Economics

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Market panic attack, Greek edition

Never have I seen Wall Street and the stock markets this scared in my life, in anyone’s lifetime. You don’t see it in the numbers or trades, but in the periphery, the things they talk about. They’ve realized that people are starting to notice a detachment between how the markets work and how reality works. You see the paranoia in Greece and Spain. Something’s coming for them, not in the way they wanted to.

Karl Polanyi, that venerable economist, once referred to the economy as merely another social institution. Social institutions last only as long as the people believe in them. What we have seen in the past couple is an indication that people are slowly starting to the realize that the market economy, by default, does not benefit them but benefits from them. When they stop believing in the market, it starts to really panic.

The market economy has become the golden idol of the mainstream left and right since the hammer and sickle fell from the Kremlin, and loyalty to its whims is the truest symbol of elitism there is. There’s a reason the term “caviar socialist” exists, after all. But when the market, in its Molochian chaos, decides to step on a nation, the situation tends to not end very well for it.

Greece will be the first example of this. Today, the general election triggered by the Hellenic Parliament’s refusal to elect Wall Street/World Bank fat cat Stavros Dimas into the sinecure position of President will bring about a massive change. For the first time, a leftist party not directed by a single Marxist idea but rather broad range of thinking will enter government. The Coalition of the Radical Left, known by its Greek shorthand SYRIZA, will win the election. It’s only uncertain just how much.

The handwringing I noticed in the weeks leading up to this election reflects the paranoia of the markets. The Independent, that piece of toilet paper that happily wipes the ass of the market after it shits, called SYRIZA, a legitimate political party that has been in existence for more than two decades and has no militant wing to speak of, “rebels,” and its leader Alexis Tsipras a communist Harry Potter. Some call that “cheeky British humor.” I call that “pissing in your trousers.”

Bloomberg, run by a man who practically played a lapdog to Goldman Sachs and J.P. Morgan while he was Mayor of New York during Occupy, wasn’t that much better. It has flustered at the thought of SYRIZA winning the election, but at least acknowledged it happening. But it tried to soothe old Dimon and his gang of losers first by saying that former political scion George Papandreou’s new party To Kinima would prevent the markets from being troubled. Once it realized that Papandreou was merely leeching off voters of the sclerotic Panhellenic Socialist Movement/PASOK, it, along with the Financial Times, fawned over Stavros Theodorakis’ To Potami as being a “kingmaker” that will tame SYRIZA’s supposed ambitions. Now they’re saying that Tsipras might find it easier to have a coalition partner, simply because he can backpedal on his rhetoric. As if he has to do that. It’s laughable, really.

What the markets fail to realize is that a lot of this is their doing. Greece is in a mess because the markets begged for them to act like Americans upon joining the Euro, along with taking a sour bet by running a Summer Olympics that will take as much time to pay off as the Vietnam War. Then, when it was clear that this was a terrible idea, they expected the country to turn arch-conservative with its finances.

These efforts at market excess were curried by the elites, led by PASOK and the conservative New Democracy. It is elite by every standard: Papandreou is a member of a dynasty that dates back to the first Prime Minister after liberation from the Germans, and whose father was the first socialist PM in Greece after the end of the junta in the 60s and 70s. His family had emigrated to America before he was born, only to immigrate back when it seemed like a good idea. He was roommates at Amherst with his eventual rival and current Prime Minister Antonis Samaras. Both went on to even more elite schools after that: Papandreou to the London School of Economics because they tend to shun foreigners at Oxbridge, Samaras to Harvard. How posh can you get?

So it’s obvious that the power structure, despite looking like there’s some political spectrum, was built entirely on keeping the markets happy. While the Greeks enjoyed somewhat decent economic growth bolstered partly by the Olympic Games, ND cooked the books and PASOK allowed it to happen, creating an illusion of glory. The establishment had it under control, with the only release valves being the Communists under Joseph Stalin and the Popular Orthodox Rally.

