Saturday, February 14, 2009

Christmas Trees and Kandy Keynes

So, in the interest of "getting it" and not being labeled as some wild-eyed extremist, let's consider the theoretical, and perhaps empirical, case for government "stimulus." (Am I alone in wishing that Beavis and Butthead would make a brief reappearance to snicker idiotically at the phrase "stimulus package"?) Hopefully, I can get my economist friend to offer a critique, if I am missing something fundamental.

The true essence of Keynesian stimulus theory is psychological. The free market critique of Keynes seems so straightforward as to be unassailable, as long as pure rational market actors are assumed. That is, neither the government nor the private sector can magically create wealth. It is, as always, a marriage of capital and labor to produce something of value. And if the government is allocating capital, then it is inevitably displacing something else that could be done in the private sector, i.e. opportunity cost. A quick sanity check on this: the money must come from somewhere! So the government must either tax it, borrow it, or print it. Either taxing or borrowing removes the money from private hands, and printing it is the ultimate illusion (no new stuff, just more money to buy it with--inflation). So, in a classic, rational market, government stimulus could be compared to scooping water from the deep end of the pool and pouring it into the shallow end.

But the reason Keynes could be right would be that, in the midst of a severe downturn, a crisis of confidence can cause those with capital to basically withdraw from rational investing. That is, there are bound to be good opportunities somewhere (there always are, there have to be, it's just a matter of finding them) it's just that in this moment of crisis, investors have no faith in anything and want to sit on their cash. So, enter the government. Said fearful investors, unwilling to bet on anything else, are nonetheless willing to lend to the government, i.e. buy treasury bonds. By being the borrower and spender of last resort, government gets the money moving again.

Keynes in a nutshell: psychological! Unless you really do believe that government, on average, as a matter of principle, actually does a better job at allocating resources than the private sector. And if you do believe that, then I think maybe the "S" word does apply... though I won't utter it, seeing as how mercilessly McCain (for whom I did not vote) was mocked.

And so, further, it does not really matter, from this point of view, whether the money is particularly well-spent or not. Yes, other things being equal, it is better for government to spend wisely rather than unwisely, but if what you want is stimulus, and if Keynes is right, just show me the money! Enjoy the Christmas tree of a bill that we have! Let us hope our children don't regret having to pay for it...

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Saturday, January 31, 2009

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)

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Friday, December 05, 2008

Greed, Gekko, and Us

Gordon Gekko has emerged as a stock figure in the national psyche, or at least he's a recurring figure over at the Slate Culture Gabfest. And apparently, the "Greed is Good" speech is a cultural touchstone in itself. (I must confess to never having seen all of Wall Street, from whence the character and speech come, but I'm pretty sure I've got the gist of it. Apart from Emilio's turn as Otto in the delightful Repo Man, I tend to avoid the Sheen boys.) Apparently Gekko's little oration, in blind disregard of the practically unambiguous evil of the character himself, actually became a rallying cry for the era that followed. "Greed is good!" an unironic cheer of the striving, trading classes.

I think the problem is largely semantic. There used to be a term, although I have not heard it in a while, for an alternative to "greed," namely "enlightened self-interest." Perhaps it was too unwieldy or just didn't fit the times, post Gekko, but it seems worth considering. As someone who will still stick up for the ideals of free markets, even in these dark hours, it is precisely this distinction that matters. "Self-interest" is fine. It is natural, healthy, and IS in fact the driving force of economic growth. (Innovation, among other things, enables growth, but the engine is self-interest.) As long as you play the game by the rules, it is fine to try and make money, even a lot of it, and I believe it should be your right. "Greed" is actually the exact point when things go off the rails--it is the point where you break the rules in order to get ahead. Breaking the rules, in economic terms, basically means theft in one form or another (fraud, for instance, is merely another form of theft).

Even Gekko, when he first introduces the "G" word into his monologue, actually says, "Greed, for lack of a better word..." He is thereby implicitly acknowledging something about the semantics and connotations of the term. Gekko is indeed evil, and indeed greedy (so I am given to understand, since I still haven't seen the film), but the speech he is giving is arguably about self-interest, and defensible on those terms, if you permit the distinction. If you do NOT lie, cheat, and steal, then it is OK to get what you can in the world. Simple enough.

But this has never been entirely accepted, even on the terms I propose. There seems to have always been a conflation between the two forms of self-interest, and it is not merely a left/right distinction. "Populists" of both flavors have always stood ready to impugn the profit motive. Making money is an unseemly pastime for the moral scolds of both stripes. The left maintains, incorrectly, that it must involve exploitation of someone, by failing to distinguish between positive sum and zero sum transactions. The right holds, incorrectly, that it must undermine other values like family, country, and God.

Yes, greed is bad, by definition. But "enlightened self interest," now that makes the world go 'round! Or so I will hold...

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Friday, September 19, 2008

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.

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