Monthly Archives: December 2014

How economies fail

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This is such an unusual post, which I ran into at SmallDeadAnimals, but is more than just about engineering, but reminded me all the way through about the classical theory of the cycle. Its title is, How Complex Systems Fail, and is a lesson for engineers, but economists would do well to pay attention themselves. I will highlight some of the 18 listed points. But do look at it all. And if you are an economist, replace the words “catastrophe” and “accident” with the words “recession” and “downturn” and the point should spring from the page.

11) Actions at the sharp end resolve all ambiguity.
Organizations are ambiguous, often intentionally, about the relationship between production targets, efficient use of resources, economy and costs of operations, and acceptable risks of low and high consequence accidents. All ambiguity is resolved by actions of practitioners at the sharp end of the system. After an accident, practitioner actions may be regarded as ‘errors’ or ‘violations’ but these evaluations are heavily biased by hindsight and ignore the other driving forces, especially production pressure. . . .

3) Catastrophe requires multiple failures – single point failures are not enough.
The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents. Most initial failure trajectories are blocked by designed system safety components. Trajectories that reach the operational level are mostly blocked, usually by practitioners. . . .

6) Catastrophe is always just around the corner.
Complex systems possess potential for catastrophic failure. Human practitioners are nearly always in close physical and temporal proximity to these potential failures – disaster can occur at any time and in nearly any place. The potential for catastrophic outcome is a hallmark of complex systems. It is impossible to eliminate the potential for such catastrophic failure; the potential for such failure is always present by the system’s own nature. . . .

8) Hindsight biases post-accident assessments of human performance.
Knowledge of the outcome makes it seem that events leading to the outcome should have appeared more salient to practitioners at the time than was actually the case. This means that ex post facto accident analysis of human performance is inaccurate. The outcome knowledge poisons the ability of after-accident observers to recreate the view of practitioners before the accident of those same factors. It seems that practitioners “should have known” that the factors would “inevitably” lead to an accident. Hindsight bias remains the primary obstacle to accident investigation, especially when expert human performance is involved.

Mr. Joseph Mallord William Turner RA

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turner the slave ship

This is not a movie for everyone, which I only know because the people I went with thought it was about an hour too long. I, on the other hand, could have gone on another hour or so, and that was after two and a half hours already. If you are looking for car chases, or romantic liaisons between young persons with movie star looks, this is not for you. But if you are interested in the life story of a great artist that begins with more than half his life already past, that is, when he is an old man, and full of the tics that come with having lived a life, then this is a film you should see. It is 98% for critics and 90% for audiences at Rotten Tomatoes; the more plebeian IMDb gives it 7.0.

The film is Mr. Turner and is about the great early nineteenth century artist William Turner. On the day I was told I had passed my PhD I went out and bought a copy of “The ‘Fighting Temeraire’ tugged to her Last berth to be broken up”, which I had long admired, but needed a serious reason to spend the money. It hung in my office for years, and I have never been to London without going to the National Gallery to see it.

But about Turner, I knew very little, astonishingly little. I know his paintings, a touch of his philosophy and hardly a thing about his life. If nothing else, you end up knowing more than you otherwise would have, and all of it is of interest. And to the extent that Wikipedia is to be counted on, the film follows his life more or less in the way it was. The scenes at the RA, or with his fellow artist Benjamin Haydon, are haunting.

There are two parts to the film that particularly appealed to me. First, it is the cinematography. Serious effort was made to recreate the world that Turner lived in as seen through his eyes. You see the seascapes he had seen, and if you know his paintings, you see a recreation of what he saw himself. “The Fighting Temeraire” makes a brilliant and unexpected entrance. Obviously to others as well, this is the Turner painting that matters.