Then the banks of Wall Street overcooked their books and screwed everyone over.

When Papandreou came to power in 2009, his lieutenant, the somewhat less posh Evangelios Venezelos, discovered the cooked books. The PM announced the problem and tried to get it under control, but this being the Great Recession, the odds of that happening were similar to finding water in California these days. One thing led to another, and the next thing you know, the Greeks became the storied boogeymen that were out to destroy the somehow already haggard European Union, setting off a chain of bailouts on the continental periphery. It was only by imposing severe and draconian austerity measures that supposedly were in the best interests of the Greeks that the continent was saved. The country was expected to become Germany, and suffer while they do so. The markets were relieved.

This latter narrative is what the markets, and the EU, would like to believe. In the country itself, however, we see a different narrative: If you aren’t in the elite, chances are you’re unemployed, or you know a friend who was. Maybe you know some friends who are homeless and are transient, especially if you’re young. If you have a job, you took a massive pay cut back in 2011 if you were lucky enough not to get laid off. You feel worthless. You don’t need to go far to know that, outside of your country, your nationality is now an epithet for sloth and dubiousness.

The markets, symbolized by the Euro, had betrayed you. Economists would say you deserve it, citing the overwrought Summer Olympics and that you have a hard time paying taxes. But those excuses can only last so long. While you don’t hate Europe, you don’t like the fact that it’s stepping on your head for something you don’t entirely control.

More importantly, the establishment betrayed you. PASOK first, then ND. Sure, Samaras put up a nice facade at first, attacking the bailouts and throwing out one of his most significant rivals in the party for daring to support them. But when push came to shove, he turned heel the moment it became clear that his continued control of the country would count on it. So both parties are still shamelessly praying to the golden idol.

The feeling of anti-establishment thinking has never been stronger in Greece. And there are few people who come close to leading that sentiment than Alexis Tsipras. Born mere days after the fascist junta fell, he’s as anti-elite as they come: Local to Athens, his parents were from the countryside. While active in politics, he studied engineering at a great local university and worked in construction for a while.

Tsipras has come to represent a unique strain of leftist thinking: One built on the diversity of opinion rather than a singular agenda. Unlike the American left, overtaken by social radicals intent on squabbling over who is the biggest victim in the room, he’s kept everyone on the same page. After all, everyone in the room is equally in the room is a victim, for they are Greeks beaten down by the bean-counters in Brussels and New York as well as the elites in PASOK and ND.

He cuts himself as young (only 40), charming and cunning. But more importantly, he’s actually competent as a leader: With such strains of thinking as classical Marxism, Trotskyism, feminism, ecosocialism, eurocommunism, even super minor strains of leftist thought like Luxembergism, you would think that SYRIZA wouldn’t last a few weeks as a small group, let alone 10 years as an electoral coalition and political entity. But that is a testament to Tsipras’ leadership.

He’s also a fighter, and that’s what makes him dangerous. Rather simply making a case on being a leftist party, he turned this election and the previous two into a referendum on the euro that has been stepping on them. Just by being that alone and unique in how they handle it was SYRIZA able to take over PASOK as not only the party of the left but also a legitimate alternative to what had been standard European politics.

It’s important to understand this election is not a referendum on the European Union. Outside of the neo-fascist Golden Dawn, the nationalist Independent Greeks and one or two factions of SYRIZA, everyone in Greece wants to stay in Europe. Their problem has never really been with Europe as a whole. The problem is the market economy that seems intent on ensuring the only thing Greece is allowed to do is suffer. It’s just that SYRIZA is more willing to let an exit from the euro be an option than anyone else in the room, and that’s what scares the markets. It means the Greeks don’t believe in them anymore.

Which brings me to To Potami, or The River. The current estimates are saying that SYRIZA will be a few seats short of an absolute majority (though it’s possible that they could still get it, especially if the Independent Greeks don’t get enough votes), meaning they will need to partner with another party to run the government. Golden Dawn is out of the question, the Independent Greeks are bit too rightist for their own good (though they could still join on a patriotic front), and the Communists are still run by Joseph Stalin.

