Review: The Divide

Jason Hickel’s book (subtitled “Global Inequality from Conquest to Free Markets” in the US and “A Brief Guide to Global Inequality and its Solutions” in the UK) delves into questions that matter to me, in my post-colonial woke state. In some case, I agreed with Hickel (meaning he’s not wrong); in others, I disagreed (meaning he’s wrong). 

First, where he’s not wrong (i.e., “I agree with him but maybe we’re both wrong”): The colonial period — and a current reality of post-colonial theft by corrupt locals and global elites — was and is terrible for many people now living in “developing” countries. Hickel is right to point out that these countries have been attacked, undermined and stripped of wealth, choice and opportunity. He is right to trace the flow of stolen money from “poor” countries to private bank accounts in “rich” countries (the UK and US being top destinations). He is right to explain how various development agencies are more interested in “hitting KPIs” than actual development.

When he’s wrong, it’s the basic stuff. The World Bank isn’t conspiring to rob the poor; they’re just ideological and incompetent, slaves to the “raving scribblings of some forgotten economist”. The WTO is not trying to (or capable) of exploitative trade regimes. It’s enamored of GDP statistics, fine-tuned rules, and a lack of imagination. These organizations (the IMF, UN, et al.) are the bastard children of quarreling “great powers” who try to dominate but mostly fcuk things up. Should Hickel complain of their harms? Yes, indeed. Does he attribute causality (and thus solutions) correctly? No, I think not. That doesn’t mean trust the World Bank. It means that countries — and citizens — need home-grown solutions. That doesn’t mean trust politicians. They often cause the problems they blame on others (Donald Trump is a gift: a political disaster of random oversized id.)

I had these mixed feelings about the book while I was reading, but I ended up liking the book for its passionate — and often carefully considered — critique of the world’s current order. I agree with Hickel in the main (historic and present exploitation often buried under “sorry we killed you, but we meant well!” propaganda), and most of my remaining criticisms center on his optimistic solutions and ideological critiques.

From here, I’ll add notes in order of topics’ appearance.

  • In 1949, Truman defined “development” as the path towards “fixing” countries of the Global South (GS) damaged by decades or centuries of colonialism by the Global North (GN). This idea implies GS should pursue GN policies and goals. The invention of “underdeveloped” gave space for the existence of a permanent underclass that would be served by charity and photojournalists, but not actual reform.
  • Hickel is right that development aid is a drop in the bucket compared to bad policies and right to question the bona fides of aid organizations that fail to lobby for structural change. (He notes, correctly, that they would go out of business if they reached their professed targets.) He’s also right that absolute poverty (headcount) matters, and that it should be counted via “lack” rather than an arbitrary (and miserly) $1/day “budget”. So, yeah, there are 4.3 billion poor people, which shows how unequal and fucked up the world is. 
  • Hickel says “something is fundamentally wrong with our economic system” (p 13), but I think it’s the political system (in which I include colonial institutions). Perhaps we mean the same thing, as I’ll admit that bad politics can lead to an unfair economic system, but does he mean the same, or does he trust in the (aggregate) honesty of politicians? I don’t.
  • Hickel says that newly independent counties were doing well with their post-colonial policies until their old masters used the World Bank, trade, etc. to derail them. I think progress was more uneven, and their need for advice thus great. I think that GN tried to impose colonial policies but also that GS made some big mistakes. I agree that GS people suffered but GN suffered as well from bad policies (as they are with respect to mismanaged social welfare).
  • I now think humans are lucky to survive their stupidity and greed. A few years ago I thought stupidity and greed rarer. I changed my mind based on the fact that our mistakes are aggregating into larger fuckups, as more dumb spills into more lives.
  • GS “pay” $billions per year to GN via corruption, theft and exploitation. That’s one reason they stay poor. Hickel claims that “unfair trade” strips much more, via underpaid wages. I don’t agree with that one (wages reflect productivity more than bargaining power in global trade), I do agree that the GS is heavily (self-)exploited via pollution, weapons sales, resource exploitation, etc. 
  • Statistical assumptions explain why either 300 million or 900 million Indians are “poor.” but which figure is right? Speaking of explanations, Hickel is sometimes too quick to dismiss the wealth-creating potential of markets, e.g., ignoring China’s entrepreneurs.
  • Inequality is so bad that average global income would need to be $1.3 million/person to raise wages for the poorest above $5/day (holding inequality constant). There’s a crying need for redistribution but — surprise — no political support from the beneficiaries of this scandal.
  • Today, we define “great powers” as those who have invaded, conquored and exploited others (UK, FR, ES, PT, BE, US, RU), not made their diverse subjects wealthy (Ottoman, Mogul, Roman and Austro-Hungarian empires). In this definition, we allow the victors to write exploitation into “inevitable history” rather than question that definition of “empirical success.” 
  • Most colonial wealth was from theft, not productivity. That’s not success. (It’s the same with wealth of the industrial revolution, as the resulting cost from climate disruption might ruin our current prosperity.)
  • Hickel uses massive statistics to impress readers on the magnitude of theft and destruction. I’d put those statistics in terms of, say, the average GN citizen back in the day, or today. The waste was terrible, but it’s ahrd to see in the 000000000000s!
  • Hickel quotes Polanyi, who opposed the commodification of land and labor as impoverishing the poor who lived on the commons. (Hickel calls this the birth of capitalism, but capitalism is millennia older.) I disagree with this IF the poor have free will, but not if their commons is stolen and they are forced into wage labor. That’s not a reason to hate markets for land or labor, but a good reason to hate (political) theft and exploitation.
  • It’s hard to overstate the horrors and evil of colonialism, but the income gap between rich and poor growing from 3:1 to 35:1 makes vampires jealous.
  • Hickel says GS counties made a lot of post-colonial progress, but then he cites the Peróns of Argentina with approval, so I’m less impressed. I agree though, that GS countries should hide from GN exporters while they grow their industries (under intra-GS competition, in my opinion). 
  • Hickel and I have different definitions of “neoliberal” (he says they like to subsidize business; Hayek and Friedman are rolling in their graves), but we agree that GN countries supported terrible GS leaders.
  • Hickel thinks various debt crises are aimed at exploiting the GS, when they are basically organized theft by elites. I agree with him that indebted countries (e.g., Greece in 2009) should just go bankrupt. I disagree with him that they would have an “easy time” thereafter in the markets. 
  • Hickel mixes a few too many conspiracy theories into his text. He’s got a good survey of anti-capitalism without an appropriate skepticism of their claims. His command of macroeconomics, use of data, and understanding of Adam Smith and free trade is sometimes way off. Thus, he assumes victims where there are suicides and threats in good ideas. He sees GS countries as powerless but also purposeful when the opposite is true, as we can see by the “wages of corruption.”
  • Hickel loses credibility with excessive claims on the damage of land grabs and climate change. That undermines his effectiveness only because he continues to miss other driving factors (political greed at many levels). 
  • Hickel ends his book with ideas for helping the poor via structural adjustment. He begins with global debt forgiveness and then moves to global democracy, just wages and recapturing the commons. I agree with these (in theory) but see little hope empirically in a world that is as exploitative as the one he described. OTOH, I am happy to agree that we should dump GDP for GPI, lower consumption, pursue UBI, etc.  At the end of this chapter of fantasies, I had no more wishes left in my magic wand — except perhaps that the rich would agree to Hickel’s changes. Here’s the first step.

