. But through the benefit of one generation passing on their knowledge to the next via spoken and written word, we were able to learn and develop methods of free interaction that work fairly well. Starting the process over from scratch with each individual or family fending for itself would just get a lot of people killed. And in the long run, we’d likely just end up exactly where we are — as has happened with the Communists and all forms of Utopianists. While it may be true that you didn’t have the chance to review and determine for yourself whether you agreed with the end-result of mankind’s experiments — you were simply forced by the government and its police to submit to the authority of the government — the road forward is to understand and address all of our experiences, not to cast it all aside with some asinine assumption that we’ll be able to come up with something better if we just force ourselves to start the process all over again.

In the defense of Karl Marx, as an example, he was writing at a time when the introduction of Capitalism into a class-bound society was creating hardship for a large number of people. Where classism may never have been a great thing — for most of history it was likely a fairly innocuous trait of most societies — Capitalism exacerbated the differences, giving the upper classes the motive and power to work the lowest to death. Marx had no way to know that the free market will gradually erode classism and lead to meritocracy. It was fairly reasonable for him to pinpoint the need for a classless society as the solution to the problems he observed. He just didn’t have the experience nor foresight to see that a hierarchical society can be classless.

Marx may have an excuse for being wrong on that point, but the average person of today does not.  But as his example shows, where you see a problem in society, if the answer for it that you arrive at calls for destroying everything and starting from scratch, you’re almost certainly wrong. Correctly identifying the problem does not mean that everything in the world must focus itself on correcting that one issue. Millions of potential problems for society have been solved through the millenia. Tossing all of those answers away for the sake of solving the one or two which haven’t yet been patched is silly. Evolve what we have, and you’ll almost certainly be more happy with the result.

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Adjusting for Apparent Money – Part 1

Posted by publius2point0 on 2010/06/20


Continuing on the idea from the previous entry, we will track through what should theoretically happen when exchange system is used when money appears to deflate due to a decreased velocity of money. To make life easy, we will use the below model of the macro economy, rather than the rather complex (and still incomplete) image included in the previous blog:

We’ll say that we have three citizens of our economy, Jack, Alan, and Tina. Each month they spend $800 on food, clothes, gas, electricity, etc. which they purchase from Fnord Inc. They are also all in debt to the central bank, owing $50 each month to pay back a $500 loan. Their salary is $1000 per month working for Fnord Inc.

Balance Sheet
Month Apparent Money (per month) Debt Fnord Inc. Jack Alan Tina
Initial $3000 -$1500 $3000 $0 $0 $0

Unlike the modern world where the salary is pegged to a particular value, in the new system of doing things the salary is based on the value of the Apparent Money (AM) as it has tracked from month to month. We calculate the AM by adding all purchases. The initial value is set to $3000 as we assume that if Fnord Inc. is able to hire 3 people for $1000 each, they must have received $3000 in the previous month. Besides adjusting salary, we also adjust the amount of our loan payments — and in fact the total amount of debt as well.

In the first month, Jack, Alan, and Tina are each paid $1000. They purchase $800 worth of supplies, pay $50 in loan payments, and save the remaining $150. The total of all purchases in the economy for this month was only $2400, so we update the Apparent Money to that.

Balance Sheet
Month Apparent Money (per month) Debt Fnord Inc. Jack Alan Tina
Initial $3000 -$1500 $3000 $0 $0 $0
1 $2400 -$1350 $2400 $150 $150 $150

With an AM that is 80% of the previous month, Fnord adjusts the amount of salaries to match and pays its three employees $800, which is the same as their $1000 salary at current apparent inflationary/deflationary rates. At the current AM, the amount that is owed in debt is reduced to $1080 ($360 per person) and the amount owed is lowered to $40. Knowing that the amount of money in the economy has decreased, Fnord Inc. also lowers the price of all of its products by 80% and so our three citizens end up buying their usual goods for only $640 each, paying the $40 in loan payments, and save the remaining $120.

Balance Sheet
Month Apparent Money (per month) Debt Fnord Inc. Jack Alan Tina
Initial $3000 -$1500 $3000 $0 $0 $0
1 $2400 -$1350 $2400 $150 $150 $150
2 $1920 -$960 $1920 $270 $270 $270

Heading into the 3rd month, it’s worth pointing out that the $270 in our citizens’ savings is worth $421.88 at the value of money at Initial. They have made only two deposits, having expected to have saved $150 each month for a total of $300. Because the Apparent Money deflated, they have gained over a month’s extra savings compared the price at which Fnord Inc. is selling products during month 3. Subsequently, they each decide to splurge a bit and not save any money.

Balance Sheet
Month Apparent Money (per month) Debt Fnord Inc. Jack Alan Tina
Initial $3000 -$1500 $3000 $0 $0 $0
1 $2400 -$1350 $2400 $150 $150 $150
2 $1920 -$960 $1920 $270 $270 $270
3 $1824 -$736 $1824 $270 $270 $270

While this might seem mighty odd, in Classical Economics this is how the economy is meant to behave. A business is only able to pay as much as it has made, so if all revenue is less than all expenses, expenses need to be cut. Of course, in the real world, the amount of money being passed around doesn’t change by 80% from month to month and of course generally it inflates rather than deflates. When we save our money, in general day, instead of giving us greater power it becomes worth less and less as the money supply inflates. This encourages us to invest our money rather than save it. But as the money supply inflates, our salary itself drops in purchasing power. We need to get a bump in our salary periodically just to stay even. Using the AM measurement to adjust salary, your salary would grow slightly from month to month in a normal, growth economy.