But what truly got to me was its philosophy, which was Turner’s philosophical thinking, at least so far as I understand it. “The Fighting Temeraire” is not some conservative lament on the disappearance of the old, but a depiction of the coming of the new. It is the tugboat that is, in its own way, the star, as a representation of the different world emerging out of the past. I don’t think this is a spoiler, but the scene near the very end where Turner sees the first of the Pre-Raphaelite paintings being hung at the RA, and which brings an enigmatic smile to his face which is not explained, is part of that approach to his life that is brought out. I think here, too, he may have also admired the new world of artistic expression that was about to descend. There are many more touches like it in the film, but I will say no more, other than to suggest you go see it for yourself.

Kaiser Bill and history

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When my son did history in his final year of high school, his major school project for the year was a paper on the origins of World War I, which he attributed to the German Kaiser. His teacher, reminding me again of why no one should stake their school career on subjects that are affected by the personal opinions of the marker, didn’t agree and gave him a relatively poor mark. Since university entrances in years of grade inflation are a precarious issue, it was always something that has remained a live issue with me, since I thought my son was actually right, and certainly right enough to have done better in a high school paper. Which brings me to this article by Joh Derbyshire on The Legacy of the Mad Kaiser.

According to Derbyshire, the most villainous person of the twentieth century was Lenin, a most worthy choice. But who then was second?

As a candidate for runner-up in the 20th-century villain pageant, I would nominate Kaiser Wilhelm II, the monarch of Germany from 1888 to 1918. This comes from reading John Röhl’s concise biography of the Kaiser, published this summer.

There is not much in the way of evidence in the article, so I may have to get the book, but there is this:

There is ample documentation in Röhl’s book of the Kaiser’s eagerness for war, for victory over France and Russia. He was sure that Britain, the third member of the Triple Entente, would not intervene. His ambassadors in London, and British government ministers, and his royal British relatives, kept trying to set him straight; but what was their knowledge of Britain compared with his?

And, of course, it was his government that sent Lenin to Moscow in a sealed train in 1917. We are all overrun by history. Sweet and seemly it is to live in uninteresting times.

At least one of us has no idea how an economy works, and I don’t think it’s me

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I don’t normally do this, but I was asked about this article at The Conversation, Why the federal budget is not like a household budget, and out of pure exasperation I sent off this reply. My title is, “An Endless Supply of Keynesian Nonsense” of which there is no shortage. I shouldn’t write things at two in the morning since the exasperation does seem to overwhelm me, but here it is for what it’s worth.

The state of economic theory today truly is a scandal. The effect of Keynesian theory on the way economists think is so disturbing that the reality is there is no likelihood anytime soon that things will begin to come good. Let me take a case in point, which comes from the article by Warwick Smith which came with the title, “Why the federal budget is not like a household budget”, which I suppose is true, but it all depends on what conclusion you therefore draw.

He also says that, “the whole deficit/surplus thing has been greatly exaggerated”, which again I am willing to accept, depending on how he follows up from this. He goes on to add that “the focus on deficits and surpluses distracts us from what’s really important in the macro economy.” OK. So just what is it that is the really important thing? And this is his great insight:

“Inflation is the limiting factor for government expenditure, not taxes or borrowing”.

That is, governments can keep spending right up until we reach the point where prices begin to rise too much. There is therefore plenty of room for government stimulus that is not limited to the amount of spending that is covered by one’s revenues. Here are his words:

“A government that can create money doesn’t need your money from taxation or from borrowing in order to spend. There is no limit to how much money a sovereign government can spend, but if government spending plus private spending exceeds the productive capacity of the economy then you get inflation.”

Until the government reaches the point where the economy is at its capacity level, it can, it seems, keep spending without taxing or borrowing, and it is all to the good. The economy will keep growing and inflation will remain under control. Here is his conclusion, in his own words so you can see for yourself I am not making it up:

“Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.” (My bolding)

How is it possible to believe anything like this and call yourself an economist?

So here is the answer to why this is nonsense, which I hope will also help you understand why the American economy is falling to bits, and if we are not very very careful, ours will do exactly the same.

An economy only grows by producing goods and services whose value is greater than the value of the inputs plus labour-time used up during production. There was a time every economist understood this. If you have some timber, a hammer, a few nails and some time, you can do many things with them, but only some of the things you might do will end up with the value of what was produced greater than the value of the timber, nails and time used up.