My one-handed conclusion is that you should read this book, first, for its description and criticism of the way the world’s poorer people have been made and kept poor. Second, you should read it for a list of good ideas for a better future. Third, don’t read it for its explanation of economics, markets or corruption. People are far more creative — and calculating.


Addendum (23 May): The brutal indifference of colonial murder

Productivity should improve your life

In his 1968 “The Tragedy of the Commons“, Garrett Hardin explained how population growth threatened ecosystems that lacked the carrying capacity for billions of people. In her 2000 “The IPAT Equation and Its Variants” [pdf], Marian Chertow reviews the history of I=PAT, an equation that summarizes how (Environmental) Impact rises with Population and Affluence but falls with Technology.

In my Jive Talk with Brian Czech of the Center for the Advancement of the Steady State Economy, I was frustrated with Czech’s advice that humans “restrain themselves” from over-consuming as a means of replacing consumption and economic growth with renewal and economic stability. Indeed, Hardin, who thought little of self-control, called for “mutual coercion” as a means of “relinquishing the freedom to breed” [pp 1247-48].

Clearly, there are problems with reducing Impact via reductions in Population or (the wages of) Affluence. There are also, I think, problems with hoping (or assuming) that Technology will advance fast enough to overcome pressures of Population or Affluence. I hold this view because most technological advances increase supply by lowering prices or providing larger quantities at the same prices, which usually means that innovations bring more rather than less consumption. This dynamic is known as the Jeavons Paradox, and we can see it in the way that additional food from the Green Revolution led to population growth, increases in auto efficiency led to larger cars, cheaper clothes led to larger wardrobes, etc. 

Are we doomed? 

There’s no sign, after 50 years, of Hardin’s “mutual coercion, but I think we have a few chances to save ourselves by reversing our burden on resources and ecosystems. I’ll go from least to most promising.

First, there’s a small chance that technological breakthroughs will bring about an increase of sustainable supply that is so significant that we can eat our cake and have it. In this category, I’d put something like a fusion reactor that sucks CO2 and methane from the air while making energy so cheap as to replace all fossil sources. This “Elon-the-savior” solution is unlikely.

Second, we could price damages and protect collective property via changes in laws and regulations. This step includes global carbon taxes and actions to replace political management of the commons with property rights for all citizens. I’ve written about this idea for national water, but I don’t see the political will to take away all those goodies from the 1 percenters who currently enjoy excess wealth at our expense.

Third, I think that there’s a strong business model for short sellers who use science and public pressure to ban or bankrupt firms contributing to climate disruption, biodiversity destruction, and ecosystem death. In most cases, short sellers bet that stock prices will drop so they can make money. It’s my suggestion that they cause prices to drop by getting businesses penalized or banned.  The UK Labour Party has floated the idea of delisting firms that do not keep to climate limits. Many asbestos firms were bankrupted by their legal liabilities. This idea is more powerful than divestment or boycotts that do nothing to undermine these companies’ basic purpose.

Fourth (and the purpose of this post), I think there’s the chance of a paradigm shift in which people decide to consume less than their affluence would support (and perhaps even have fewer kids). This “inward shift of demand” would lower economic growth without lowering our quality of life.

How would it work?

Let’s begin with a definition and a misunderstanding.

The definition: Economic output = productivity * work effort, holding constant capital stocks and allowing proportional input of raw materials. This concept underlies economists’ claim that our prosperity advances with our productivity. It also explains why GDP/capita is the target measure of choice for most economists. High GDP/capita defines the difference between rich and poor countries, but it ignores inequality as well as sustainability. (I prefer the Inequality-Adjusted Human Development Index and Genuine Progress Indicator as measures of success.) 

The misunderstanding: Productivity automatically means more output and consumption, when it need not mean more of either. A recent Economist repeats this assumption by asserting that “improving productivity is generally agreed to be the best way to achieve faster economic growth and higher living standards.” Economic growth is neither necessary nor sufficient in providing higher living standards once a minimal level of food, clothing and shelter is achieved. 

To understand more about this misunderstanding, remember that economists target “utility” — often defined as happiness — as our motivating goal in life, meaning that humans will chase increases in utility when given the opportunity. But what contributes to utility? Sure, we can talk about the consumption of basic goods (food, shelter, clothing), but we can also include leisure time, a satisfying job, or good health — things that do not necessarily arrive with more money. Going further, we also know that people spend a lot to get  “positional goods” that set them above others in some way — a penthouse apartment, for example. (These goods are also called Veblen goods after the economist whose 1899 book, The Theory of the Leisure Class, first defined “conspicuous consumption”.)

The problem is that economists, by assuming we always want as much as possible (“non-satiation”), have lost track of the different ways we maximize utility.

Higher productivity could mean less work rather than more consumption. 

Here’s an example. If I work 40 hours and make $10/hour, then I earn $400/week, which I spend on goods and services. Thus my contribution to GDP is $400/week.