But of course, sometimes the total quantity of purchases through the economy does drop, and at that point businesses have to cut expenses. In Classical Economics, this is handled by lowering wages, but in the real world it’s often handled by cutting employees as has been pointed out in previous blogs.

Increased Savings Equals People Laid Off

After the recession hit, there was a lot of call for banks and other large institutions to be more spendthrifty. One bank, I remember, had a tradition of throwing a big picnic for all of its employees once a year. The average citizen as well as the government all gave evil glares at this bank because of how wasteful they were being in a recession.

In the terms of Classical Economics, this makes some sort of sense. The true state of the economy has become clouded by various people and organizations doing a poor job of managing money, and so money needs to be withdrawn from those so that money can once again be safely spent on things which are financially sound. But in the terms of the real world, this is simply stupid. When the bank doesn’t throw its picnic, the catering company that was depending on the hundreds of thousands of dollars that it had gotten reliably each year for the last decade suddenly can’t pay any of its employees. They have to lay many or all of them off. Unemployment increases, which means that revenue to banks and all other businesses falls further. With decreasing revenue, but wages stuck at high levels by contracts, minimum wage legislation, etc. there’s no way that a business is going to hire on more workers.

Under the AM price adjustment method, however, as the call to save spreads across the nation and revenue starts to be cut across the market place, the cost of maintaining your employees stays consistent with revenue. Everyone is able to continue working and living, holding their money in savings and even having it gain in value the worse things get. When they are certain that measures have been taken to correct what was wrong with the economy to make customer confidence go down, the carrot of the increased purchasing power of their savings kicks in. They can buy a lot at cheap values, so the instant it seems like the air has cleared, people will want to get back into the market.

Of course, there will be some layoffs. The enterprises that were truly wasteful will be cut. But since corporations are saving their money as well, with those savings increasing in value, these laid off people are comparatively cheap to hire back for fiscally sound ventures.

The one interesting point of the AM adjustment is the treatment of loans. In the model laid out in Tying it all Together (Classical Economics), the amount of money paid back in loans is always equivalent to the amount that was loaned. If we continued to track the scenario of Jack, Alan, and Tina, however, the total amount of money paid to the central bank would not equate to the total loaned. To demonstrate, let’s presume that like month 1 and 2 that the AM deflated by 80% each month:

Balance Sheet
Month Apparent Money Original Debt (adjusted for AM) Owed (adjusted for AM) Remaining Debt (adjusted for AM) Before Payment Remaining Debt (adjusted for AM) After Payment
1 100% -$200 $50 $200 $150
2 80% -$160 $40 $120 $80
3 64% -$128 $32 $64 $32
4 51.2% -$102.40 $25.60 $25.60 $0

Adding the Owed column, the total paid was only $147.60. The AM adjustment scheme creates what I term fundamental money, inflating the economy. Given that all other recession-breaking schemes also create inflation of one sort or the other, this isn’t any particular travesty.

Revisiting Market Bubbles

To revisit the case of Jeff, Tanya, and Berkley that was laid in in Market Bubbles, we’ll show how AM adjustment’s creation of fundamental money solves the standoff created by a collapsing bubble.

1) Tanya borrows $50 from Jeff (the central bank). AM = 100%
2) Tanya buys comic books at above their true value from Berkley for $50. AM = 100%
3) Jeff confiscates comic books and sells them to Berkley for $10. AM = 20%

Since the market has adjusted to the amount that is being spent, down from $50 to $10, the AM has adjusted as well becoming 20%. At 20%, the amount that Tanya owed to Jeff ($50) becomes $10. Tanya has successfully paid off her debt and Jeff considers himself to be fully paid off. He doesn’t have to agonize over tracking down more money. At the same time, the $40 that Berkley has is now worth the equivalent of $200. The bicycle that he wanted to buy cost $120 at old prices. At prices adjusted for the poor economy, it only costs $24. With the $40, he can buy the bicycle that he wanted and go to work at the company that was too far away before.

4) Berkley buys bicycle for $24. AM = 48%

The salary being offered by the time he bicycles over will only be 48% of what it was, but since prices are also 48% of before, that’s perfectly okay. He owes nothing, and since neither Tanya nor Jeff are employed by the business, all of the money that he spent goes back to himself.

5) Berkley receives salary of $24. He spends all of it back on purchases. AM = 48%

If he takes all of his money out of savings and starts spending it, the value of the apparent economy will rise to $40 (80% of the original AM). Until someone goes into debt, it can’t grow any higher than that, so we can say that the market has fully corrected for the bubble. In Classic Economics, it should have corrected all of the way down to $0, but there’s no particular reason that it needs to do that. Ultimately, we left Berkley — who made wise economic decisions — in a pretty position compared to Tanya, who now has nothing. And we did so without stalling the economy.

On the other hand, we let Jeff off easy. He doesn’t have any outstanding debts, so he’s feeling fine to loan again. Of course, he had expected to be able to profit by $20 from Tanya, so in a sense he did lose out. But more importantly, he’s probably not going to loan to anyone trading in comics any more, and really that’s what we want. Ultimately, bubbles will always form and there’s no way to know where they’re going to happen. Plenty of very smart and respected economists thought everything was going fine right up to the moment that the housing crisis broke. You’re better off to fail around it gracefully than to live and breath by “Punish the evildoers!” Figuring out how the bubble happened and making sure it doesn’t happen again is where your attention needs to go. If someone was actually acting nefariously, criminal prosecution is the answer, not trying to milk a stone.

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