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Implications of a Knowledge Economy

November 8, 2008

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The idea of an “information economy” is such a cliché that I’m bored of this article already, and I haven’t written it yet.

But all too often, the key implications are missed.

The central fact of the information economy is this: anything that we know exactly how to do can be done very cheaply.

The bulk of economic activity is now devoted to things that we don’t know exactly how to do – things that we have to work out as we go along.

The important implication is that management is now the largest cost. To improve efficiency from here on, the most important thing is to reduce the cost of management.

That’s an emphasis that’s never been taken before. “Measure twice, cut once” has always been seen as wisdom. But if cutting, and the stuff to be cut, are cheap, and measuring is ten times as expensive, then we need to work out how to get by without measuring twice.

There has been one long-term trend which has improved management efficiency, and that is the trend towards large scale. If a business goes from one steel foundry to ten, the steel foundries don’t become any more efficient, but you might spend less on management. It is easy to observe, that at ground level, large organisations seem to be less efficient than small ones, but this may be justified by reduced management costs. However, I think this trend has gone as far as it usefully can (if not further). A merged organisation may spend less on top management than its preexisting components did, but it has more layers of management, and the efficiencies can cancel out.

There is another trend that has to some extent concealed the increased cost of management, and that is the spread of managerial responsibility down the hierarchy. You do not need to have “manager” in your job title these days to be expected to devote a significant proportion of your time to managerial aspects of whatever process your organisation undertakes. Everyone fills in forms.

The important point is that a better managed operation is not necessarily a more efficient one – not if the cost of management outweighs the benefits. The old assumption that scrimping on planning will always cost more in the long run has to go.

This is not completely new – there is perhaps a parallel to the blitzkrieg or auftragstaktik innovations in the German army in the 1930’s. As I understand it (and military history is not my field), the old principle was that, on encountering an enemy, an advancing force would stop, gather as much intelligence as possible, make a plan, and then attempt to take on the enemy. The new doctrine was, on encountering the enemy, to immediately attempt to outflank. Sometimes the lack of planning and knowledge would leave the advancing force stranded in a blind alley, but war is a dangerous business at the best of times, and the benefits in speed and surprise of skipping the planning stage outweighed the costs.

I was triggered to write this by Simon Jenkins’ account of the 2012 Olympics (spit!). The budget for management of the Olympics has now hit £654 million, more than the cost of building the main stadium. This is partly the plain fact of the knowledge economy, and mostly the result of not recognising that doing something more efficiently, in today’s world, means managing it more efficiently.

There is a secondary point, which is that managers have greater political and social power than non-managers, and that therefore there is stronger pressure to cut non-management than to cut management. But I won’t be able to make that point better than chris dillow does, so I’ll leave it to him.


What was the problem?


Since I have claimed that the derivatives involved in the financial system problems were not too complicated, what was the real problem?

There are many candidates, too many to cover right now. The use of irrelevant statistics to justify risky holdings, as I mentioned before, was a large part of the problem. The government pressure to make more and cheaper loans to less creditworthy borrowers has been widely commented on, and may have contributed significantly, but can’t excuse the banks’ errors.

The actual error made by the banks was very simple – embarrassingly simple, really. They bought mortgages to securitize them. They split the securities into high-risk, medium-risk, and low-risk bits. They valued the bits and found that they were more valuable than the original mortgages, which meant the process was profitable to them. They sold the high-risk bits to speculators and the medium-risk bits to long-term investors. But they kept the low-risk bits. Thats it! That’s the error!

Presumably, after they valued the low-risk bits, they found that nobody actually wanted to buy them at that valuation. What they should have done was price them down until people did want them, then re-evaluate the whole business on the basis of the actual market prices that they got for them. I have no idea whether that would have meant that securitization would have carried on or not. But either way, it would not have left the financial system dangerously exposed to the housing crash. At worst, it would have ended up as the “normal” sort of Wall St scandal – clever investment bankers sell a whole load of toxic crap to investors (see auction-rate, internet IPOs, etc. etc. etc.)