If I learn skills and double my productivity, then my wages should rise in proportion (to $20/hour), and I have more choices:

  • Conventional: Work 40 hours @ $20/hour to earn (and spend) $800/week. My contribution to GDP doubles with my consumption, and that higher consumption means my “footprint” has also grown heavier.
  • Security: Work 40 hours @ $20/hour. Spend $400/week, save $400. My contribution to GDP stays the same but now I have way more financial security, and my savings contribute to capital accumulation that increases productivity and/or natural capital.
  • Leisure: Work 20 hours @ $20/hour to earn (and spend) $400/week. Now I have 20 extra hours to do what I want, which could mean doing free activities (cash consumption equal) or “self-supply” activities (e.g., cleaning my own place or watching my own kids) that will save me money but also reduce GDP. 

Of course, I could also choose a mix of these three extremes that matches my preferences (subject to “frictions” around working 20-40 hours). The key ideas here are that we should use our productivity gains (i.e., the returns  to university education, work experience and the wisdom of life) to make our lives better, not just to consume more — and contribute to ecological stress. (I’m aware of Keynes’s 1930 “Economic Possibilities for our Grandchildren” [pdf] which I will read ASAP, which I blog on here.)

Can this happen? How would it work out?

Yes, it could happen. I have personally made choices that involve less work and less consumption in my pursuit of financial security and a simpler life (what a relief, selling my car). I have also explored how hipsters can pursue a low wage, low consumption path to satisfaction. In terms of social transitions in rich and poor countries alike, I see these steps:

Early stage: Hippies, tiny-house advocates, and those who agree with Thoreau in “my needs are few, therefore I am rich” perspective consume less in a consumerist society. Mr Money Mustache is a famous proponent.

Adaption: Poorer people can immediately do better for themselves if they replace wasteful consumption promoted by influencers and advertisers. The poor of rich and poor countries can pivot to better role models. The poor are still targeted by ponzi schemes, mafias, predatory preachers, and corrupt politicians, but greater financial security might give them more breathing room to step back and make better choices

Competition: Some people think them must work harder to compete for limited living, educational or social space. That’s true, but reduced consumption of new cars, dinners out, etc. can leave “non-consumers”  with more savings or buying power.

Population: A non-trivial number of young people are thinking twice about having kids, mostly because kids are so expensive, but also because it’s hard to bring more children into a world that’s increasingly stressed under the environmental and political pressures of 7+ billion people struggling for positional success. Fewer kids mean less spending and thus less pressure to work as much.

Supply Side: The big change would happen if there’s a “tipping point” of housing demand, i.e., smaller houses replacing larger houses at a 2:1 ratio (two 75m2 flats replacing one 150m2 flat), which would mean more affordable housing, shorter commutes and denser urban spaces. Such changes would need to come with caps on parking spaces (for those who still “must” drive) and other areas of competition over the commons, but the supply shift would also reduce prices and thus the need to work as much.

Demand side: Lower consumption would means smaller stores, fewer deliveries, less waste, and many other improvements that would improve quality of life and reduce ecosystem pressures.

My one-handed conclusion is that you should think about converting your productivity gains into greater happiness rather than greater consumption.


Addendum (21 May): Here’s a good podcast discussion on happiness via non-consumption.

Addendum (6 June): I am reading a history of the open-source software movement, which has a strong ethos against corporate “overhead” absorbing time and money without creating social benefit. What’s interesting is that they also appeal to less, but better work:

The GNU Manifesto explicitly calls out the corporate work arrangement as a waste of time. It reads in part: “We have already greatly reduced the amount of work that the whole society must do for its actual productivity, but only a little of this has translated itself into leisure for workers because much nonproductive activity is required to accompany productive activity. The main causes of this are bureaucracy and isometric struggles against competition. The GNU Manifesto contends that free software has the potential to reduce these productivity drains in software production. It announces that movement towards free software is a technical imperative, ‘in order for technical gains in productivity to translate into less work for us.’”[106]

Addendum (25 June): An overview of the DeGrowth Movement.

Review: Free to Choose

This 1980 book by Milton and Rose Friedman (subtitle: “A personal statement”) is well-known for its role in promoting free markets and deregulation. It sold millions of copies and motivated not one, but two television series devoted to its contents. The book now often serves as a totem for those who rant against “big government,” often (in the case of Fox news et al.) without the covers being opened. (I got my unread copy from my dad, who supports  lots of these “causes.”)

I wanted to read the book to learn how the Friedmans analyzed policies and suggested reforms for the general public. I also wanted to know how many of their ideas stand up to scrutiny from someone (me) who appreciates markets but has some reservations related to the ways that markets interfere with the commons (via, e.g., negative externalities) as well as the importance of non-market public and common-pooled goods.

(Many anti-market types treat Milton Friedman as a corporate hack who supports dictators over babies, but they are often painfully ideological and misinformed.)

It turns out that most of the book is excellent, except where the Friedmans (Rose was perhaps a perfect example of the “woman behind the man” in the way she contributed to work that often bore his name) brushed over collective goods, in what looks to be a spectacular example of over-confident misunderstanding.

In this review, I will follow their ten chapter titles:

In Chapter 1 (The Power of the Market), the Friedmans discuss how prices signal information, provide incentives, and distribute wealth and income. They acknowledge the role of government in distribution and regulation of bads (negative externalities) but caution against trusting governments to choose on behalf of the majority when politicians might choose for themselves. They quote Adam Smith on the role(s) of government:

First, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. [OMG. I tried to get a page reference for this actual quotation. but it seems like there are no searchable editions of Smith on the internet (econlib is dysfunctional). What an ironic failure in the provision of public goods!]

It is in this third role — the provision of public goods — that the government’s place is essential — and contested, by liberals in the American (don’t trust markets) and European (do trust markets) traditions. Sadly, the Friedmans dismiss this role via a sophistic slight-of hand that still surprises me. Here is their text (pp 30-32) with [my comments in brackets]:

Adam Smith’s third duty raises the most troublesome issues. He himself regarded it as having a narrow application. It has since been used to justify an extremely wide range of government activities. In our view it describes a valid duty of a government directed to preserving and strengthening a free society; but it can also be interpreted to justify unlimited extensions of government power.

