Gödel, Escher, Bernanke

I have recently been thinking about Gödel's Theorem and the regulation of markets. No, seriously... I know. I can't help it.

It is extremely important to note that I recognize a serious hazard here. It is dangerous to attempt translation across domains of knowledge, and such attempts often go awry, but I believe there is at least a slight chance that there is something real with this idea.

The question is whether the law can be accurately described as a "formal system," which has a mathematical definition. It seem plausible to me to suggest that it can, because all legal questions ultimately seem to boil down to a binary choice: Is action X lawful? That is, given a set of facts, describing the actions of some person, group, or entity, were those actions permitted or prohibited by the law?^* In greater detail, the laws and regulations would represent the axioms of the formal system. Furthermore a grammar exists (largely inscrutable to most of us, but natural for lawyers, judges, and such) for constructing assertions or statements in this system, e.g. "Being that, on the Eleventieth of Smarch, Homer J Fonebone did willfully violate article diggity-two, section naughty-five of the state penal code..." (Heh, heh, he said "penal.") Finally, at least in this brief treatment, the grammatically valid statements in this system are ultimately adjudicated as "true" or "false," i.e. a verdict. The law in practice, messy as it is, surely never obtains the status of a formal system, rigorously defined, but in idealized form, this is a reasonable model of what law aims to be.

Now, Gödel tells us, for those who have not visited our friend Kurt recently, that any rigorously constructed formal system must be either incomplete or inconsistent. That is, the system will either contradict itself by producing at least two derived statements that actually contradict each other, OR, if such contradictory statements are prohibited, then the system cannot validate the truth or falsity of all possible statements. That is, there can never be a simple, mechanistic algorithm for determining the truth of any and all possible statements in the system.

If this does, in fact, apply to law, then the signs are certainly all around us. I see two major consequences: First, this renders the idea of "strict constructionism" logically impossible. Various "lower" courts are often arriving at blatantly contradictory conclusions on matters of constitutional law, and since the law, at least in theory, must be consistent, the Supreme Court must resolve the dispute. In doing so, the court sometimes makes new law, which, if I am correct, is not (necessarily) arrogance or hubris, but actually a logical necessity. This is not to say that the Court is always right, or that it does not sometimes exceed its proper bounds, but merely that existing law, as written, will never be both complete AND consistent. This is not quite the same as the classic "the framers couldn't forsee everything" argument, but a statement about logical inevitability.

The other consequence relates to the currently heated "debate" (really at lot more like ad hoc and ad hominem arguments hurled about the chattering political commentariat) concerning regulation and the economy. I have more than once heard prudent, thoughtful people argue that no matter how much we regulate, clever accountants, CEO's, CFO's, and lawyers will find a way to innovate to find "loopholes" that enable some sort of behavior that was intended to be prohibited. I have always found myself nodding, or even exclaiming, my agreement. Now, it seems that this argument may possibly be mathematically true.

Finally, as always, yes, we need regulation. Regulation is just law at the lowest level, and without the rule of law, not only will markets fail to function, but society collapses. But I do believe the Gödelian argument, if valid, points in the direction of so-called "principle based regulation" as an alternative to the minutely detailed proscriptive framework that dominates the modern regulatory landscape. Rather than chasing the mirage of a perfectly tuned and adjusted vast edifice of rules, which will inevitably fail to cover all situations, we should formulate the problem as one of basic principles. Regulate transparency, disclosure, and clarity. Do not, as a rule, try to prohibit any particular contractual arrangement between parties, but rather ensure that the parties fully disclose relevant obligations, and do our best to ensure that disputes about any given contract can later be sorted out effectively and fairly by the courts, for when the shit inevitably hits the fan.


Notes

* I am expressing the problem in language suitable for criminal law, but the reasoning should apply equally well in the civil arena, with suitably adjusted verbiage. Also, the observant, or lawyerly, reader will have noted that I asserted "given a set of facts," omitting the courts' role in actually finding facts. I understand that finding facts is also one of the chief duties of our legal system. This actually makes the argument stronger. Not only are courts needed to find the facts, but they can never be replaced by some mechanisitic framework even taking the facts as given. (Return)

First thing we do, let's kill all the canaries and roosters!

Comes word from on high that market regulators are considering banning or otherwise restricting short selling, to "help stabilize the markets." Genius. Thank God our men and women of vision are on the job, saving us from the evil speculators.

It brings to mind how in the old days, miners would take various birds, most famously canaries, down into the mines, presumably because they enjoyed the plumage--the mines being otherwise such a dark and dreary place. Trouble is, the birds would die occasionally, and there was very often a buildup of toxic gas in the mine at the very same time! Clearly the canaries were a serious hazard, the gas buildup often sickening or even killing miners. Thankfully, the practice is now a thing of the past, the birds are rarely taken into the mines, and the number of gas-related miner deaths has declined apace!

On a related note, it has come to my attention that nearly all recent stock market declines have taken place during daylight hours (market local time, that is). Given the seriousness of this problem, I call for a large scale rooster-slaughtering program. Eliminate the sunrise, and I can nearly guarantee that the stock market will stop dropping (if not immediately, then at least after one final round of selling). Yes, this does raise the problem of how we will get more chickens in the future, but I am simultaneously calling for our genetic scientists to get to work on cloning hens, which should resolve the matter in short order.

You can thank me later.

The "Tyranny" of Scale?

