eye of the storm

i was down at my mom's in woodville, va for t-giving, when we came across this column by george will, pitting rational economics against the practice of gift-giving, my daughter jane (9) was moved to write her first letter to the editor, or in this case email to georgewill@washpost.com.

the basic argument, which will is getting from joel waldfogel (really? waldfogel?) goes like this: the value as measured in $$ of the gifts people receive is less, overall, than the price paid for them by the giver. this shows that gift-giving is an extremely inefficient use of resources, with the possible exception, will kindly tells us, of gift cards.

it would be rash to assume that will isn't giving any presents this year; he is drawing our atention to an interesting argument. and i'd like to address it in a bizarrely general way, a way that attacks what we might call the rational basis of economics. some day i'd like to take rational decision theory and game theory and just rip them to shreds; they are, i assert, delusory, or rather fundamentally non-empirical; they rest on a set of idealizing assumptions that entail that they have no purchase (so to speak) on the actual world. [the one stab i did have was on the decision-theoretic "proof" of the legitimacy of state power, by james buchanan (see the youtube version here), which if i do say so, i eviscerated in a couple of paragraphs.]

the idea that value can be measured in terms of what people would pay is wrong, of course, and one obvious way to understand this is the use of money or objects to enhance social cohesion, or to express love, to manifest or express qualities of character that are of immense value: generosity, for example, or the overcoming of greed etc. there are entire economies based on the gift. this is why the economics of capitalism or smithian rationality is just wrong, wrong, wrong. one way to state this is that economic activity is not a distinct sphere of activity; it is joined to every other: emotional, political, psychological, moral, aesthetic etc etc. there is no distinct sphere of economic value. but this is only one angle which shows the falsity at the heart.

it's not that i want to see obama fail, which would be monstrous anti-patriotic racism. but i would kind of like to see the whole damn thing collapse like a house of cards, which i think is the only possibility for a slight, temporary halt in the growth of state power. admittedly, any tiny glitch in the continuous growth of the state would be a bizarre anomaly in our march to a future bright with promise, a march that is inevitable because we americans are a people who dream, indeed who basically only dream.

how am i ever going to deal with my envy of slavoj zizek? christ now he's writing for the nytimes. well, maybe like this: for all of zizek's super-bold rhetoric etc - admittedly toned down here - the position is an extremely conventional statist leftism; really he just wants us all to be swedes. the great imagination of the prose is matched by the utter dullness of the actual positions. it's cool that he loves utopian thinking: a kind of nice reversal. but what does he actually want? "socialism with a human face." gee whiz.

just to give the capsule refutation: once you've constituted a state sufficient to give you your socialism, then whether it retains a human face is entirely at the whim of those who operate the power you've constituted.

since i frequently slap at frank rich, i want to say that this is good. but i also want to say that it's caught up in the anachronistic state vs corporation, pre-squishy-t conceptuality. so, ok, let's say that we create a new bureaucracy, a financial consumer protection agency. who do you think would staff such an agency? well, who understands the arcane workings of investment banks, etc? it sounds good, but in effect it will be a gov/industry cooperative that will wield the gov's resources in such a way as to benefit both. "consumers" can't be represented, because they've got no idea what's going on. 

i'm embedded in the world of television commercials for girls' toys (don't worry, i have a 9-year-old daughter). it's pretty amazing how the toys track (a year behind) the economy. so bratz, the gigantic-eyed extremely heavily made-up and accessorized dominant doll of 2005 has been replaced by moxie, a plucky dressed-down bratz with slightly smaller eyes and vague obama-like commitments. all the bratz wanted to do was shop, the better to pursue their life goal of embodying the fantasy life of roman polanski, complete with quaaludes. but moxies have to face adversity with courage and lower heels etc. meanwhile barbie has bought the song "barbie girl," the old aqua satire on barbie, and de-ironized it, thus adding on an impossibly intense layer of...irony. seriously, it's exponential.

janie is watching me blog and she points out, which is true, that she hates bratz and moxies.

moxies:

 

bratz:

george will rocks the house.

there is a notion abroad that we have been brought to crisis by unbridled capitalism. no. we've been brought to crisis by unbridled state/capital identifications/configurations, by squishy totalitarianism. a situation in which the treasury department is essentiall indistinguishable from goldman sachs is not, putting it mildly, one of dog-eat-dog undisturbed private competition. the markets were highly regulated by the state, only the state and the institutions it was regulating were intertwined and symbiotic. this should not be conceived as private-sector dominance of the state, but as the continuing merger of the two into a single system or even a single institution. and in my view theobama people are not amewliorating but intensifying this relationship. it's anachronistic to call that socialism.