The valid element arises because of the cost of producing some goods or services through strictly voluntary exchanges. To take one simple example suggested directly by Smith’s description of the third duty: city streets and general-access highways could be provided by private voluntary exchange, the costs being paid for by charging tolls. But the costs of collecting the tolls would often be very large compared to the cost of building and maintaining the streets or highways. This is a “public work” that it might not “be for the interest of any individual to erect and maintain though it” might be worthwhile for “a great society.” [This example describes a collective action problem in providing a public good that government “solves” via collecting taxes to pay for the roads. The Friedmans do not address the problem of congestion that plagues such collective goods but not toll roads that use prices to limit demand.]

A more subtle example involves effects on “third parties,” people who are not parties to the particular exchange — the classic “smoke nuisance” case. Your furnace pours forth sooty smoke that dirties a third party’s shirt collar. You have unintentionally imposed costs on a third party. He would be willing to let you dirty his collar for a price — but it is simply not feasible for you to identify all of the people whom you affect or for them to discover who has dirtied their collars and to require you to indemnify them individually or reach individual agreements with them.

[snip]

To lapse into technical jargon, there is a “market failure” because of “external” or “neighborhood” effects for which it is not feasible (i.e., would cost too much) to compensate or charge the people affected; third parties have had involuntary exchanges imposed on them.

Almost everything we do has some third-party effects, however small and however remote. In consequence, Adam Smith’s third duty may at first blush appear to justify almost any proposed government measure. But there is a fallacy. Government measures also have third-party effects. “Government failure” no less than “market failure” arises from “external” or “neighborhood” effects. [Here the Friedmans seem to imply that market failures will automatically lead to government failure] And if such effects are important for a market transaction, they are likely also to be important for government measures intended to correct the “market failure.” The primary source of significant third-party effects of private actions is the difficulty of identifying the external costs or benefits. When it is easy to identify who is hurt or who is benefited, and by how much, it is fairly straight-forward to replace involuntary by voluntary exchange, or at least to require individual compensation. If your car hits someone else’s because of your negligence, you can be made to pay him for damages even though the exchange was involuntary. If it were easy to know whose collars were going to be dirtied, it would be possible for you to compensate the people affected, or alternatively, for them to pay you to pour out less smoke. [This is a clear application of the “Coase Theorem” that was proposed in 1960; it depends on “low transaction costs” in measuring harm and finding those harmed.]

If it is difficult for private parties to identify who imposes costs or benefits on whom, it is difficult for government to do so. As a result a government attempt to rectify the situation may very well end up making matters worse rather than better — imposing costs on innocent third parties or conferring benefits on lucky bystanders.  To finance its activities it must collect taxes, which themselves affect what the taxpayers do — still another third-party effect. In addition, every accretion of government power for whatever purpose increases the danger that government, instead of serving the great majority of its citizens, will become a means whereby some of its citizens can take advantage of others. Every government measure bears, as it were, a smokestack on its back. [Here I think they lose the plot, by implying that the lack of a specific victim — of climate change, say — undermines government action that would also be unjustified due to its funding via distortionary taxes, which have nothing to do with the problems of externalities (the fallacy of an irrelevant appeal). Then they go on to make quite the leap…]

Voluntary arrangements can allow for third-party effects to a much greater extent than may at first appear. To take a trivial example, tipping at restaurants is a social custom that leads you to assure better service for people you may not know or ever meet and, in return, be assured better service by the actions of still another group of anonymous third parties. [Are they implying that pollution problems can be resolved via a system of tipping?  This trivialization signifies a failure of comprehension to me, as environmental damages — and government actions to reduce them — were well known in the 1970s.] Nonetheless, third-party effects of private actions do occur that are sufficiently important to justify government action. The lesson to be drawn from the misuse of Smith’s third duty is not that government intervention is never justified, but rather that the burden of proof should be on its proponents. We should develop the practice of examining both the benefits and the costs of proposed government interventions and require a very clear balance of benefits over costs before adopting them. This course of action is recommended not only by the difficulty of assessing the hidden costs of government intervention but also by another consideration. Experience shows that once government undertakes an activity, it is seldom terminated. The activity may not live up to expectation but that is more likely to lead to its expansion, to its being granted a larger budget, than to its curtailment or abolition.

So I agree that benefits must exceed costs, but the Friedmans appear to take this exposition as the end of the conversation, i.e., that governments should not, by default, be trusted to regulate negative externalities because such regulations create burdens on the market and require the services of bureaucrats who are paid via taxes. This discussion is oversimplified to the point of uselessness. Only someone as stupid as Donald Trump would read this and conclude that all regulations should be ditched, because it’s too hard to identify winners and losers, and that taxes are theft, but it’s exactly because of idiots like Trump that the Friedmans’ conclusion that regulations are unjustified unless they pass a strict benefits/costs test gets boiled down to “regulations are bad.” That’s a real missed opportunity.

That said, I must note that the discourse around non-excludable (public and common-pooled goods) was underdeveloped in the 1970s, so perhaps the Friedmans were working with the tools of the times. OTOH, they could have thought a little more about what even Adam Smith noticed in the 18th century. (The index has nothing on commons, public goods or collective action — perhaps because it has too many entries on “communism”? 😉 )

In Chapter 2 (The Tyranny of Controls), the Friedmans make a good case for freedom in trade and choice of occupation. They would have dismissed Trump as a short-sighted mercantilist whose policies would harm the country as a whole as they aided the special interests who got his attention. I agree with all this, with the only caveat that I would regulate industries (oil, finance, medicine) that create negative externalities (pollution; financial crises) and/or possess market power (asymmetric information) over consumers.

In Chapter 3 (The Anatomy of a Crisis), they go over the role of government in worsening the Great Depression, mostly by messing up the money supply (the topic that won Friedman his Nobel Prize) and interfering with trade. All I can say about this chapter is that its lessons were not heeded in the late 80s, as a too-big-to-fail financial system attracted government bailouts, and thus even larger risk-taking by those who would privatize profits and socialize losses. (The Friedmans were not fans of business per se.)