Why did the banks hang onto these investments, rather than sell them? I guess that they believed they were “really worth” pretty close to par value, and that buyers didn’t want to buy them at that price just because they were uninformed. Also, because they were rated as so safe, the regulators were happy to consider them non-risky for the purposes of capital requirements. That was the regulators’ biggest error. Because of course these two justifications contradict each other. If the securities can’t be sold at their alleged “real value”, then they are tying up the banks’ capital, and should be counted as such.

(I’m surprised we haven’t heard more about the mezzanine tranches that were sold to fund managers, pensions, insurance, etc. They were never seen as safe, so the bodies holding them could afford to take losses on them.)

It almost seems a shame that this whole crisis is caused by one such straightforward error. It ought to be something like “derivatives are too complex” or “regulators were subverted” or “government forced banks to make bad loans”. It’s a let-down that it was just “banks held one particular type of investment that it was never their business to hold, just as a by-product of one business line”.


Financial Complexity

September 22, 2008

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I want just to grab one factoid out of the swirl of information and misinformation relevant to the current financial situation – the idea that the problems were caused by fiendishly complicated derivatives (see, e.g., here)

Horribly complex derivatives do exist: a “snowball”, for example, “is a structured swap with a funding leg and a coupon stream whereby the coupon paid on a given date is given by the sum of a fraction of the coupon paid in the previous period plus an amount determined by the realization of the rate process in the coupon period itself”

However, while estimating the value of a snowball requires so much computer power that researchers are designing custom hardware and offloading computation onto graphics chips, the difficulty of valuing a derivative does not depend on the derivative itself being complex. The mortgage backed securities which are the most obvious cause of the current problem are actually quite straightforward. That doesn’t make them easy to value.

The point of the complexity is in fact to make them easier to value. After all, no amount of differential calculus will tell you whether Mr Bloggs at number 11 will default on his mortgage, if you don’t know whether he has a job, and what his credit card balance is, and whether house prices on his street are going up or down. If you have good statistics, however, you might have a decent stab at how much a thousand mortgages are worth, or how much the best 400 out of a thousand are worth.

That was the theory. It failed, not because of the complexity of the derivatives, or because of errors in the mathematics, but because the statistics were crap. Statistics collected over ten years during which house prices only ever went up were not of much use when prices started to fall. Statistics collected on mortgages originated by lenders with their own money cannot be used to accurately model mortgages originated by lenders working only for commission. Et cetera.

The other bugbear instruments in some commentary are the “weapons of financial mass destruction”, credit default swaps. These are simpler still; just a guarantee by one party of a debt owed by another. The main problem with them is their very simplicity – rather than selling them on like securities, someone holding one would just create a new one to cancel it out. That’s what makes it so difficult to sort things out when a participant like Lehman defaults – its net position is manageable, but that net consists of astronomical credits and debits that almost, but not quite, cancel each other out. If the CDSs were more sophisticated (with central clearing), the problems would be smaller.

I think that this New York Times piece is very good, except for the one point, that the difficulty of valuing a mortgage derivative is not due to its inherent complexity, but mostly just because it’s made out of mortgages.


Anomaly UK

May 4, 2008

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I’ve been doing this for three and a half years, and some of the first things I posted I’d written up to a year previously. I want to recap over the major propositions that define what a newcomer would find.

Global Politics

I think the arguments used to advocate the Iraq War were legitimate, but that the costs of the war, both to the OIF alliance and to everybody else, outweighed the benefits and it was therefore a mistake. There were people who correctly anticipated this, but I wasn’t one of them; I was a “don’t know”.

The major competing political forces in the world are the EU’s corporatist totalitarianism and the USA’s residual individualism. No other world power or ideology – including Russia, China and radical Islamism – comes close to challenging either of them.

Many foreign countries are crap places to live, but I don’t think there is any strategy for improving them by military action that will have overall beneficial results, although it might get lucky now and again. I think it is more beneficial to respect the sovereignty of other countries’ governments, even where they are very nasty.

Democracy

Democracy necessarily entails class divisions. Either democracy is working within a ruling class and is kept “straight” by the need to efficiently resist revolt by the disenfranchised class, or else the important division is between politicians and non-politicians.