um, yeah. one response to regulation is to compexify your instruments so that (1) the regs don't clearly apply to them, or (2) they become completely incomprehensible so that no one knows whether or how or under what rules or bureaucracy they coould be regulated.

this notion of pricing risk appears rational, or even mathematical, and indeed the whole insurance industry depends on the concept, which originates in the probability theory/inductive logic of people like pascal. but the question is beset by innumerable difficulties. it's not at all clear that by any standard the risks were underestimated, even in a situation wherein we see the risks realized. first of all, the traditional way to generate the relevant probabilities is in terms of past frequencies. but though, say, the collapse of securities has happened before, both the securities themselves and the context in which they collapsed had been radically transformed: the analogies under which the frequencies are delineated are extraordinarily complex and subtle. in some ways, each moment of climate or financial history is similar to all the others and more similar to some of them than others, in myriad or indefinitely many respects. in other ways, each event is incomparable. the current problems are in a billion ways similar to 1929 or whatever, in a billion ways entirely different. actually pricing the risk of some new security or credit default swap is beyond complex: it is in principle impossible, more or less, especially because the swap itself is a pricing of risk, thus involving you in an infinite regress.

so let's say your reference-class in assessing the risks of some security is the performance of similar securities in the past. then you'll price the risk very low until the collapse, very high afterward, and that is roughly as good as you can do, if you are required to proceed in this manner. of course the risks were underpriced twenty minutes before the collapse by the standards of twenty minutes after the collapse. on the other hand, if you're speculating that there may be a collapse given a new set of circumstances, then previous performance might be largely irrelevant or actually (pace more or less all inductive logic) counter-predictive. the better the previous performance in some sense the higher the risk: that's what we call a bubble.

say you're a health insurer. it might seem that you're pricing risk well as you rake a small profit consistently. until the unexpected epidemic: then the models all collapse. insurance always works within this paradox: it ticks along, then collapses all at once when the hundred-year hurricane comes.

well, the frequency theory of probability, according to which the probability of an event is fixed within a certain range by the frequency of similar events in the past is only one approach, and has to some extent been superseded by computer-modeling. but the models themselves are, of course, derived from information deriving from the past and present. what is the chance of some unique or incomparable event happening at the level of a global ecosystem? i'm not sure this is even a well-formed question.

yet another approach is to use bundled knowledge or intuition: to make betting behavior of large groups (or "the market") a measure of risk. it goes without saying that this is trivially anti-productive in the case of stocks etc, or else there would be no bubbles and busts.

now that we're under risk is not in question. but that risks in situations of extreme complexity can be rationally priced at all is certainly a question, not a fact on which to ground a critique or make policy. this problem infects what friedman rather cavalierly calls "wise regulation": it was not at all clear what sort of regulation would have been wise with regard to credit default swaps before the collapse; they had established a long-term record of steadiness and profitability; indeed they appeared to be forms of insurance against risk rather than forms of risk.

i think in some ways the intuitions of informed persons are probably better than mathematical models, that your best chance with credit default swaps was someone who'd been thinking about it saying: smells funny. but that's a hard way to defend an expensive regulatory regime. and of course those intuitions are based on things like frequency, perversity, social consensus, personality of the intuiter etc.

we live, as it were, by trying to eradicate risk, though we also court it, and both are perhaps adaptive and counter-adaptive. but i'll tell you this: at the level of driving to work or the level of infinitely complex economies, we're never going to be without it, and ultimately would not want to be. if it could be accurately "priced" it would no longer be risk.

but my main point is just this: by definition, induction or probability-as-frequency does not brace you for the crisis and does not provide you with a reasonable assessment in its aftermath.

basically, politicians of all stripes have had the realization that there is some backlash against infinite spending/debt, and perhaps they even actually believe that borrowing/"printing" a new trillion every week might have some bad consequences. so here is the argument: we have to spend like crazy now, then return to fiscal discipline next year when it all turns around. only, the stimulus consists largely of programs, such as health care or the education stuff, that create entirely new entitlements and bureaucracies and which are, of course, going to have to be funded until the anarchist revolution of 2083. and guaranteeing investments, or simply buying highly questionable assets, produces a debt which is very likely to grow over the years/decades rather than shrink. it's not a temporary emergency measure; it's a permanent doubling of the size of the federal government. perhaps this will help us into a secure, albeit dependent, future. perhaps it introduces semi-permanent stagflation. perhaps the dollar collapses and we mutate into a large zimbabwe. but whatever happens, we are not going to "return" to fiscal responsibility next year.