In Chapter 4 (Cradle to Grave), the Friendmans argue against social security (setting the foundation for “privatize social security”) as a bureaucratic, unsustainable gift to the rich. They suggest a “negative income tax” (i.e., wage subsidy) as a better way to help poor people. This proposal has been adopted in the U.S., although its recipients are vilified by the Right (and thus attacked by IRS agents asking for masses of paperwork), and the system is also far too bureaucratic in comparison to a universal basic income — an idea that I support and the Friedmans would not due to its potential to tax the productive to reward the lazy. The rest of the chapter complains that government transfer programs are wasteful (due to paperwork and bureaucratic salaries), which may be true to some degree for some programs (regulations written by industry to mess up health care, to give one example) but not for all programs (the IRS and Social Security Administration have tiny budgets relative to the funds they handle). In the end, I think that the Friedmans would regret the extent to which their ideas have been used as dogma by Republicans who cut taxes for the rich while leaving the poor to “bootstrap themselves off the floor, climbing via crumbs scattered by 1 percenters.” 

(In the US, “1 percenters” make more than $420k per year. Worldwide, 1 percenters make more than $32k and/or has a net worth of more than $770k. Scope matters. These figures are also dramatically larger than they were in the 1970s, when the rich paid more tax.)

Chapter 5 (Created Equal) argues for equality of opportunity rather than outcome. In the process, it rails against wealth and income taxes as unfair and harmful to voluntary efforts of the rich to help the poor. Although this perspective is (again) attractive in a world of rights, obligation and community, it’s a recipe for disaster in the present world of “I’ve got mine, fuck you.” It’s for this reason that I favor wealth (property) taxes devoted to funding goods available to all citizens, i.e., education, healthcare and/or basic income. It’s only when you have the basic opportunity to get an education or be healthy that you can thrive.

In Chapter 6 (What’s Wrong with Our Schools?), the Friedmans document the shift from choices among private providers to monopolization of “free” education by the State, which not only pursues its own goals (e.g., obedient citizens) but also spends far more on administrators than on students. They suggest giving educational vouchers to parents who can choose where to send their children (I recently learned this system is used successfully in the Netherlands and Chile; it’s also used, not without controversy, in the US). When it comes to higher education, the Friedmans are against subsidies, since most of the gains go to middle and upper-class students. They suggest that poorer students can afford school by “selling equity” in their future rather than taking (if they can get them) unaffordable loans. This podcast reviews a recent implementation of this system. As someone in “education,” I agree with their critiques and their solutions. I also agree that systems of “grading teachers” are probably worse than systems of parental choice.

In Chapter 7 (Who Protects the Consumer?) the Friedmans complain that government regulations result in lower economic growth and excess spending on bureaucracies that serve themselves or special interests. They then make the error of assuming that governments that make shoddy products (“private goods”) will also make shoddy regulations (“public goods”), which betrays an (intentional?) misunderstanding of the different natures of those goods. Later in the chapter, they are more open to “regulation via prices” (i.e., polluters pay carbon or effluent taxes) but still betray a bias or myopia (Page 215: “One source of atmospheric pollution is the carbon dioxide we all exhale. We could stop that very simply. But the cost would clearly exceed the gain.”) that supports my worry that they have missed an important element of “freedom to choose,” i.e., the freedom from polluted air, water or land that endanger our health or lifestyle. Whereas I agree 100 percent with many of their concerns on government overreach, I think their dismissal of regulations has given too much ammunition to ideologues (Trump, Julian Simon, Walter Block et al.) who think markets can supply public goods or protect common-pooled goods. They cannot.

In Chapter 8 (Who Protects the Worker?), the Friedmans argue against minimum wages, unions, etc., calling instead for more competition between employers. These positions made sense (they came at the end of what is now seen as the high-point in worker wages), but not in a world where industry concentration (thus market power to push down wages) are high and the 1 percenters suck money out of everyone’s pocket via corrupt legislation. I’m sure that the Friedmans would oppose this situation, but they seem to overlook its potential.

In Chapter 9 (The Cure for Inflation), the Friedmans revisit the topics of Chapter 3 and make the observation that governments cause inflation by creating too much money to spend and then benefit when the spending reduces the (book) value of the resulting debts. I wholeheartedly agree, which is one reason why I think that Bitcoin (for all its “interesting” market dynamics) has made the case for an asset with a known, steady and slow issue of new supply. A swap of central banks for “automatic money printing” algorithms might leave fewer tools for “managing” the economy, but fewer tools means that the consequences of their use will be easier to observe and thus their use more careful.

The book ends with Chapter 10 (The Tide is Turning), which accurately reflects the momentum of the late 1970s, when the book was written. In this chapter, they collect thoughts on government over-reach and capture by special interests, highlight attempts to bring more innovation and competition to markets affecting our lives, and even provide pro-forma constitutional amendments on free trade, sound money, and so on. The chapter is inspiring, and definitely had an impact on policy debates in the US and other countries. 

Sadly, the Friendmans, in their opposition to government incompetence, gave too many reasons to oppose government per se. Although I hate the expression “smart government,” I do think there’s a need for the right kind of government and governance at the appropriate level. If I was writing a epilogue for this book (hopefully shorter than this review!), I’d mention that government programs should focus on protecting the collective goods we share and providing the public goods that benefit all of us. My metric would thus focus on subsidies that go to everyone (e.g., children, the sick and the old) rather than special interests (farmers, bankers, the 1 percent) that suck the wealth of the majority. Besides that, I agree on their emphasis on markets, competition and choice over regulation and bureaucracy, but I’d be more cautious about throwing out the baby with the bathwater. (Listen to this recent VOX podcast for a discussion on balancing the roles of the State and Market in making a just but productive society.)

Overall, I recommend this book, one-handedly, to anyone who wants to think about the role of government, the rights and responsibilities of the individual, and how ideology can open our eyes — and sometimes blind us.


Here are all my reviews.

