Economics

Introduction to proprietary cities

The Freeman was kind enough to publish a short introduction to the intellectual history of proprietary cities, by yours truly. Here’s an excerpt.

There has been a lot of discussion about what Tyler Cowen calls shareholder states. A shareholder state is a territorial governance structure where the decision-makers have a monetary incentive for performance: Decision-makers would be rewarded for decisions leading to long-term growth. This system contrasts with democracy, where decision-makers rarely think past the next election cycle.

But the discussion has been missing an understanding of the intellectual history of proprietary communities, the “purest” type of shareholder state. A proprietary community is a territorial governance structure under a single owner. This structure more closely approximates private property, giving it an advantage over other governance structures. In a proprietary community, there is a single decision-maker with an interest in property values, which are highly correlated with economic development.

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Review of Rationalism in Politics by Michael Oakeshott

This summer I read what is now one of my favorite books, Rationalism in Politics, by Michael Oakeshott.  One of the premier conservative thinkers of the 20th century, his work is criminally underrated.

Rationalism in Politics is a collection of essays.  The best are in the beginning.  He makes arguments similar to Hayek in Law Legislation and Liberty: Rules and Order, attacking rationalism, the belief in the use of reason to re-organize society.  Instead, we should be aware of the limits of our knowledge, and not be too presumptuous in our ability to use reason to re-shape society.

Perhaps the best analogy to understand Oakeshott’s thought is to compare it to the Austrian idea of the market process.  Austrians dislike the economic focus on equilibrium, instead arguing that the market is a process by which knowledge is learned and society is organized.  Oakeshott makes similar points with regards to politics.  Rather than decry the messy reality, he embraces it.  People acting on imperfect and wrong information is inevitable in the political process.  It is only through such interactions does politics come to resemble the order that it does.

I highly recommend Rationalism in Politics to anyone interested in politics or economics.

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An economist considers Burning Man

I spent last week at Burning Man. It was one of the best experiences of my life. However, as much ink has been spilled on the experience of Burning Man, I will direct my attention to where I have a comparative advantage, understanding the social organization of Burning Man.

Burning Man is a city which exists for a week. In 2014 the city had 70,000 inhabitants. Creating a social order of 70,000 people is hard enough. However, what makes Burning Man so interesting is that they not only create a city, but they also operate under social norms that are alien to the outside world.

The two most important norms are that of a gifting economy and removing all trash. Monetary transactions are unacceptable. All matter brought into Burning Man must be brought out. The difficulty in enforcing both norms is that Burning Man is big enough to be anonymous. If I wanted to dump my trash during the night I might be yelled at, but it is easy enough to disappear into the dark with no further social repercussions.

Economists have long distinguished between familiar and anonymous social interactions.  The rules we use when interacting with family and friends are different from the rules we use when interacting with strangers.  This is because social pressure is sufficient to ensure cooperation among individuals who have long term repeated interaction. However, one shot interaction with strangers requires different rules to ensure cooperation. These rules range from reputation used by Ebay and Uber to formal contracts used in the business world.

What make Burning Man so impressive is that they have been able to sustain rules that primarily exist in small groups in a city of 70,000 people. Burning Man proves social pressure is scalable far beyond what is normally assumed. Further, such social pressure works even though each year 40% of Burners are new residents. These new residents, by and large, successfully are integrated into the wider social order.

This is where the tension between new and old Burners come in. For almost every event, there are people who complain that it has changed for the worse as time progressed. The new attendees don’t understand the culture, and have morphed the event into something unrecognizable. The dynamic exists in Burning Man too, probably to a greater extent than other events. However, while I tired of hearing people complain about the good old days, it is clear that such conversation fulfills an important social function. It pressures new attendees, such as myself, to learn and conform to the norms that have made Burning Man what it is.

(Image credit Neil Girling)

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Families and time preferences: Should a libertarian society be childfree and polyamorous?

Usually when libertarians talk about marriage, it’s about how the government shouldn’t be involved. When we talk about children, we debate whether or not we can sell them. Rarely do we ever talk about the role of the family in a free society. The US is experiencing a huge decline in the nuclear family, and with it, some very clear economic costs. Fewer people are getting married and the ones who do are waiting longer to take the leap. The average number of children per family is down to .9 from 1.3 in 1970, causing some people to refer to our current period as the “baby bust.” In the face of these statistics and the popularity of social experimentation among young libertarians, it is essential to take another look at the role of the nuclear family in relation to both the well-being of society and the individual.

At first glance, it’s easy to look at these statistics and sing the praises of human progress and individualism. In his article, Capitalism and the Family, Steve Horwitz argues it was capitalism that pulled women out of the household and into the workforce, while simultaneously reducing the demand for child labor. In other words, the birth rate declined and women were able to focus on building their careers before getting married.

