Thank you for your work in the public discourse. Your moderate pragmatism is often both interesting to read, and wise. However, a post today entitled “Whos Talking About Sheeps Clothing“, bothered me, not so much for what you said about it, but for the assumptions that are made by you and the others of the posts you reference. My response is, like all those I write, a far broader treatment than you (or anyone else) may consider is warranted. However, while Socrates stated that the first purpose in any debate is to define one’s terms, it has become apparent over the centuries, that we must also define our method, define the population that we mean to affect, and the time frame of the outcome we desire. The world is more complicated than the syllogism alone assumes, because the indices by which we measure preferred outcomes are different. This difference in methods and in set of indices may be, or at least appears to be, the difference between social classes, and the difference between political parties.
The political and economic discourse is full of blame-casting today. It attributes malice to individuals who instead have different goals and who lack the knowledge to make better decisions, and lack a breadth of understanding by which to compare their values and solutions to that of others. No one wakes up in the morning and decides to be evil. Even a determination of selfishness is difficult to construct for either the subject or the external observer.
While in your posting on American Decline, you’ve (the collective you) included three diatribes against the private capitalist structure, and it’s incentives, you’ve failed to posit an alternative solution, and the mechanism by which such a solution is ‘knowable’ by it’s participants. It asks the reader to assume he is wise enough to regulate such a thing. And the reader, mired as he is in the stream of mythical history, all too easily ascents to the assumption.
To start with a little perspective, one of the reasons the board system works in europe is because each country is much smaller, less diverse, less economically diverse, and each country is more simple in it’s strategic needs (by far), and because the ancient class system is still in place in europe and the class relationships between the government and the executive leaderships share similar values and ambitions – something that has been removed from american private and political culture. (although not south american).
The class influence may seem a small one, but it maintains a mythos that limits market behavior – including compensation. We had these limits here in the US, both in executive compensation, and in law and limits on fees. But they disappeared with the meritocratic american-dream-lottery, that helped fill the continent with people. And even this mythos for the common man held up well into the early twentieth century, when the accumulated impact from the post civil war era’s transformation of te federal government and it’s increased powers allowed people in the upper classes could use government to close the ranks, as well as leverage the government to create temporary or politically advantageous semi-monopolies.
We have no similar behavioral constraint. In fact we developed very different institutionalized behaviors both in public and private sector governance. And while the three postings cast these CEO’s as wolves, rather than another breed of sheep, it is perhaps, in this context of institutions, more likely that they are sheep.
Recommending regulatory solutions to this problem of cultural institutions and incentives is certainly one way of approaching the problem. Unfortunately regulation doesn’t alter the underlying behavior, and in this case, would simply reinforce the underlying set of assumptions that cause us to have the problem of exaggerated incentives. Furthermore, regulatory philosophy in this case, which you also clearly categorize as punishment, demonstrate a lack of understanding of why these incentives exist. So proposed regulatory solutions that do not alter the underlying causes are band aids that do not fix the problem only redirect it and reinforce it. And the solutions recommended seem to rely upon ‘common sensibility’ and suggest no method of measurement other than ‘common sense’, or that common sense that is determined by regulators. To define a solution, in any field, not just this one, means posting an epistemology that makes it possible for participants to know the criteria for success, and the incentives for encouraging success. Appealing to regulatory oracles is not one of them. We don’t need to resort to an unpleasant branch of philosophy, we can simply say we need a method of accounting that makes good judgement possible.
Furthermore, it’s an error in social science (verus physical science) to pick a small scope of experments and apply them to the broader spectrum of social and political problems. While the scientific method is useful for this kind of analytical deconstruction, because it is a process of discovery, the social sciences are resistant to that method, but instead, require that we include all possible data and synthesize solutions by iterative refinement. Even Aristotle knew this, and when he wrote the Politics, and surveyed all the constitutions of hellas before he drew idealistic conclusions. To solve a problem like ‘American Decline’, requires we look at the scope of all possible causes for American Decline, and then identify patterns of similarity between them. It is not all that difficult to do that if you go back just two hundred years. We are not short of reasons. There are plenty of them.