Review: Dredge Drain Reclaim

Johan van Veen began this book [free download] — subtitled “The Art of a Nation” — during World War II. He “found the time” because the Nazi occupiers of the Netherlands had forbidden most Dutch from maintaining the dikes and water works that kept the nation from sinking underwater. It was thus lucky for the Dutch that the Germans lost the war, otherwise they might have had to retreat from rising water that would have taken about half their land, their most important cities, and a majority of their civilization!

In the postwar years, Veen was able to finish the book and add more information, so I read the fifth edition of 1962, which was published after Veen’s 1959 death. 

I found this to be a fascinating read due to its historical detail and wealth of data but also due to Veen’s obvious passion for engineering and water management. This passion was also backed by decades of experience, as Veen was the chief engineer of Rijkswaterstaat (the Dutch government’s body in charge of national water management) and — due to his prescient and insistent warnings about weak and under-maintained dikes — the chief designer of the Delta Works project that began in 1954, right after the tragic storm of 1 Feb 1953 that broke dikes, flooded 1,300km of land and killed over 1,800 Dutch. Veen had warned of such a risk in an earlier version of this book, and he set out immediately to recover, repair and build out defenses that would prevent the same tragedy from happening again. (No such floods have come to pass, but climate change will bring new and unusual challenges.)

The book is divided into four chapters. In the first, Veen sets the scene by reviewing the fascinating culture and history of the “free people” who chose to live at the mercy of the sea rather than pay taxes to live on the lord’s land. I recognized quite some dimensions of Dutch character, as well as learning more about the history that distinguished its regions (in Friesland they began by piling up mud above high tide; in Brabant they dared to block rivers, died by the tens of thousands when dikes broke, and then went out in the world to share sell their dike-building expertise). This chapter (called “Spade work” but more properly drain)  explains why the Dutch take maintenance so seriously (to my great joy) — they have centuries of experience in those everyday tasks and numerous examples of what happens to those who do not keep their dikes strong and drains clear. (Veen confirms that the Dutch did indeed kill those unwilling to do the work needed to protect the community. My favorite (!) punishment was when the resister was skewered with a post and then buried, alive, in the dike that he failed to maintain.) In these early days, the Dutch needed to work with water that was too powerful for mere men. This necessity created men of art, skill and patience enough to build up an area over decades. I was surprised (and then not) to read of the many Dutch working abroad: The Erie canal was financed by the Dutch; its locks were built by Dutch engineers. This section finishes with descriptions of the great leaders who led the Dutch to claim so much of their land from the sea, and plea to ignore short-term profit and loss in favor of the long-term returns to the nation of new land. (Veen’s “think of the children” perspective is easier to understand as claim that a government with a low discount rate can build mega projects. That’s true, but it can also result in white elephants.)

Chapter 2 describes the surprising appeal of dredging, which never struck me as either fun or exciting. To make a long (hundreds of years!) story short, let me assure you that dredges are very exciting for the Dutch, as they — first in horse-driven and then in steam-driven form — made the difference between Amsterdam being a port at the center of an empire and a muddy estuary. Dredging was even more important to Rotterdam, as it allowed the Dutch to build canals and clear rivers to create the capacity that resulted in the largest and busiest port in the world (until Asian ports took over in 2004). 

Chapter 3 “Master of the floods” is actually about land reclamation, which has produced a sizable share of the Netherlands. Here, Veen is in his most excited state, describing the great reclamation of the Zuiderzee. The fact that event did not pass (only one-quarter of the area was reclaimed, most obviously in Almere) makes this chapter interesting, as it reflects both the optimism of an engineer-unchained as well as capturing the boldness of “future” that characterised the post-War generation. The chapter is full of details on the science of land/water interactions, and histories of the efforts to persuade citizens to “invest in the future.” The engineering required to dredge new land into existence was extreme, risky and world-famous. The Dutch are still leaders in explaining how to master (or fight) nature. 

The final chapter is Veen’s argument in favor of the Delta Works, which would cost a fortune but reduce the risk of floods such as that of 1953 by reducing the Netherlands’ linear risk via massive sluices and dams designed to keep the North Sea under control. In this chapter Veen, posing as the guest author “Dr. Cassandra,” argues for the Delta Works. To justify “invest in the future,” we are reminded of the old proverb “economy is   good, except for making dams and dikes.” This is Veen’s argument for ignoring benefit-cost analysis and just building the Delta Works. Luckily for us, he was right, if only in underestimating the value of saving his country from drowning.

I recommend this book on one-hand for its fascinating history and insights into the nation’s character, accomplishments, and power in managing water.

Thanks to PH for sending me this book!


Here are all my reviews.

Jive Talking launches

I started thinking about doing a podcast last year because I wanted to find a new way of learning, catching up with people in my network, and bringing new ideas to people. I still like blogging (and will continue to write here), but podcasting provides a different perspective, most obviously because it allows conversation.

I “soft launched” Jive Talking about one month ago with five interviews. In the past few weeks, I have had time to fix up the Soundcloud page hosting the podcast* and put a bit more time into improving “production quality.” I still have a long way to go before I am happy with these details (listen to my intro!), but they are not as important as the conversations, which are unscripted and free to flow wherever we wonder (and wander). I am not alone in liking this element to podcasting:

One of the things that’s so cool about the new media technology is that people want . . . They just want direct communication. They don’t like high-level production values, all to people on YouTube, and they’re very savvy media consumers. A highly produced television show just looks like a lie. If you’ve got something to say, they just want you to sit down and say it. They don’t even want you to edit it so that it’s smoother because that just looks like you’re spinning the content, and you probably are.

My one-handed conclusion is that you’re not going to learn anything until you try something new, so here goes! Please listen to a few episodes, tell me what you think, and/or suggest new guests (including you!)

Episodes:
01 // What do we mean by water privatization?
02 // Monja Esterhuizen on losing less water in South Africa
03 // Delton Chen on incentivizing carbon mitigation
04 // Marina Della Giusta on #metoo, teaching economics, and careers for millennials
05 // Walter E. Block on pollution, regulation, and libertarian ideals
06 // Michelle Wilbur on small-scale renewables, oil and living in Alaska


* Jive Talking is now syndicated via Stitcher. I’ll get Apple iTunes and Google Play links soon!