The belief that a government has any idea where value adding activities can be found is one of the dopeyist ideas ever concocted. Governments can certainly spend the money they create, and some of what they do is value adding, but hardly everything. To believe that what governments produce automatically has greater value than the resources they use up is so nonsensical it is hard to believe any economist would ever peddle such a notion.

Take our own stimulus. The two major projects were pink batts and school halls. If you ask me if we are better off with a larger number of insulated houses and a better school infrastucture, I am happy to say that, all things being equal, we are. But if you ask me whether we have had a return of more than $43 billion on our outlay – the approximate price tag of this spending – then the answer is that we have not had anything like that amount of benefit.

You may delude yourself from now till the end of time that these benefits were provided “for nothing”, but have you not seen our own reality. The dollar is falling, our standard of living is being dragged down and unemployment is on the rise.

Ah, but where is that inflation? For most, real incomes are not rising, so however small the official inflation rate may be, it is plenty high enough to erode our ability to demand. Have you tried to buy a house lately to take one example?

But the real damage comes through the other mechanism in which inflation affects an economy, which is the deterioration in our capital stock. Our economy is just not being maintained, never mind allowed to grow, because the government is diverting our resources into its own projects, instead of allowing businesses to replace their capital as it erodes during production. The real side of the economy is slowly but ever so surely falling to bits.

If you don’t understand it, well you are in good company since people with economics degrees apparently don’t seem to understand it either. But even if you don’t understand the process, you can certainly feel the effects.

On the first Keynesian texts but when will there be the last?

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In the discussion thread on introductory texts on economics from the 1890s to the 1950s, in which I discussed Clay’s Economics, the issue has swung round to what is a story frequently told on the left, how political pressure from the right killed off the supposedly great first Keynesian text, Loris Tarshis’s The Elements of Economics. To which I contributed the following:

This note is in regard to Lorie Tarshis’s first “Keynesian” text in the US, his Elements of Economics, which supposedly was killed off by an attack from William F. Buckley, thereby clearing the way for Samuelson to take the field with his own more cautiously written Keynesian tract. This story about Buckley and Tashis is an old established myth. In fact, Buckley went after Samuelson just as much as Tarshis. This is the start of Buckley’s assessment, which in some eyes might even look quite prescient:

“Marx himself, in the course of his lifetime, envisaged two broad lines of action that could be adopted to destroy the bourgeoisie: one was violent revolution; the other, a slow increase of state power, through extended social services, taxation, and regulation, to a point where a smooth transition could be effected from an individualist to a collectivist society. The Communists have come to scorn the latter method, but it is nevertheless evident that the prescience of their most systematic and inspiring philosopher has not been thereby vitiated.

“It is a revolution of the second type, one that advocates a slow but relentless transfer of power from the individual to the state, that has roots in the Department of Economics at Yale, and unquestionably in similar departments in many colleges throughout the country. The documentation that follows should paint a vivid picture.” — William F. Buckley, Jr. God and Man at Yale: The Superstitions of Academic Freedom, Henry Regery, 1951, p. 46-47.

And I might also mention Buckley’s attitude to Keynes, also from the same source, which would have applied to Samuelson quite as much as Tarshis:

“The individualist insists that drastic depressions are the result of credit inflation; (not excessive savings, as the Keynesians would have it) which at all times in history has been caused by direct government action or by government influence. As for aggravated unemployment, the individualist insists that it is exclusively the result of government intervention through inflation, wage rigidities, burdensome taxes, and restrictions on trade and production such as price controls and tariffs. The inflation that comes inevitably with government pump-priming soon catches up with the laborer, wipes away any real increase in his wages, discourages private investment, and sets off a new deflationary spiral which can in turn only be counteracted by more coercive and paternalistic government policies. And so it is that the “long run” is very soon a-coming, and the harmful effects of government intervention are far more durable than those that are sustained by encouraging the unhampered free market to work out its own destiny.”