It is at this point in the discussion the politician says “but I need to act now, to do something”, and the economist says “we aren’t trying to solve that problem” and the entrepreneur says “but we can at least fix this one problem”. To which we must respond, that none of them understands what problem they are fixing, and in their division of knowledge microcosm they, somewhat humorously, believe that they have sufficient knowledge to make useful decisions about a topic of human contemplation that is defined by it’s incomprehensibility: the market itself.
But to consider such a scope and perform that comparison, requires you separate what it is possible for people to know at any point in time, from what they did know, from what they did not know, that people later did know. (If that isnt’ confusing enough on it’s own.) Otherwise you will make the same error in historical analysis that you are making in the three postings you reference above — none of which postulates a solution other than common sense application of information that can only be derived from knowledge gained in retrospect, making it valueless and a childish vanity of the people that propose it. We have had a series of waves of ‘scientific’ falsehoods over the past century and a half. And studying where we failed in those falshoods tells us more about how we can succeed, than do an analysis of our percieved successes. Tis again, is an application of the principle of falsification. And we have failed mightily: managed economy socialism, DSEM economics, democracy, monetarism, phlogiston theory, and countless others.
If you perform that extended analysis, you will find the answer. You may not like it. But you will find the answer, because it is there, as plain as day.
And then you can read, in volume, book after book filled with the people who after the 1870’s price-recession, after the 1914 european civil war, after the 1920’s immigration boom, after the 1930’s depression, and as members of FDR’s administration, all warned us that we would accomplish exactly what we have done – distorted our information system.
Since credit is a distortion, that distortion of our information system can be useful *IF*, credit is granted for things that can be tested: things about which we know enough to issue publicly backed credit against. And that’s the issue right there: the limit of what we can know. The interesting thing about credit, is that if you give a loan, and attach a price you are not attaching a price like that of the oranges in the market, but attaching the estimate of the person doing the pricing versus the estimate of the consumer (who is much more ignorant), and the estimate of any regulator (who is more ignorant) and the estimate of the buyer of the debt instrument (even more ignorant), and giving profit to the originator. In other words real-property value estimates are not the independent prices that we attribute to temporally exchanged products. Furthermore, predictions of all forms rely on historical categories of measurement that are open to radical change. Furthermore, the greater the amount of prediction (credit) issued, the greater the distortion of the predictive value because of the greater distortion of the category being predicted. (Which was not included in the XXX formula that purported to forecast risk. An error that is unimaginable to some of us. ) But because of social insurance schemes like bankruptcy and deposit insurance and unemployment, such risks are an act of privatizing wins, and socializing all the losses. Credit issuance and debt instruments are not ‘free trade’ – a term which assumes that a good (like a commodity) is in both price and utility self-evident. *Property values are an artifact of the person making the masurement, not of the market itself.* Instead of being a free market concept, it is the same process of loan sharking, which privatizes wins and socializes losses. To repair this complex scheme requires only that the originator be unable to sell the loan, or at least, he must hold X% of it, and his losses come out first. That is a solution. This is not an abstract regulation based on common sense, it is an acknowlegement of the liability that we require of all market commodities: that they are what they reprepreent to be. Ethic requires that in asymmetry of information the advantage goes to the ignorant, even if it is not to his beneift.
There may be other solutions but that is a solution because it is calculable and it is calculable because the category we are measuring (the originator’s estimate) is attached to it’s conclusion (how the loan performs) and provides incentives (the originator profits or loses), and is *possible*, (the originator and the borrower can make some sort of estimate that far in the future.)
We can apply the same logic of privatizing wins and socializing losses to vast numbers of speculative industries where there is not a division of labor, and the necessary division of knowledge, and therefore necessary ignorance, and a pricing system that helps people communicate, but instead there is asymmetry of information. However, there is only asymmetry of information when it is possible to know what a commodity (a debt instrument) purports to be selling.