We understand money pretty good.

I’ve always nodded my head at the truth in Upton Sinclair’s insight that “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” but I recently realized its importance in the quest for sustainability.

It’s clear that many people who make their living from “freeing carbon” (oil workers, loggers, car makers, beef producers, etc.) are not interested in ideas about limiting carbon (and equivalents). As a result, we’re getting climate change and damages of $100 for each $1 these “vested interests” earn.

So now I realize the sad possibility that many of these vested interests — had they saved some of their “carbon windfall” — would be ok with a decarbonising world. That would be because their savings gave them other options for earning, and enjoying, their lives.

Compare Norway and Alberta (or Alaska). Norway saved and invested lots of its oil money, so it now has $1 trillion, or about $185k per citizen. Alberta and Alaska, I know, have saved a lot less. This difference in savings is important because savings make it easier to cope with risk. Norwegians would not be so worried if the “oil carbon was turned off.” Alaskans, Albertans, and the residents of most oil- carbon-exporting countries (including the US) would be terrified, because they make their living from freeing carbon.

It is thus that I arrive at my over-simplified, one-handed conclusion: If we’re going to turn off the  carbon, then we need to “take care” of those who profit from it. The simplest way to do this is pay them off. The easiest way to raise the funds to pay them off is to tax carbon. I would make the tax “dynamic” such that the burden fell for those who ran from carbon while it rose on those who strolled in the same general direction. 

It’s not about the planet, the future or technology. It’s about money.

The air we breathe

I grew up in San Francisco and Los Angeles in the 1970s, when gasoline was leaded (thus damaging brains and increasing crime), and pollution from cars and industry much worse than it is today. (Read about changes in LA from the 70s, improvements for kids since the 90s, SF’s improvements since the 60s, and the recent dangers of inhaling smoke from wildfires.)

As a water economist, I am well aware of the advantages of clean water, which gives me a similar respect for clean air. The problem is that it’s hard to see air or water pollution, which is why I support visualizing technology. 

In the case of water, we’re still waiting, but the technology* for measuring, viewing and recording air quality is improving rapidly, which makes it more likely that average people will change their habits and push for policy changes that can be seen on their devices. (Here’s a great podcast on how residents of a poor area near San Francisco dramatically improved their air quality. Pollution in London’s Tube is 30x street levels, so maybe it’s time to bike?)

Delivery scooter in Bangkok market alley

With that preamble out of the way, let me tell you about the Air Tricorder (!) I bought for €70 in Chiang Mai, Thailand.

As you can see, it’s a plastic box with fans and sensors inside that gives real time measures of the Air Quality Index (AQI) that combines measures for PM2.5, PM10 and NOx. (This video shows how quality changes as a freight train rolls through Utrecht’s central station.) The drawbacks of the Tricorder is that it does not record geo-tagged data, which means that you need to stop often and manually correlate location and time with the AQI.**

What I found to be very interesting was how AQI would change in various places, sometimes counterintuitively.

First is the fact that AQI in an alley may be lower than on a busy street, either because scooters drive in the alleys or people are cooking over charcoal (!!) in the alley. (The Tricorder doesn’t go above 500, which is labeled “ludicrous.) Those cooking habits — along with burning wood in the fireplace or smoking indoors — explain why indoor air pollution is linked to 4,000 deaths per day, worldwide.

Hazardous air INSIDE the theatre?

Second, polluted air doesn’t just “stay outside,” and it can even be worse than outside if inside air is not circulated or filtered (see photo). China’s leaders know this, which is why they have dozens of machines scrubbing the air of their homes and workplaces in polluted Beijing.*** 

Third, the majority of pollution comes from bad practices (burning coal) but also old, outdated and poorly maintained machines and factories. Various countries regulate this issue by banning certain practices or older models of cars, scooters, trucks and so forth, but poor/corrupt countries do not have or enforce these rules, which means that their citizens die younger and children suffer brain damage. Is that policy pro-poor? Probably not, given that their richer neighbors use more energy and travel more

My one-handed conclusion is that you should check your personal air quality and speak out for policies and practices that will improve it.

* Note that I am talking about mobile or personal devices. You can easily get quality measurements from fixed stations (US or EU), but that information is less personal (and thus less actionable) because it’s not about you here and now.

** I was super excited to buy a Flow device that would send real time data to my smart phone, but the €180 device bricked itself when I tried to share it with my GF’s phone. (Flow was funded in late 2018 via Kickstarter.) Two weeks later, I am still waiting for a solution. Their tech support seems to be struggling. I’ll update this post if get a working device (or my money back).

***  This famous twitter account, set up by the US Dept of State in 2008 — back when we were great — forced Chinese leaders to engage with the problem.

Addendum (28 Feb): Living with Bangkok’s dirty air

What do central banks do?

Marcello asks:

What are the pros and cons of the fed raising the interest rates? How does it help control inflation?

I’ll begin by describing the main goals of financial regulation and central banks before turning to the relationship between inflation and interest rates and the Federal Reserve’s tasks.

In theory, financial regulation, like any regulation, is meant to improve market efficiency and reduce systemic risk. In most cases, this means promoting transparency, spreading accurate information promptly, and preventing fraud and mistakes that put the entire system at risk. In reality, these goals tend to be ignored by politicians who want big banks (“national champions”) or benefit from bribes and (retirement) jobs at banks that they allow to make excess profits by taking risks at taxpayers expense (“privatize the gains, socialize the losses”) or growing “too big to fail.” In the US, the biggest problems arise from dividing regulation among so many government agencies that it’s ineffective and the ongoing subsidies to FannieMae and FreddieMac, the private-profit, government-guaranteed mortgage buyers at the central of the Financial Crisis of 2007-12.

Central banks sometimes regulate banks (and other non-bank financial firms), but they are always in charge of managing the money supply with the goal of “keeping inflation under control,” which has been codified as “near 2 percent” for historical reasons.

The connection between inflation and interest rates is tricky, so let me say a bit more about inflation, interest rates and the money supply.