The true reason, in my view, that Samuelson’s text won out over Tarshis’s is because it is a far better book, much much more accessible. The macroeconomic side, with its C+I+G diagrams and others of a similar kind, is a fantastic improvement in the underlying power of explanation. I have first editions of both Samuelson and Tarshis, and there is no comparison. Even Samuelson’s 1948 version is an order of magnitude better, both to teach and to learn from. There are virtually no diagrams in the macro half of Tarshis’s text (and the diagrams in the micro half are often bizarrely complex), while Samuelson has a number of diagrams (a small number, especially in comparison the text we are now all familiar with), which bring out the underlying message in a way that the hundreds of pages of diagramless text in Tarshis does not.

I might add, but only just for fun, that in my Defending the History of Economic Thought, I discuss the ways in which diagrams have dumbed down economic thought, so that we now move lines in a two-dimensional space, instead of trying to think through the actual economic adjustments that are supposedly going on. But that is just by the way.

And if you have reached this far, Nato asked a very interesting question, for which I am grateful, and for which there is a very interesting answer. The question: “Talking about your contributions, Say’s law and the classics, is the Elgar debate with Rochon still running?”

The answer: We had agree to a third letter each and when I sent off my third letter off, I suggested that perhaps we could even go for a fourth. The reply that came back was that Rochon had decided that he no longer even wished to do the third, so we would stop there without publishing this third letter.

It is clear that he is no longer game to go on, but that was, in my view, all the more reason to hold him to what he had agreed. Keynesian economics is the absolute standard in macroeconomics at the moment. If anyone should have been overwhelmed in this debate – going only by the numbers – it should have been me. My third letter was a clarification of some of the issues already raised, I replied to what had been written previously, as well as going on with a further discussion of the problems with Keynesian theory. That is just what such a debate should be. Each of us gets to respond to the issues the other has raised. By probing for the weak points in each other’s arguments, we bring the various tensions on our own positions to light and, hopefully, learn something at the same time.

I can only say that if Keynesian theory is as indefensible as it appears from the the first two letters defending Keynes, and which I think my third letter would have helped to emphasise to others, then I think there is some kind of moral duty to publish my third letter. This is not some small matter, but involves the entire theoretical and strategic approach to managing our economies. If the Keynesian defence is as feeble as it has been shown it to be – and I would hardly deny that there may be others who could do a better job – then I think my third letter should enter into the public debate, and if there are others who think they can do better, they can come forward to try to explain the Keynesian position more clearly. But to me this is a debate that we need to have.

I will only add at this point that the matter is not yet closed.

Unreality on the left

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Do you suppose they at least notice their own biases themselves?

A study that sought to show that conservatives reach their beliefs only through denying reality achieved that result by describing ideological liberal beliefs as “reality,” surveying people on whether they agreed with them, and then concluding that those who disagree with them are in denial of reality — and lo, people in that group are much more likely to be conservative!

Justice Australian style

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There is something sickening and seriously insane about our system of justice. Just remember, as you read this, that the last line is “Both had been granted bail.” The link also has photos.

THE Martin Place gunman Man Monis was acquitted of threatening to shoot his wife just two years ago as a magistrate threw out her application for an AVO, court files reveal.

Less than a year later Noleen Hayson Pal was dead, stabbed and burned alive allegedly by Monis’ new girlfriend Amirah Droudis at his urging.

A picture of Monis as a strange, controlling man who painted water on the naked body and breasts of some of the women who visited him for “spiritual healing” and raped others whole boasting of being a security guard and having firearms has emerged from court files.

He met Ms Pal when she saw his advertisement in a newspaper as a psychic but their relationship was unconventional.

They did not live together but he spent a night or two at a time with her.

He refused to have his name on the birth certificates of his children but when the couple split up, he told lies to the police and the Department of Community Services about her father sexually molesting the oldest boy so he could get custody.

A terrified Ms Pal had told Downing Centre Local Court in January 2012 how the father of her two children had called one night after they had split up and demanded to meet her at McDonald’s at Green Valley.