I really do love Slate. Generally excellent writing, a decent ideological balance (or at least intellectual honesty), and a fascinating array of topics. But there is the occasional clunker, such as this piece of pseudo-economic "thinking" on "The Tyranny of the Market." by Joel Waldfogel. I could not refrain from jumping into the Fray, here is my post from that forum:

Lord, what dreck. So there is a minimum necessary size of a market for some product before it becomes profitable to make that product. Hallelujah, Mr. Waldfogel has discovered economies of scale, thanks for sharing that with us! Somehow I suspect that Friedman, Hayek, and von Mises (with a couple of Nobel prizes between them) had actually heard of this concept.

Heavy sigh. No, free markets are not, in fact, magical fairy gum-drop land, where all is a happiness and light. They're just (almost always) better than the alternative. Setting aside the hard-core free market question of whether it is appropriate to take from the majority to benefit the minority (or vice versa!), Native Americans have not, generally speaking, had to go barefoot up until now, I suspect. Aside from making do with ill-fitting mass produced (and therefore inexpensive) shoes, I don't doubt that many purchased specially made shoes--when they could afford them. And there's the crux, to the extent that Native Americans had trouble finding shoes to fit them (as opposed to Nikes, which is not the same thing) it was almost certainly a matter of money. Another news flash: poverty causes deprivation. While generally libertarian, I am not religiously so, and so I am not opposed to any and all welfare spending. The best way to help people with little money, in the short run, is to give them money. With money, they can get shoes, or food, or medicine or whatever the hell they need, and the government doesn't need to enforce an arcane list of requirements on businesses in order to force them to make specific products. In the LONG run, the best way to help poor people is economic growth, and here the record is unequivocal: capitalism beats the pants off socialism.

What the modern shoe industry (and economic activity in general) has accomplished is to continually provided better and better products at better and better prices. Those people who had the most common feet shapes and sizes benefited before those with atypical feet. What is gratifying about Nike's decision is that they are now giving a new group of consumers access to the same superior products, in terms of price to performance, that others with more typical feet have been enjoying for some time. The fact that Nike doesn't see a lot of direct profit in this line of shoes, but is doing it anyway for goodwill and good PR, is ALSO a sign of market economics at work. Good PR is good marketing, just to restate yet another observation that should be obvious, but apparently doesn't occur to Waldfogel.

The good news is that the march of technology and entrepreneurial innovation is pushing economies of scale lower and lower. A prime example being the "long tail" of Chris Anderson fame. Without the same physical limitations of a traditional bookstore, Amazon is able to offer something like a bajillion times more titles (forgive the technical lingo, I've been reading too much economics), because low inventory and other overhead means it needs to sell fewer and fewer of any given title to make money. Similarly, technology has changed the profitability scale at the publisher level as well; digital presses have lowered the cost of printing dramatically, so that books become profitable at much lower production numbers, and many more titles with smaller market potential can now be published.

Much the same can be said for vast swaths of products in many different markets, including pharmaceuticals, another topic touched on here. But it should not escape notice that one of the major contributors to the $1 billion price tag on getting a drug to market is... (anyone?) government regulation. This is not to say we should have no oversight of the industry, but the cost of getting FDA approval is huge, and makes the bar ever higher for the marketability of any given drug. Allowing greater flexibility in approval for smaller niche-market drugs would almost certainly work better than some hypothetical mandate to force researchers to work on some particular drug type.

A final note: Since the market allegedly "tyrannized" them, why don't we ask Native Americans just how well the U.S. government has taken care of them over the years? Any takers?

Mystery of Capital Rides On...

A well-written article at TCS by Peter Schaefer about unlocking the “dead capital” of the developing world, and what a huge opportunity it could be for everyone. I like just about everything he has to say, although I am curious as to why the name Hernando De Soto never comes up. (Answer: ah, I see, he does link to De Soto’s book, as I just did.) At any rate, my one quibble is with the assertion that (mostly) all the developing world needs (I’m paraphrasing and simplifying) is “America’s original blueprint”. That is, the work of the framers at the end of the 18th century, who, in his view, set up everything so well that our economy evolved into its potent, modern form as a matter of course, flowing inexorably from the framers’ genius. I would argue that it is a bit bigger than that. The true construction of America’s prosperity and freedom both started earlier and ended later than the era of the framing itself. To take them backwards, De Soto points out how the process of squatting, followed by formalized property rights, played out over a couple of centuries. This is something that Schaefer seems to acknowledge at certain points, but that gets lost in the simple assertion of the framers as the fount of all this goodness. The framers did some good work, but to the extent that this pattern is the root of modern wealth, it is as much a cultural phenomenon as a political one, or even more so. The framers recognized and helped formalize some of this approach, but the cultural values that gave birth to it before the framing, and perpetuated it afterwards, are really the key.

Property rights, and the securing thereof, are indeed key, but there is a crucial, fascinating, and paradoxical twist. A modern economy clearly relies, in part, on stable and secure property rights, but they cannot be entirely rigid and fixed! If they were, then they formalization process itself would never really work! If you respect the property rights of the wealthy landowners who nominally “own” all this land being squatted upon, then you can’t formalize the squatters’ rights. Indeed one “critique” I read of De Soto’s policy prescriptions suggested that his ideas made things worse because some official landowners go in and forcibly evict squatters when they see formalization coming. I put “critique” in scare quotes because I don’t think much of this line of criticism. Allowing the wealthy, “official” title holders to evict the squatters is absolutely ass backwards of the De Soto plan. You can’t say that an approach that does the exact opposite of the intended plan is the fault of the plan. You have to deal with the rich landowners up front, in whatever manner will work. I’d say in general you’re best advised to buy them off. Use the foreign aid money to do it. Most of the foreign aid to the poorest countries gets skimmed off and goes to the wealthy already, and this way you’d at least get some tangible return on the investment!