Most people would be better off in a society with minimal government as advocated by the libertarian movement. However, this is against the interests of politicians, and therefore is not achievable, under democracy or under any other political system. A wider understanding of the situation would result in marginal improvement, however.

For those not being directly promised bribes by one candidate or another, the amount of predictable improvement in policy by electing one candidate rather than another is often outweighed by the difference in entertainment value between the candidates, as estimated using the market prices of entertainment. Democratic politics can therefore be seen as a small section of the (huge) entertainment industry. That is not to say that government is insignificant, just that the changes that can be made to government by democratic politics are.

Climate

The Climate Change debate is about politics, not science. The question is whether the small chance that disastrous change will happen but can be averted by a concerted global programme of austerity justifies the costs of such a programme. The dangers are exaggerated by those who support austerity or transnational government or both. The dangers are minimised by those who support prosperity or small-scale government or both. The latter group includes me, but I try to avoid dishonesty.

Copyright

Copyright exists to correct a market failure: that the creation of new valuable information benefits anyone who obtains a copy, but the costs are concentrated on the creator. Like all interventions to correct market failures, there are dangers, including capture of the regulatory structure by concentrated producer interests, which has clearly been demonstrated by retroactive extension of copyright terms. Also, as with other such interventions, it is not obvious that the market cannot find its own solutions to internalise the externality, nor is it obvious that the costs of regulation and the deadweight losses do not outweigh the benefits of the correction. Getting rid of copyright might be an overall benefit, although it would be dangerous. The evidence is overwhelming that reducing the scope of copyright would be beneficial, and that regulation aimed at suppressing technologies that are used to evade copyright enforcement is very harmful.

Free Software is cool. The overhead of protecting copyright in software is very damaging to the efficiency of the software production process and to the quality of the product.

his post will remain as a kind of “index” to the blog, and I’ll update it if my positions change.


Entertainment and Policy

May 4, 2008

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Boris Johnson’s win is consistent with my theory that politics is a branch of the entertainment industry. Boris won because people liked him on TV, not because they had any confidence he’d do a good job. In fact, it simply doesn’t matter whether he does a good job or not.

Whatever the budget of the GLA, the actual amount of cash he can shift from one activity to another over the next four years is probably on the order of only a few millions. He can change a few buses, approve a few “don’t knife each other, there’s good chaps” posters, approve or deny one or two large buildings.

On the other hand, he will be on television a lot, and get a lot more attention, because now he’s (drum roll) In Government. And if you treat each of his appearances as a light entertainment programme, value it as equivalent to an equally entertaining non-political celebrity appearance, and multiply up the number of such appearances over the four years, his entertainment value to the voters easily outweighs whatever costs might be imposed on the voters if he is a Bad Mayor in a policy sense.

And in fact the predictable cost of Boris vs Ken is near enough zero. Who knows, Boris might even be better. While the predictable difference in entertainment value is huge – not only is Boris more entertaining than Ken on a level playing field, but more importantly the Ken show has run for eight years and we’ve seen all the best bits.

My point is that (a) Boris has been elected because he’s funny and people are bored of Ken, and (b) This is, with apologies to Bryan Caplan, rational voting.

And of course, it is nothing new: Ken was elected in 2000 for just the same good reason.


Black Mass

April 27, 2008

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As I mentioned some time ago, I planned to buy John Gray’s Black Mass when it came out in paperback. I came away from the book very disappointed.

I would guess the core of the book is the second half, which is a criticism of the Iraq war. This is a very strong attack on the overconfidence of the idea that a western democracy could be set up in Iraq, and on both the deception and self-delusion of the leading advocates of war.

That much is fine, but criticisms of the Iraq war are ten a penny. The book as a whole is an attempt to generalise from that to put neoconservatism in a tradition of rational utopianism starting with the enlightenment. Jacobinism, Marxism, Nazism, neo-liberalism and even Al-Quaeda itself are all described as incarnations of a single myth of an end time of perfect rule spread across the whole world by human rationality.