It is not asymmetry of information if the difference is unknowable — It’s either gambling or fraud. In particular, the use of probabilism is not applicable to debt objects en masse because en masse, the category of original prediction is distorted. We have seen this proven out of late in the credit crisis – although for some of us, the idea was absurd from the very beginning. The quantitative information included with a debt instrument is insufficient (and may always be so) to categorize the instrument as something that is traded rather than something that is gambled upon. I am one of the people that believe that older generation traders simply hired the younger generation of computer literate traders to build and use databases in full knowledge of what it was that they were doing. And the younger traders and computer scientists were poorly educated enough to fail to undersand the consequences of their assumptions. Eitehr that or they were paid to ignore it, or insufficiently talented to understand that the knowledge that they derived from the complex data expired as an advantage once use of it achieved a critical mass, adding additional distortion to the market’s information system.
If we regulate something, lets start with regulating gambling, and understand that a CEO is operating a table in a casino. He must work within that environment that the state has created, since thse capital markets cannot exist without state sponsorship.
Of course, doing such a thing as conducting an inventory of all the possible reasons for American Decline requires a fairly broad scope of knowledge. But then, the problem you are commenting on requires a broad scope of knowledge. And commending on a problem with political import, without that broad scope of knowledge, well, isnt that just another form of privatizing wins and socializing losses? 🙂 I jest. But freedom of speech is, unbeknownst to it’s advocates, a subsidized political activity. And it is of questionable value. We are not sure that in the presence of enough information to make political decisions (information which we admit we don’t have) that free speech is anything other than one class of people attempting to justify theft by way of government from another class of people through some form of deception or misrepresentation.
And it is the lack of this broad scope of knowledge, just as much as it is silly personal political, class, status, and metaphysical biases, that prevents people in this debate from coming to agreement on how to fix the problem. Each little fragment of society postulates it’s little problem and solution combination, but lacks the skill and knowledge and perhaps time to see the similarity between offered solutions from different fields.
For example, of the thirty-six-odd civilizations that have died in history, all appear to have died for the same reason. Of course, someone like Jarred Diamond attempts to blame this on environmental causes, without asking how people became so numerous, and what system allowed them to exploit their environment, without stopping from over-consuming it. (Some people are out gunned, germed, and steeled, but a lot of them are so because they don’t adopt guns and steels so to speak.) We know the answer, just as we know the answer for how to stop overfishing the seas. We just don’t implement it. We can manage what we can calculate as long as we divide up the effort of calculating to match the division of knowledge needed to perform the calculation. The societies died from failing to develop an epistemic means of organizing society and managing it’s resources. they lacked sufficient property, money, credit and accounting to transitoin from farm economies to urban economies. Religion is a very simple tool. Taxes and laws are very simple tools. They expire in utility at farily low population density. After that density, credit is the only tool that we have invented that works, because it can be managed by the market, not by governors, and applies UNEQUALLY to people who, ina divisinon of labor (unlike slaves and farmers) are in fact, very different in their abilities.
Capitalism is an ‘ism’ if it is a mystical form of belief that you rely upon when making incalculable decisions. And as such no different from any other ‘ism’, such as relying on an assumed collective benefit when making incalculable decisions. Capitalism as a set of institutions that provide both incentives and the technologies by which our individual meager minds can calculate possible uses of the material world, and compare complex, multi-part, multi-state, multi-option, possibilities, in a vast division of knowledge and labor.
The vast majority of decisions are unclear to both individuals and groups. We use myths to help us make tie-breaking decisions as individuals and groups. Where we do not have sufficient myths we use biases. Where we do not have sufficient biases we use ‘ism’s. But the vast majority of our decisions, are only ‘decisions’ because they force us to choose between things about which we have inadequate knowledge. Our myths and biases are how we make most decisions. They have to be. We don’t have enough information otherwise. Time preference is one of our most commonly visible biases. In fact, the difference between classes may entirely be one of time preference.
And the weakness in our political system, is that we must, of necessity, under the ruse of democracy, where highly politically interested minorities rule over politically disinterested majorities, where political participation is at a higher cost to the business person than it is to the populist advocate, rely upon myths, ism’s, and biases, because we lack the calculable means by which to make any other form of decision.
I’ll say that again. “We lack the information.” Or do we?
It appears to me that we have the means, but that we lack the general knowledge to apply them to the policial spectrum, simply because doing so, while truthful, and allowing people to achieve their goals of both calculable capitalism and calculable redistribution, will disempower the political class by doing so, and rightly, and correctly, demonstrate the weakness of our form of government in the process, which is, (because we have destroyed our traditional myths) our only current social mythos. And it appears, that it is a no more legitimate myth, in retrospect, as was our religious mythos.