the thing about money as a purely imaginary or fictional entity, or (to put it less pejoratively) the product of a convention: if people forget what it is or suddenly realize they don't have a grasp on the concept, it ceases to be anything at all. now that's a meltdown. it's a hopeful thing to say that race, for example, is  a social construction, because then it might dissolve like a mist at any moment. we're seeing money misting over right now. the end of race might be the end of certain kinds of suffering, though it is also a loss. the end of money is would entail massive suffering, though it might have excellent results as well, like an odd return to the real world.

really what replaced the gold standard is force: you are required to accept this stuff in payment of debts etc. but there are many factors in the value of money, which also functions as a fictive commodity and the value of which fluctuates by some funky analogue to the law of supply and demand. it could lose its value even without the complete disintegration of the force at the heart of its value.

i guess it's safe to say i don't understand monetary policy. it would seem offhand that the federal reserve buying treasury bonds just sort of can't have any real effects, as though i decided to improve my financial position by offering to cash my own checks. i guess what i don't get is where imaginary and real action intersect. or maybe i'm realizing i don't actually know what money is.

notice, for example, that aig paid some ungodly amount of money out to goldman sachs, which they had insured to the hilt. now notice that ex-ceos of goldman sachs were treasury secretaries in both the bush and clinton administrations. in other words, the united states treasury and goldman sachs are not distinct entities. now what do you expect? even-handed and fair distribution of funds? an impartial statement of the propsects if aig goes bankrupt, etc?

one thing you have to see: a government spending trillions in ten minutes is just going to have to become the world center of corruption. i guess that's stimulative. on aig. what i'd like to see is the story of how they got so large. i think you'll find that they controlled their own regulation and growth through, for example, campaign contributions, their own form of insurance. this is why ever-heavier regulation is not likely to produce the result you want. new instruments are developed as strategies for ever-more  complex evasions. lobbying proceeds. money flows in both directions. the regulators and the regulatees are not ultimately distinct. in a state capitalist squishy totalitarianism, the state and the corporation are not different things, so regulation is almost a silly notion.

printing money is the right way to get us out of this mess. i suggest this is no more substantive as a way to deal with actual economic problems than consulting the tarot or sacrificing columnists to yottle.or, really, just wishing with all your might.

the extinction of gigantic creatures is always a moving spectacle of trauma, and leaves the pervasive stench of carcass everywhere. here's a piece i wrote for reason mag a few years ago on the theme, in a different context. oops actually here's the reason piece. the gigantic organism looks mighty and invulnerable, but is finally just incredibly slow and stupid. these gigantic corporations are in a symbiotic relation to the american state: they are not fully distinct from one another, as is perfectly clear in the case of aig and will be next week in the case of citigroup. and perhaps what we're witnessing is the end of the age of the dinosaur: a mass extinction of bizarrely huge organisms. the suffering will be immense, deeply sad. but as to the gigantism itself: celebrate its collapse. of course the american state will emerge even more gigantical, for one thing by merger with all these concerns. but it'll soon be clear that its own gigantism is also fatal: it's like the last predator feeding on brontosauri. the best parallel is probably the soviet union.

you can keep saying: do it smart, do it nimble, etc. but you're constituting an insanely large bureaucracy that is going to be unbelievably stupid, mind-numbingly inefficient, unresponsive to stimuli, unbelievably slow. but it will. hence, be temporary.

not to quibble with the omb or the cbo, but bo's notion that he's going to halve the deficit during his term just seems baldly ridiculous. the trillion might just be the first installment on the stimulus, and creates many programs that will have to be funded for many years. what the bank bailout will finally entail in anyone's guess: $1.5 trillion, one would think. then tax revenues will be severely curtailed by the recession. any sense that deficit spending might be a problem is refreshing at this moment, but this seems, let's just say, ludicrous and dishonest. it's one of those times when you just go, huh?

bo, signing the stimulus: "this is the beginning of the end."

$1.5 trillion? hey yo, no problem. pretty soon, we will have spent more than the value of all the real estate comprising the nation, and all the items sitting thereon. but after all, money is merely a convention, eh? a fiction as it were, and there is no actual economy or value to which it corresponds. so i suppose that the recovery will also be...purely fictional, which is ok since we are the stories we tell, not, like, physical creatures in a material world. let's just call it infinity and have done.

now this seems right to me. what ferguson doesn't really do is tell us where, given that we are taking an approach just the opposite of what he suggests, we are heading, though he does call the destination "argentina."