She went along because it was next to a police station which made her feel safe.

As her parents waited in the car with her two young sons, Monis told her: “If I don’t see the boys more than I see them now, I will make you pay even if I have to shoot you.”

Her parents backed her up in court, standing up for their only child.

Her father, Ashouk Pal, told the court that since 2009, Monis had not been welcome in his home.

Her mother, Marian Pal, said Noleen had been frightened “because she knows how dangerous (he) is.”

On May 30, 2012, the charges against Monis were dismissed by the magistrate and the AVO was dropped.

On April 21, 2013, Ms Pal was visiting his Werrington unit to pick up their two boys after a custody visit when she was attacked, accelerant poured over her and set on fire.

Droudis, who has since married Monis, is charged with murder and due to appear in court on February 27 next year.

Monis had been charged with being an accessory before and after the fact to murder. It was alleged that he had incited, procured, aided and counselled her and then afterwards, he had “received, harboured, maintained and assisted” her.

Both had been granted bail.

So tell me. Is she still out on bail?

Marriage and monogamy

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A very surprising set of results, I have to say:

But when you look specifically at sex itself, at patterns of actual sexual activity and their link to marital happiness and longevity, direct evidence for a permissiveness premium is extremely hard to find. And for women, almost all the the data points sharply in the opposite direction. Notwithstanding the potential for regrets, women who only had sex with their future spouse are more likely to be in a high quality marriage than women who had a higher number of sexual partners. Divorce rates are higher for women with multiple premarital partners than women who had only one; they’re twice as high for women who have cohabitated serially than women who only cohabitated with their future husband. Independent of marriage, relationship stability is stronger when sex is initiated later, and monogamy and a restricted number of sex partners is strongly associated with female happiness and emotional well-being, period. And these results hold irrespective of education levels, as this piece by Brad Wilcox and Nicholas Wolfinger points out: There’s a stronger correlation between multiple premarital partners and marital instability among less-educated Americans, but well-educated Americans, too, show much stronger marital outcomes when they have fewer premarital partners. (And interestingly, the usual connection between education and stability disappears entirely for people who married their first partner: They’re equally unlikely to divorce no matter whether they attended college or not.)

[From Instapundit]

Samuelson v Tarshis – a battle of the books

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On the discussion on the HET website over introductory texts in economics, there is quite a bit on how the first Keynesian text in the US, Lorie Tarshis’s, The Elements of Economics, was killed off by an attack by William F. Buckley, which cleared the way for Samuelson to take the field in his own more cautiously written Keynesian tract. This story about Buckley and Tashis is an old established myth within the left of the economics community (which means most of it). This is the start of Buckley’s assessment, which has quite a bit to say for it, and is very prescient:

“Marx himself, in the course of his lifetime, envisaged two broad lines of action that could be adopted to destroy the bourgeoisie: one was violent revolution; the other, a slow increase of state power, through extended social services, taxation, and regulation, to a point where a smooth transition could be effected from an individualist to a collectivist society. The Communists have come to scorn the latter method, but it is nevertheless evident that the prescience of their most systematic and inspiring philosopher has not been thereby vitiated.

It is a revolution of the second type, one that advocates a slow but relentless transfer of power from the individual to the state, that has roots in the Department of Economics at Yale, and unquestionably in similar departments in many colleges throughout the country. The documentation that follows should paint a vivid picture.” — William F. Buckley, Jr. God and Man at Yale: The Superstitions of Academic Freedom, Henry Regery, 1951, p. 46-47.

And I might also mention Buckley’s attitude to Keynes, also from the same source:

The individualist insists that drastic depressions are the result of credit inflation; (not excessive savings, as the Keynesians would have it) which at all times in history has been caused by direct government action or by government influence. As for aggravated unemployment, the individualist insists that it is exclusively the result of government intervention through inflation, wage rigidities, burdensome taxes, and restrictions on trade and production such as price controls and tariffs. The inflation that comes inevitably with government pump-priming soon catches up with the laborer, wipes away any real increase in his wages, discourages private investment, and sets off a new deflationary spiral which can in turn only be counteracted by more coercive and paternalistic government policies. And so it is that the “long run” is very soon a-coming, and the harmful effects of government intervention are far more durable than those that are sustained by encouraging the unhampered free market to work out its own destiny.