The greeks were somewhat lucky. Between the fall of Mycenaean civilization and the rise of hellenic civilization they lost writing for five hundred years. And in doing so invented a new mythos out of need. We still live part of that mythos today. We were in the process of creating a new mythos with Romanticism. We killed it with Scientism – which is important to separate from Rationalism. But we lacked the understanding of the limits of science. We lacked a solution to Hume’s Problem. We currently can see that it has something to do with fractal mathematics applied to the learning and forgetting curves of individuals at different ages with different social and economic classes and different bodies of knowledge, and those individuals are affected by the volume of that stimulation compared to it’s rate of retention and forgetting. But we do not have a way to forecast it, simply because it is so vastly more complicated than the mechanics of the physical world, and the fairly linear mathematics of finite categories that allow us to forecast in it.
Scientism, which is a mythos, has failed both in economics and in the Managerial State. It is an insufficient social science. It has failed because we lack the calculative technologies to bridge the managerial state (in time and across generations, with declining populations) with the theocratic, myth-using, political state. And this is not simply because the democratic egalitarian state relies upon the myth of equality, but that’s no small part of it.
We need to create a new binding mythos, and we also need to implement the technologies that we already possess. And what’s frustrating is that we do already possess them: tagged causal accounting, accounting that separates profit and loss from operatons from political compliance and debt, taxes that levied against profits from credit but not from operational service to consumers, credit that moves downward creating a more consumer-serving society, and less credit concentrating upward creating politically competitive nations, or at least two classes of credit and companies so that consumers are served and the state remains competitive. And finally a government that profits from interest earned by it and the people it represents, not taxes inflicted which distort consumer and business behavior creating vast loss, anger, class warfare, and confusion.
Because these technologies were invented by libertarians, who are, almost to a man, anti-redistribution, I suspect that they will not be implemented. However, it is possible to implement them and to include, a rational form of redistribution. And it is possible because libertarians tried desperately to solve the problem of epistemology in the social sciences. It appears that they have done so. But implementing those solutions would vastly decrease the class warfare, and make politicians accountable for their actions. And the vested political interests will not tolerate this.
Libertarians were wrong on free trade. They did not understand the problem of human capital, since when they were writing, they saw ‘labor’ as relatively unskilled resources, when in fact, as Germany has shown by building it’s society to create great skilled labor, it’s just the opposite. Libertarians were wrong, in thinking that the world could form a division of labor by country. While that is a convenient way of thinking, it fails to answer the problem of having every country need to find work for all it’s citizens, rather than just those who best suit the national place in the division of labor. Libertarians were wrong on creating a moralistic, and metaphysical sense of reasoning in order to justify their privatization of wins, and socialization of losses. Private capital is, and always was a myth. People pay for social order by forgoing opportunities for theft and violence. They pay into the social wishing well. Private capital was needed, but there are limits to it, because there are limits to the consequences of it’s use.
But they were NOT wrong on incentives and calculation. Because they openly acknowledge the problem of a division of knowledge, labor, and of ignorance in time. They openly acknowledge the corruption of any power structure, and any government, and any bureaucracy. They do not seek to justify democracy, or democratic decision making, and instead acknowlede it’s fallings.
It is entirely possible to give people health care, job cushioning, and for the rest of us to pay for the incompetent minority to stay home so that we get decent service at a train station. ASsuming we put rabid controls on immigration. And possibly on births.
But it is not possible unless it is knowable, and that is to say ‘calculable’. And it is not possible to implement calculable solutions with current accounting and tax regulations, nor with a political and intellectual class that would be largely disenfranchised in the process, because they, like priests before them, would largely become of little value if we were not absent the information that they, by regulation or lack of it, and credit or lack of it, themselves cause.