First, there are two types of inflation. “Supply-push” inflation reflects the supply of money. As a simple example, start with a money supply of 100 and 100 units of goods sold at an average price of 1.00. In this case, the price index is 100 because the average basket of goods costs 100 units of money. If money supply doubles (everyone has $2 for every $1 in their pockets), but there are still 100 units of good, then the price index doubles to 200, meaning that inflation is 100 percent. (The most familiar price index — the Consumer Price Index, or CPI — is often used to measure inflation.) Supply-push inflation is present in Venezuela because the government is printing money — and lying about it with the hope that citizens will not notice — while the supply of goods is falling (big topic for another post).

“Demand-pull” inflation results when people devote more of their spending to some goods and thus less to other goods. In most cases, this inflation is normal and benign, because it increases profits in that sector and thus attracts more supply (resources arrive from shrinking sectors), but various political-economic distortions might lead to harmful sorts of demand side inflation in, for example, higher education, medical care and housing in the US. I could write a whole book on these issues, but I’ll give you the simple example of housing markets where demand is strong (people are moving to the area or buying larger houses because they are wealthier) but building regulations restrict demand.

Interest rates can be used to raise and lower inflation by making money “more expensive.” If inflation is high, then an increase in interest rates means that it’s better to save rather than spend money because you can make more money by leaving the money in the bank or investments. This reduction in the “velocity of money” means that they are fewer people chasing the same number of goods, so prices of those goods slow or stop rising.

Interest rates are often set in markets for money based on the demand of a country’s currency vis-a-vis other countries or the money supply set by central banks. It is for these reasons that interest rates depend on exchange rates, banking reserve requirements, open market operations (buying and selling bonds) and many other factors that are hard to understand, let alone manage. It’s this complexity that lies at the heart of debates over the role of central banks. Some people think that central bankers are geniuses that manage our collective prosperity. I am with the other people who think that humans introduce more noise and prefer that a bot increase the supply of money at a known rate and leaves the market to sort out the other factors. (Bitcoin was released 10 years ago based on that exact logic. If you’ve followed its price gyrations, then you know that other factors affect its demand and thus its price!)

Also note that interest rates vary by maturity (e.g., interest rates on overnight deposits vs 30-year loans) because varying “time preferences” lead to different aggregate demand functions.

This summary should give you a (vague) idea of how regulations are supposed stabilize prices and markets, but a brief look at the macroeconomic performance of 200+ countries will tell you that politics, regulations and cross-border operations combine in unpredictable ways to produce systems that fail often, systems that fail when shocked and systems that affect others due to their size or reliability (i.e., the US, EU, China and Japan).

It’s my opinion that the greatest threat to financial and non-financial markets arise from political interference (e.g., India, Turkey, China, UK, Italy and the US in recent months). In many cases these are caused by populists who think that markets can be manipulated to suit their superstitions. They are sometimes right in the short run but always wrong in the medium (1-2 years) and long run. (I think that bitcoin and other “trustless” currencies might gain value in the near future as people lose faith in populist shenanigans.)

Finally, let me note that the US Fedeal Reserve in unusual in its dual mission of simultaneously keeping maximizing employment and preventing inflation. Although its hard to optimize on two margins, it’s even harder to pursue these goals because increases in employment eventually lead to increases in wages (as the supply of workers falls short of demand), which leads to demand-side inflation and thus the need to increase interest rates, which will cool the economy and thus dampen demand for workers.

So what are the pros and cons of increasing interest rates? A reduction in economic activity and job losses (cons) but a decrease in prices and inflation (pros).

My one-handed conclusion is that markets are hard to “manage,” and thus should be regulated in a slow, incremental and transparent way. Most economists understand this. Few politicians do.

Forgetting things past

Under the GDPR, EU residents have gained several important rights over their data. (Privacy laws are weak in the US and non-existent in China.) 
 
One of them is the “right to be forgotten,” which tries to balance the right to privacy against the public’s need to know history. 
 
This post is not about these rights, but the actions that we can take to improve our remembrance of things past, i.e., removing details that might have been interesting for a few days or months but no longer matter to us.
 
As examples, consider emails you wrote to someone you no longer date, silly photos of events long ago, or tweets in reply to a once-urgent-but-now-forgotten conversation.
 
The main idea of deleting, cleaning or summarizing your past is not to whitewash it but to align with our natural tendency (or ability) to forget events (both good and bad) over time. This tendency is very useful, but it loses its power if our digital detritus is saved and shown to us (or others) when we (they) are looking for something else.
 
Even worse, the rise of artificial intelligence means that companies that are storing our data on various clouds (dropbox, iCloud, google drive, etc.) are increasingly likely to mine those data to build algorithms that they will use to make money.
 
Thus, in the past few years, I have:

(Note that I have kept copies of all these deleted items on a back-up hard drive — just in case — but I kinda doubt I’ll ever look at that stuff. Years ago, I threw away the negatives from a few thousand rolls of film I shot while traveling for five years. I’ve not missed them. I still have most of my travel diaries from that period, but I have no temptation to read the detailed scribbles of my 25-year-old self.)

My one-handed conclusion is that you should take control of your digital memory, first to protect yourself from the bots and second to free your memory to keep what’s really important. This control takes more effort than letting things pile up, but the resulting privacy and calm should make the effort worthwhile.

America’s Pravda

When I visited my father a few weeks ago in California, I was forced to listen to Fox “News” for more than the 12 seconds that I can usually stand. What struck me then was its relentless devotion to all things Trump and obsession with tiny slights that served Republican talking points (like four days of discussion of Jim Acosta’s refusal to give up the mike while asking Trump questions at the press conference). 

What I didn’t realize is how far Fox has strayed from any objective definition of news-reporting or journalism. As this VOX video shows — with clips of Fox personalities — the channel has basically morphed into a full time propaganda machine for the Republican Party. Yes, that may be profitable, but it’s also horrible to see tactics borrowed from Orwell’s Ministry of Truth and the Soviet Union’s Russia’s Pravda (un-ironically meaning “truth”) in the US. 

Watch the video and tell me that you’re ok with that. (If you are, then I have a few dictators whose prisons you’d enjoy.)

My one-handed conclusion is that a few too many Americans seem to prefer delusion to truth and tribal loyalties to national strength. Sad.