The true reason that Samuelson won out is because it is a far better book, much more accessible. The macroeconomic side, with its C+I+G diagrams and others of a similar kind is a fantastic improvement in the underlying power of explanation. I have first editions of both Samuelson and Tarshis, and there is no comparison. Even the 1948 version is an order of magnitude better, both to teach and to learn from. There are virtually no diagrams in the macro half of Tarshis’s text while Samuelson has a number which bring out the underlying message in a way that the hundreds of pages of diagramless text in Tarshis does not.

I might add, but only just for fun, that in my Defending the History of Economic Thought (Elgar 2013) I discuss the ways in which diagrams have dumbed down economic thought, so that we now move lines in a two-dimensional space instead of trying to think through the actual economic adjustments that are supposedly going on. But that’s just by the way.

Clay’s Economics

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This was the query at the history of economics website, which I might note, has had quite an interesting response:

I’m working on an analysis of introductory economics textbooks published in the United States between about 1890 and 1950 (the period between Marshall and Samuelson, roughly). I’ve accumulated an ad hoc collection of texts based on the holdings of my library and scattered references in the secondary literature (Elzinga 1992, Walstad et al 1998, and Giraud 2013 in particular), but I was hoping that there might be some more systematic way to generate a universe of texts from which to sample. Does anyone have a recommendation for a good source that discusses principles texts in this period, perhaps with information on relative influence (number of editions, course adoptions, or sales)? Does such a source exist?

This was my own contribution:

In a reply to a recent request for any centenary celebrations coming up in economics in 2016 which was put out by the editors of the History of Economics Review, our HET journal here in Australasia, I wrote:

“2016 is the hundredth anniversary of the publication of what I think of as the best single introductory text on economics published in the twentieth century, Henry Clay’s Economics: an Introduction for the General Reader. I would very happily provide you with a shortish note on this great text – you have to see just its publication history from 1916 to 1942 when the second edition was published to appreciate just how extraordinary it was. Used everywhere, including Oxford and Cambridge, and not just mechanics institutes. Also the best summary of pre-Keynesian theory available, in my view, from any source.”

I realise that the request in this instance is for “introductory economics textbooks published in the United States” and Clay was published by Macmillan in the UK. But looking here at my lovely first edition, the second listing of the publisher’s location reads in a way which does suggest that it would have had a publication history within the US:

“The Macmillan Company
“New York . Boston . Chicago
“Dallas . San Francisco”

And as in indication of its presence in the United States, I also have this: Problems and Exercises to Accompany Clay’s Economics for the General Reader and Ely’s Outlines of Economics, which was published in 1921, whose author was:

“H. Gordon Hayes
“Professor of Economics in Ohio State University”

I might point out that in this set of questions – which you might for fun test your graduate students on for their understanding of economics – it is Clay who is mentioned before Ely.

I will finally mention that in The Great Gatsby, a text as American as it gets, we have this passage in reference to Gatsby himself as he stands waiting in the library for Daisy to arrive:

“[He] looked with vacant eyes through a copy of Clay’s Economics.”

If even Gatsby was reading Clay, who wasn’t?

What I didn’t mention was that I titled my own text to follow Clay’s: Free Market Economics: an Introduction for the General Reader. The number of out and out Keynesian falsehoods that are revealed by going through Clay is astonishing, starting with acceptance of Say’s Law means classical economists always assumed full employment. It’s not a short book, and its lack of diagrams makes it hard for someone of the present generation of economists to bother with, but it very efficiently gets the job done. And naturally, what I like best about it, is that it is the economics of John Stuart Mill, brought up to date for the first half of the twentieth century, just as my own text is Mill for the 21st century. Did I ever mention, by the way, that the cover of my book shows a Mill made of Clay?