American decline is caused by the myth of American ascendancy. We put in place a commercial state, an extension of English Mercantilism, which took over the colonialization efforts from england, and made them local, and then profited from filling the continent with human beings. It took a particular set of political principles to accomplish that task. But that task is complete. We used the profits from it to take over the British empire. We used the time we had after the fall of the European empire to push profits down into the laboring and post war consumer classes. We used television and advertising to market to these newly created suburbanite consumers. We built corporate structures (and corporate myths) to assist in this conversion of farmers to suburban and urban consumers. In a vast competition for which class would win control over this new world order, the lower classes fought for political control via socialism, and the merchant classes via commercialism, libertarianism and Republicanism and free trade. Both argued for free trade. And the old Noble social order, which had lost it’s willingness and perhaps the ability and wealth by which to enact violence in order to preserve their order, simply either abandoned political participation, or resorted to some form of scholastic argumentation, completely at odds with the popular, and more energetic and well funded movements. They, like many civilizations before them, handed over power to the merchant classes, and the merchants, dependent upon trade and profit, not an ability to project the very violence that is needed, rather mandatory, to create private property that allows merchants to exist, fell the the mercy of the vast number of common men, and their level of understanding and time preference.
In America, we have a political structure that has a purpose. It has had a purpose since it’s inception. We have a political structure and now a corporate structure for selling off a continent to immigrants and using the profits to build an empire. That empire has vast human value becasue it exported property rights, accounting, and corporate investment technologies by using military technologies and cultural institutions. That empire also exported meritocracy, but it exported meritocracy simply because meritocracy was it’s competitive advantage over less advanced civilizations. We no longer have a continent to sell off. We no longer have extraordinary profits to use to extend our empire. We did not protect our intellectual assets. We no longer have an advantage in human capital. We did not protect our militaristic value system of self sacrifice and meritocracy. Nor did we protect our lower classes by insuring that they were both competitively skilled and disciplined. So we no longer have our very expensively capitalized mythos, that took centuries to construct. We made the mistake of getting fat dumb and happy.
You can blame a lot of this on the democratic socialist movement. (Which is the underlying and yet unanswered problem.) You can blame it on the culture of empire driven by the need to federalize (create an empire) over the local states, and then using that method to take over from england. (which is what happened). You can blame it on the general Suffrage and enfranchisement and feminist movements (which is where quite a bit of the incentive against capitalization and discipline is due). You can blame a lot of this on the commercial and libertarian movements. You can blame it on economic and cultural disruption created by the advance steam, fossil fuel, and electrical power, and it’s productivity increases. You can blame it on the destabilization of opening a new continent, and the price and democragphic impact it had on european culture, who now does not see its job as keeping the east at bay. You can blame it on the ignorance of the average american, who in a democratic society either must be educated to know better, or removed from his political power. And in particular you can blame it on the takeover of the academic establishment by members of the liberal order who have actively undermined education as a tool of controlling the educational theocracy as a means of conducting class warfare, and of women’s dominance of lower education and their knowing and willing destruction of masculine values of dominance, competition, excellence and self sacrifice in favor of empathy, inclusion, non-disruption and equality. Some people give extraordinary credit for destruction to the jewish immigrants who created a lot of both the libertarian-monetarist, legal-relativism, and communist-socialist thought. But this ignores the lack effort by the Christian europeans who simply gave up and checked-out of the political order entirely since the late 1800’s, and who, albiet at the point of a gun in the sixties, changed the teaching of history from an artistic science that favored capitalization, individualism, duty and sacrifice to a political collectivism that favors consumption, redistribution, hedonism, and pleasure. You can blame it on the right who attempted, deceptively, or with fear tactics to use a democratic political process to maintain a social order of liberty, when friends of liberty have always been the minority, because only the minority desire a meritocratic world to live in. You can blame them mostly for failing to create a market for schools instead of having state run education. This woud, above all things, created class based schools, and forced lower classes to compete upward. There is plenty of blame to go around.
These are not trivial problems. American decline is not a matter that will be solved by executive compensation, or any of a dozen other silly little ideas that rely on the comon sense, ( ‘mythology’) of individuals, because each person makes as many decisions a day as he takes steps. Most of these decisions must be made with inadequate information in short time. People rely upon myths that can be generalized and habituated in order to make decisions. Without them these myths and biases they cannot make any. Certain of these myths are very important: credit, justice, the relative purchasing power of money, as well as not to profit from artificial ignorance (ethics), not to profit because of hidden costs (morality), and not to profit despite the fact that we can get away with things (fog of law, fog of bureaucracy, prohibition on just violence).