Which leaves To Potami, run by talk show host Theodorakis. People are making them out to be some form of “taming” force because SYRIZA will need the votes, and To Potami would rather stay on the euro. The problem is that they are not taking into account a couple key points:

  1. Theodorakis and Tsipras are closer in belief on the bailout documents that have been harming Greece than most believe,
  2. Theodorakis has no political experience whatsoever.

The last two TV personalities that started a political party and entered a democratic parliament were Beppe Grillo in Italy and Yair Lapid in Israel. The former has let his 5-Star Movement self-immolate due to Occupy-level infighting, while the latter was eating out of Bibi Netanyahu’s hand until he realized the food was shit and called his Yesh Atid out of the Knesset. Both are polling poorly now. The odds are likely that Tsipras could easily outplay Theodorakis. If the former can control a bunch of Trotskyists and feminists with giant egos, what’s one talk show host?

ND will not win reelection this time around, that much is certain despite bailed out Goldman Sachs’ claims to the contrary. They betrayed the populace, and their partners will be either non-existent (the Democratic Left) or close to it (PASOK). They were very close to defeat the last time, and were likely only saved because their friends in Brussels still had some sway over the populace. Not anymore.

So what happens after the election? Things get fun. Over the course of the election campaign, outsiders from Europe, including World Bank snout and EU prez Jean-Claude Juncker, had made the ever ominous elitist threat that they “hope” the Greeks will make the “right decision.” ECB president Mario Draghi has threatened to prevent access to the way-too-late quantitative easing program if SYRIZA dares to try to move the foot off the country’s head.

However, the last time the Greeks were asked to be treated like this, their response was a rather simple one: “όχι!”

No wonder you can smell the markets’ fear.

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Review of The End of Power

The End of Power by Moises Naim is the most interesting book I have read in a while.  It advances the simple thesis that power, defined as “the ability to direct or prevent the current or future actions of other groups or individuals”, is declining.  The way I prefer to put it, the choice set of our leaders has become more constrained.

Naim argues that power, not just political power, but corporate and military power is declining.  A thought experiment can be as follows.  Compare Barack Obama to a 13th century king.  While Obama undoubtedly commands more resources, his choice set is fairly limited.  There is constant pressure applied by various interest groups which constrain him.  A 13th century king, on the other hand, has a wider choice set.  He likely has a few advisors, but is largely free to act in any way he so chooses.

Naims thesis can be interpreted as a generalized form of the trend toward political decentralization that some have documented.  In fact, Naim discusses such political decentralization, both arguing for and admitting the inevitable political innovation.  He puts his thesis in grandiose terms, comparing the coming innovation to the Greek city state democracies and the French Revolution.

What Naim didn’t include was an explanation of why power is ending or a judgement of whether such an end is a good thing.  I’ll try to provide a brief account of both.  First, the world can be imagined as a series of networks representing the relationships between people.  The further intertwined the networks are, the less power individuals have.  They are constrained to follow the rules put in place by those in their networks.  In other words, the decline of power is inevitable as the world becomes more interconnected.  This is a good thing because making actions predictable is a necessary, though not sufficient, step for long term planning and economic development.

Naims book is also interesting because he represents the power elite.  He was both a former executive director of the World Bank as well as editor in chief of Foreign Policy.  The book has a blurb by Bill Clinton on the front.  Other reviews include The Wall Street Journal, The Washington Post, and George Soros.

I highly recommend this book to anyone interested in changing forms of governance and politics more generally.

Private cities and public places

Have you heard the old libertarian joke?  It goes like this.  Should heroin sales to minors be legal on public sidewalks?  The libertarian responds, why are there public sidewalks?  The libertarian answer captures a certain truth.  Conflict arises when spheres of action, the set of actions deemed by others as reasonable, are ill defined.  Private property denotes clear spheres of action, thereby minimizing conflict.  By resorting to private property instead of public property, questions of appropriateness of certain courses of action are taken out of the public sphere.  In essence, the joke says the sales of heroin (I will ignore the aspect of children) should be a private matter.