While I admire independent women (and men, for that matter) and respect a couple’s personal decision to have fewer or no children, I think my generation is going to experience a huge amount of non-buyer’s remorse for choosing the #singlelyfe or the increasingly popular DINK life. To be clear, I think that less child labor and more working women is likely a good thing; I just think that the pendulum may have swung too far to the other side in an attempt to rebel against the “shackles” of traditionalism.

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There is no such thing as capitalism

Shot:

Chaser:

Before it is an ideological option, capitalism is a being, with an individual history (and fate). It is not necessary to like it — but it is an it.

Nick Land, Outside In

What is Capitalism? Where do we even begin to define it? When we find Adam Smith describing Capital (as ‘stock’) it already exists. Or does it? Capitalism is believed to be simply the system “in which trade, industry, and the means of production are controlled by private owners with the goal of making profits.” from this we develop a contrary theory ‘socialism‘ – in which they are controlled by public ownership. However, at no point in time does this ideal situation arise; in Smith’s discussion in Wealth of Nations, he documents the effect of tariff changes on wheat prices. That is to say, he documents what is ostensibly a public control on trade. Never do we have a system in which all three of these come completely into the hands of private owners – but who are private owners, anyway? Is a man who serves as an alderman for a time and then goes back to his business a ‘private owner’? Is a King a private owner, or a public owner? Are men like Dick Cheney, who switch between high office politics and high corporate governance private owners? Are they actually public owners?

We can, for some situations, attempt to make a clear delineation. A tariff is a public control over trade, provided it is the government – by which we mean the sovereign and its delegates – that determines the tariff and sees that it is enforced. If the sovereign is a king, we still regard it as a public control in this system; as the king embodies the people or state. But this embodiment, even with democratic sovereigns, is problematic. Granted, in theory it makes sense, but in practice we find regulations pushed by private actors through government to benefit them. Trust busting is notoriously taken on behalf of a monopoly’s potential or real competitors. This is not new – even before there were official incorporated entities like we have, there were private actors using public office and law to benefit themselves. There doesn’t seem to be a non-technical distinction between private and public; or it may be that private and public are not, as we might have assumed, contradictory at all.

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The first conscious machines will probably be on Wall Street

We must consider the possibility that intelligence, creativity, and even consciousness are purely functions of the material world, with human beings as a peculiar kind of computer. In a world operating under this assumption, machines can theoretically have directed cognition, decision-making and consciousness. Even today we see supercomputers owned by financial institutions making trading decisions on behalf of the companies that own them. These are specialized machines that do something that produces similar results to cognition, and the fact that they are specialized thinking machines might lead one to believe that this precludes them from being conscious. I think the opposite is true; human beings are not generalized computing organisms. The machines in question, just like humans, are not general purpose beings, but highly selective imitation devices with an innate dedicated language system.

The financial industry is always on the bleeding edge of technological application. Always. Beyond ticker tape, the telecommunications revolution and mere computer algorithms, today’s Wall Street is the first and perhaps only industry putting artificial intelligence toward actual productive ends. Machine trading, which today mostly falls under high-frequency trading, (HFT) accounts for 73% of US equity trading volume, an increase from 25% of equity trading volume only five years prior. HFT machines make dozens or even hundreds of trades within a second, which far outstrips the ability of a human or any group of humans to make such a decision. The Sharpe ratio, which is used in the financial world to indicate reward against risk, is much higher with HFT than with traditional strategies. Vast profits can be made by these trades being made before others, whether it is a few milliseconds before competing traders, or executing trades before others even realize it. The supercomputers executing these strategies look for various signals, such as volume, volatility, changes in global interest rates and tiny economic fluctuations. But beyond quantitative data, news articles, tweet and other qualitative information accessed through the internet is taken into the calculations by use of natural language processing system that convert mined text into meaning for the machine. A recent example of this artificially intelligent news analysis happened when Associated Press had its twitter account hacked, making a tweet on April 23, 2013, falsely asserting that there was an explosion at the White House. The S&P Index lost $136 billion in a matter of four minutes, though it was recovered just as quickly. Wallace Turbeville notes:

Most trading of securities and derivatives is accomplished using supercomputers wired directly into exchanges and other venues. They operate at trading speeds well below milliseconds so no human is involved. The trades are dictated by artificial intelligence software… pattern recognition software that infers motivations and other characteristics of other traders in the markets to pick which ones to exploit. Another element of the system is software that reads data, including Twitter traffic, for key word combinations so that the supercomputers can fly into action within, let’s say, one ten thousandth of a second of the appearance of the words. I am going to go out on a limb, here – I suspect that a tweet that comes from a “verified” Twitter account and includes “Obama”, “White House”, and “bombs” might qualify as a sell-triggering word combination.

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