The problem with the thesis is that it proves too much. By the standards he sets, there’s hardly a movement imaginable that would not be able to qualify as utopian. If you imagine a better future than the present, you’re a utopian. If you rhetorically appeal to any religious or mythical glory, you’re a utopian (even if the rhetoric is obvious hyperbole). If you claim that something that worked in one country could work in another, you’re a utopian. If you exhibit undue confidence in the success of your current policy (such a rarity among politicians), you’re a utopian. I felt that the only movements that avoided being labelled as a utopian were those which, with hindsight, actually achieved durable success. Therefore Reagan, despite all his rhetoric, was no utopian, because communism was really defeated.

The book also suffers by the association of the Bush regime with actual evangelical Christianity. While this might casually appear to be consistent with the argument, every earlier version of the utopia myth Gray describes relies on actual human achievement without divine assistance. The accidental coalition between secular ex-Trotskyite empire-builders and devout backwoods millenarialists plays no part in his wider thesis.

Fundamentally, I think Gray is misunderstanding the importance of myth in politics. The point is not that people believe the utopian myth to be true, it’s that a narrative, whether an explanation of the past or a forecast for the future, feels subjectively more convincing if it accords with some myth than if it doesn’t. The follower of Marxism or neoconservatism or whatever would not say that the final victory was inevitable, but the theories of the leaders would feel more persuasive because they carried in them the essence of the myth. Some ideas are easier to get carried away by than others.

And then there’s the final chapter. Oh dear. I really don’t want Anomaly to become simply a climate denial blog, but there’s something overwhelmingly ridiculous about spending a whole book attacking political movements which you claim are apocalyptic religion in disguise, and then casually, in passing, signing up to the most alarmist of all climate change predictions in their entirety, and citing as scientific authority a book entitled “The Revenge of Gaia“. If someone could explain that level of blindness in otherwise highly intelligent commentators, and I certainly can’t, they would be making a real contribution to the understanding of political history.

The only slight indication of awareness of the contradiction in his position is the following feeble half-justification:

… In another sense the prospect is not apocalyptic at all. In wrecking the planetary environment humans are only doing what they have done innumerable times before on a local level …

In the end the point is that Gray is not against mythology, only against one particular myth:

Happily, humanity has other myths, which can help it see more clearly. In the Genesis story humans were banished from paradise after eating from the Tree of Knowledge and had to survive by their labours ever after. There is no promise here of any return to a state of primordial innocence. Once the fruit has been eaten there is no going back. The same truth is preserved in the Greek story of Prometheus, and in many other traditions. These ancient legends are better guides to the present than modern myths of progress and utopia.

NO! STOP! The problem is with mythology as a guide to policy, not with just one myth. Myths are bugs in the mind, nothing more. The answer to bad policy based on myths is not other myths, it’s accuracy and humility.

Of course, his own continuing preference for myth might explain the vehemence of the book. His claim that neo-liberals believed in their inevitable global dominance struck me as very strange: if neo-liberal means people like me, and I normally interpret it that way, we have always inclined more to pessimism and defeatism than triumphalism, even at the end of the eighties when a few of our ideas like privatisation were spreading across the world. But of course Gray himself was one of us at one time, and if he took a millenarian view of things at the time, then, like me sticking up for the Men in Skirts, he could be expected to turn against his old ideas violently. But his error was not his liberalism, it was his mythologising, and he has changed the myth instead of keeping the politics and rejecting myth.

Gray needs to put down Leo Strauss and the Bible, and read some Pratchett.


The Essence of Government

April 26, 2008

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Further to my previous post, I have come across this piece from last week by Jim Henley, also dealing with the problem of how libertarianism can make a practical difference.

I think libertarians are, rather, the court jesters of politics. I mean that in a good way. We whisper to Caesar that that he is mortal. We caper about, turning ourselves blue if necessary, reminding everyone that government power is inescapably violent and inescapably self-interested. You’re probably not going to care, but we’re going to make you actively decide not to care. And sometimes, maybe you’ll care after all. As a class, we can be stupendously silly people, believing and saying the most absurd things. But our rulers are silly people too, in different and more malignant ways. And as fools, we have the freedom to say so.