However, while I believe the public sphere is currently too big, I do not believe the optimal size of the public sphere is zero.  The following essay is my attempt to square my advocacy for private or proprietary cities, cities where a single entity owns the land on which the city is constructed and leases it to renters, with my belief in a public sphere.

First, one can distinguish between what might be termed an economic (or crude) defense of proprietary cities vs a holistic (or liberal) defense.  An economic defense would solely consider whether people vote with their feet.  If people choose to move to the proprietary city, it is better than their alternative options.  A holistic defense considers more than just people voting with their feet.  It questions whether proprietary cities can offer adequate protections for civil rights.  Will there be a healthy civil society, freedom of speech, freedom of association, due process for those accused of crimes.  In short, will a proprietary city be an extension of the modern liberal order, or a subversion of it.

As an economist I am very sympathetic to the economic arguments.  In fact, all other things being equal, more crude proprietary cities are better than fewer.  However, all other things are not equal.  Crude and liberal proprietary cities are, to some extent, substitutes.  This is especially true for the first proprietary cities, whose success (or failure) will likely determine the future evolution of proprietary cities.

Dubai, though not a proprietary city itself, offers a glimpse of what crude proprietary cities could become.  A society segmented by class, South East Asians providing the manual labor, admittedly at higher wages than they could get at home, but without many basic freedoms, and Europeans.  There is little mixture between the classes, and no hope for the South East Asians to enter the upper class.

On a more theoretical level, we can consider the limits of proprietary cities.  Private spheres allow for action that is unacceptable in public spheres.  If you visit my house, I am perfectly within my rights to restrict your actions.  I may ask you not to voice certain opinions or to enter without my permission.

This line, however, becomes blurry as private spaces enter commercial arrangements.  The argument for banning discrimination based on race is that business is fundamentally different from residence.  The sphere of action businesses can take is more restricted than the private sphere one can take in one’s home.

As nominally private enterprises scale, the distinctions further blur.  In a company town, should the company be legally allowed to restrict speech critical of the company?  Aside from legality, morally, should it?

When considering proprietary cities, we can compare Dubai and Hong Kong.  Do we want a city where manual laborers are second class citizens, unable to participate in the public sphere, or a city where the poor have comparable opportunities to the wealthy?  Hong Kong is obviously not an ideal liberal city, but it is far ahead of Dubai.

I have argued that proprietary cities be given institutional autonomy as well.  With such autonomy it seems reasonable for the host country to ask for certain procedural safeguards for civil liberties.  A bill of rights, if you will, protecting the residents rights to speech, religion, association, protest, fair trials, and more.

While I strongly support political decentralization, there are differing visions on how a decentralized world would appear.  It could be fragmented into different groups, with little trust and interaction between the groups, with no group representing liberal ideals.  On the other hand, decentralization could allow us to escape modern tyranny, experiment with better governance, and kept intact basic values which continue to hold us together.  With regard to proprietary cities, the latter must be fought for.

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We should send the Swiss to space

I started a new blog with a couple of my fellow George Mason PhD students and friends. Well, they started it, I tagged along. You know it’s going to be awesome because of the name, Calculus of Dissent. The blog will be a bit more technical and academic oriented than here, focusing on our research. Given this is my blogging home and it fits my eclectic tastes rather well, most of my blogging will remain here.

My first post was on who we should send to colonize space. Hint, its the Swiss.

Consider the following thought experiment. Earth is dying, unable to further sustain human life. Mankind has thrown their last resources into creating a space ship that can reach a habitable planet. However, the space ship can only carry 10,000 people and little is known about the planet beyond gravity and oxygen levels. With the literal fate of humanity lying before us, who do we send and why?