I think he’s right, and if he’s right about America, the same is even more true of Britain, where libertarian ideas are that much further from the mainstream.

The problem is that all politics is based on a lie: that the essence of government in a democracy is to serve the people, and that political questions are about how best to serve the people.

In fact the essence of government, in a democracy or elsewhere, is that the strong enslave the weak. What democracy provides is not a different essence, but, by the mechanism of dividing the strong against each other, a situation where the strong enslave the weak much less effectively. The point of democracy is to provide ineffective government, which is a good thing.

So if the debate is about what the government should do to better serve the people, then I am a libertarian (indeed now a Libertarian), and will bore my victims to death talking about lower taxes and more flexible markets and civil liberties and the rest of it. But the policies I complain about are usually not imperfections in our servant, the government. They are the reality of our master, the government, sticking out through the bars of the cage in which it is restrained.


Who Rules?


Mencius is taking a week off and has invited requests. The area I would like to see clarified is the analysis of how western democratic governments actually make decisions. Is the political show of parties and elections a fake, or do politicians really control policy? It often appears that the question of who really has power is answered differently according to the needs of the argument Mencius is making. Events which favour the Democratic Party demonstrate the all-powerful nature of the Universalist church, while victories by the Republican party are mere smoke and mirrors.

My thinking is that elected politicians have some freedom of policy within a “window” defined by what MM calls the “permanent government” : the bureaucracy, the unremovable congressional incumbents and the media. The day-to-day business of politics is therefore not “fake”: it actually drives policy in the short term. And because particular events at particular times can have long-term effects, electoral politics has long-term significance.

However, the predictable long-term trends of politics have nothing much to do with elections and elected office-holders. They are best described as the movement of the window of policy within which politicians can move, and are controlled by other forces: what MM calls the “Hexagon”.

Take an example from the UK – the market liberalisation of the first Thatcher government. Thatcher wanted these, and Callaghan didn’t, and so they happened after Thatcher was elected Prime Minister in place of Callaghan in 1979. That is politics working as normal people imagine.

However, the Heath government came to power in 1970 intending many of the same reforms. It was not permitted to carry them out. The unions opposed the reforms just as they did in the 1980s, but the elected government was not permitted to crush them as Thatcher later did. By 1980 the permanent government had come to accept the necessity of reform, and moved the window to allow it. The reforms happened in 1979-83 instead of 1976-1979 because of electoral politics, but they happened in 1979-83 instead of 1970-73 because of the change in the policies of the permanent government.

There is therefore only some truth in the conventional view of politics. That truth is magnified in popular perception by a unanimous rewriting of the past. Ted Heath, having failed to implement the Selsdon programme, became its opponent, and it is now generally assumed that the only reason the reforms happened in 1979 was electoral politics. More recently in the US it is now widely assumed that Al Gore would not have invaded Iraq, despite the fact that in 2000, as far as military action overseas was a left-right issue, the left was in favour and the right against, not to mention what came after.

On top of the real party political issues, then, issues that are not decided as the result of elections are later treated by history as if they were. when the permanent government’s policies are unsuccessful – such as the preservation of the economic-policy status quo of 1970s Britain, which was imposed on Heath against his will, or the invasion of Iraq, they are blamed on the politicians, who are generally slow to deny that the policies actually carried bout by “their” governments were really their policies (not wanting to look ridiculous).

Indeed, even the most intransigent of extremist, the most unlikely ever to change their mind on a subject, can be turned from one side to the other by the simple expedient of electing them to office and to the duty of defending the policies that they have opposed all their lives but cannot change. This is not hyperbole.

In that way, political questions that are determined by the permanent government become party political issues: the politicians in office defend the policies that they were forced to carry out, and the politicians in opposition have to attack the policies in order to remain relevant. It is almost beyond doubt that if the butterfly ballots of Florida had gone the other way in 2000, the Democratic party would now be the party of the Iraq War and the Republican party would be divided on whether to support or oppose it. Of course, it is quite possible that the course of the occupation may have been different in that case, but that is beyond what I can guess.
2014: dead link http://www.commondreams.org/headlines02/0213-01.htm updated to https://web.archive.org/web/20080522032238/http://www.commondreams.org/headlines02/0213-01.htm


Democratic Legitimacy

March 6, 2008

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I said before that I think democracy is a trick, but a necessary trick: a free prosperous people will attempt to overthrow the government unless they think they control it.