My post was picked up by Nick Land who expressed shock and bemusement at my tone, though I suspect he agreed with my reasoning. I took that tone because as an economist playing the outside observer helps alleviate bias, as well as my perhaps naive belief that most people are reasonable.

I do not believe anything I wrote was terribly controversial, though that is perhaps more symptomatic of my bubble than anything else. Land seemed most surprised by my nonchalant tone arguing for sending a single culture to colonize space. What I said is not particularly controversial among economists. There is a large literature on the (negative) relationship between ethnic homogeneity and various outcomes.

The economic theory is fairly uncontroversial. People tend to trust their in groups more than out groups. High ethnic fractionalization is linked to low trust, among other things. This become especially problematic with modern states as no ethnic group wants to trust the other with state power. Mark Weiner gives a persuasive account of how an important aspect of the creation of the modern nation state was wiping out tribal affiliations.

The common sense theory is similarly uncontroversial. We would not want to send a stone age tribe which murders strangers to colonize a new world. Similarly, we can rank, though there would admittedly be some disagreement, which cultural groups have traits that are most likely to lead to success colonizing a new planet.

Basically, this is a long winded way of saying you should check out my new blog. Here it is again in case you’re lazy.

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Should Google run a city?

The Freeman was nice enough to publish my piece asking whether Google should run a city.

Would you want to live in a private city?

No? What if Google were running the city? Would that change your mind? Google building and running cities is less crazy than you think.

Google has expressed interest in constructing cities, and Larry Page wants to create autonomous zones that can experiment with social rules. Combined, these two ideas have the potential to transform the world. Institutional change can jumpstart economic growth while competent, efficient administration can ensure those gains are not lost to corruption.

I think Silicon Valley could become an extremely powerful force for local autonomy. They have the money and interest. That being said, I believe they have much to learn on the political and legal side. However, they are hardly alone in that respect. Few understand the importance of legal institutions to economic development.

Why state capacity matters

Bryan Caplan is skeptical of the state capacity literature. I believe that state capacity is important. Unfortunately, everyone I have read on the subject gives an unconvincing explanation for its importance.

Timothy Besley and Torsten Persson, the economists who write most frequently on the subject, argue state capacity is important for two reasons. First, the ability to tax leads to states providing public goods. Second, the ability for the state to provide a legal system encourages investment.

The importance of public goods seems overstated. Robert Fogel found that railroads, many of which were built privately, only increased GDP by 2.7% in 1890. Given the relative importance of railroads compared to other public goods, it seems unlikely the ability to pay for public goods is the important aspect of state capacity.

Similarly, the provision of legal services by the state is unconvincing. Daron Acemoglu and Simon Johnson unbundle institutions, distinguishing between private property and contracting institutions. Private property is protection from the state while contracting is protection from private predation. They find protection from the state is far more important for economic development than protection from private predation. People don’t need the state to protect property rights, only to get out of the way.

So, in spite of this, why do I believe in the importance of state capacity. As an aside, I claim no originality, this is my reading of Douglass North and I am confused why no one else seems to have picked up on it. State capacity is important for controlling violence. A weak state is unable to effectively control violence. As such, it is beholden to numerous groups. These groups support the state because the state provides them with rents. A strong state is far less beholden to such groups. As such, a strong state is able to allow for economic freedom. A weak state is threatened by the wealth economic freedom creates.

Further considerations must be made. State capacity is not a good thing in and of itself. It must co-evolve with constraints on government. State capacity without such constraints results in Nazi Germany. However, too weak state capacity results in the modern Congo.

Lastly, to answer a question put by Peter Boettke on Facebook. Why do I believe state capacity is an important part of the explanation of the success of Western Europe? My reading of the history of the late middle ages is that the primary advantage of the modern nation state was its ability to crush local monopolies. England, as John Nye points out, had higher tariffs than France for much of the 20th century. The advantage of England was its internal free trade. State capacity ensured goods could move freely in England, when prior they would be taxed at every semi-autonomous jurisdiction.