I don’t think they really can control it, because the class interests of politicians are so much in conflict with those of productive people that they overwhelm other distinctions. They only situation in which a government can genuinely act in the interest of a class wider than just politicians is when there is a larger class of relatively powerless people – slaves or peasants – who would be a threat to a divided ruling class. That is the characteristic of democracies before the twentieth century.

Any stable government must therefore either fool the people into thinking they have control, or else deny them the freedom and prosperity which makes them capable of temporarily taking over.

The point of democracy’s illusion of control is not to make people think the government is good (there are limits even to illusion), but to make people think it is legitimate. Legitimacy buys government the tacit support of the indifferent, and makes it very difficult to overthrow.

If the population were both informed and rational, they would reject the concept of legitimacy, but would tolerate government unless it were sufficiently bad as to be worth paying the (very high) cost of a revolution, just to replace it with another government that would be no more legitimate, but possibly less bad.

What I am afraid of, therefore, is not that people will become informed. I am afraid that people will correctly reject the legitimacy of democratic government, while incorrectly hanging on to the concept that government should be legitimate. That is the stage that would produce a fruitless and hugely destructive search for a genuinely legitimate government.

Government is not the servant of the people. It would be nice if it were, but it would be nice if internal combustion engines ran on water. Any theories about what government should do to best serve the people, whether good or bad, are of no more relevance to the real world than are strategies for playing video games. In the real world, governments are gangs of thieves, and cannot be anything else.

This line of thinking is as usual influenced very strongly by Unqualified Reservations, but I like to think I was beginning to head in this direction already.


Democracy and Entertainment

December 15, 2007

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Yesterday’s bit on the greater resources of television current affairs departments compared with political parties was more of a question than an answer. I’ll try to work out what it means.

There are a few caveats:

  • The money that is spent on news programming includes things like studios and cameras as well as developing the content to put on them.
  • MPs get paid by the government, which is extra resource to the parties not counted in their budgets.
  • The civil service plays a role in developing policies for the ruling party.
  • Political parties have an incentive to be vague about policy, whereas media organisations can afford to be more specific and clearer – they gain more by being provocative than by being right.

Nonetheless, I still think that Channel 4’s policy on higher education is the product of more research and investment than went into the Labour party’s. MPs are paid to be MPs, not to develop policy, and the civil service has its own goals and constraints and is not under the control of the Labour party.

What does this mean?

First, I should be less sceptical than I have been about the “power of the media”. I have always felt that, since the media is constrained to doing what gets it audience, its independent influence on policy is small. However, if what it needs to do is to provide some alternative policy with which to challenge politicians, but it has relative freedom to choose which alternative to develop, then its independent influence is greater than I thought.

Next, why is it the case that we (as a society) invest more in reporting politics than we do in politics itself. Either something is seriously screwy, or we value politics as entertainment more than as a way of controlling government. Or both.

I think it’s quite clear that the population does treat politics mostly as entertainment. The resemblance between Question Time and Never Mind the Buzzcocks is too close to ignore. If someone arrived from another planet and had to work out which of the two concerns how the country is governed, I think they might find it tricky. (I think they get similar numbers of viewers). There are even hybrids like Have I Got News For You to make it more difficult still.

Further, I think voters are correct to see politics primarily as entertainment. Since my attempt to construct an argument that voting could have a non-negligible probability of affecting an election – the infamous correlation dodge – died a logical death, I am left with the usual reasons for voting – primarily how doing it makes me feel. Those reasons apply equally well to voting for Big Brother or Strictly Come Dancing.

In conclusion, I think our system of government is one which selects leaders and policies as a byproduct of the entertainment industry. This might not be a bad thing: the traditional alternative is to select leaders and policies as a byproduct of the defense industry, which I don’t think is obviously superior.




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