Instead, American decline will be solved, if at all, by institutions that give people the tools to make good decisions regardless of their place or class or role or job in society. And the replacement of our current faulty mythos on both ends of the spectrum with one more appropriate for our new and permanent circumstances. But to make that argument rational requires data, not moral argument. And that data will eventually, one way or another, come from what we currently consider accounting data, but accounting data that is not categorically ‘laundered’ – in other words, where cause is maintained throughout the cumulative chain where the data is used. ANd in particular, where it is never ‘pooled’. Because pooling accounting data is laundering money. Taxes in particular tend to be the grandest form of money laundering.
Societies die from internal causes because they lack the general will to adapt to new circumstances, and it’s elites lack the political will to make the change, and lacks sufficient elites in the radical public, conservative militaristic, and pragmatic commercial specializations to drive that change. Instead we are often saddled with those who are resistant to doing so largely because they are too comfortable in their current circumstance.
Getting fresh talent into the elite structures in all societies is the primary objective of any social order. Because they implement change. But the secondary purpose is to maintain a mythos that forces the society to capitalize sufficiently to maintain it’s competitive advantage. And third, we must maintain sufficient incentives so that we can compete en mass against other nations who are doing the same.
Consumption is not capitalization whether it takes the form of consumerism or redistribution. They are both forms of spending, not capitalizing. France is perhaps the most prominent country that is spending it’s vast history for temporary democratic political power. They are forcing us via the united nations to do much of the same.
Our problem is the same as it has always been for man: given increases in a division of labor and knowledge that allow us to increase populations and further increase the division of knowledge and labor, what institutions do we need to develop to allow our resource management, forecasting and measurement to be conducted in our new, faster, more populous circumstances.
Common sense isn’t the answer. Regulation is a form of common sense, because regulations are created and written within the current mythos. Laws as we make them are institutionalizing a state of affairs that constantly becomes out dated. Laws, very often, institutionalize the public’s silly ideas. Good laws emerge from codifying business practice. Regulation and laws are not tools for doing, they are tools for punishment. Law is a set of prohibitions not recommendations. And even if it were not, we cannot know what to recommend other than to innovate.
Credit is a form of inducement. It is the opposite of law because it is both positive, a recommendation (but not a command) an incentive, and applies to individuals, not to all men. Credit is a much better practice than law. Unfortunately, we do not see credit with the same power as law, despite the fact that we live, not in a law society, but in a credit society. The social order is maintained by credit not by law. Any immigrant will tell you that american citizenship is a matter of debt participation, and that carrot is more effective than is the stick of law for which the common people have no knowledge and nothing but justifiable, well earned contempt.
Unfortunately both our accounting and our law, are constructed for a time of multi-month long shipping cycles. But we live in a world where run rate is determined by weeks, and profits and losses are better calculated by the day. Production cycles by company are not how we calculate investments or determine asset values, and in particular, not how we tax. But production cycles are the only calendar that any organization should operate by.
What we can know what to recommend is the institutions of calculation that allow us to cooperate, coordinate and communicate in vast numbers in real time.
THe purpose of government then, is to assist in the accumulation of capital needed to solve problems where the incentive to take risk cannot possible to form by nature, largely because of it’s size. That is what governments have been doing since the dawn of civilization: concentrating capital that cannot be concentrated otherwise because the mareket does what we cannot understand, it does not well do what we DO understand.
The purpose of government is not to formulate and institutionalize common sense, which is only sensible for some very limited period of time. We have a lot of change to swallow, and unfortunately it is beyond the scope of our elites. That’s how a civilization dies.
It is to use credit to manage society as individuals who are unequal, not law to manage it as a unity of equals, which it is not. Law is for slave owners and peasants who are equal in their victimhood. Credit is for citizens who are unequal in their ability to serve each other. We are, as a civilization, trying to solve the WRONG problem. It is not how to run a better government with laws, it is how to lave very few laws, and run a government of credit and interest, and to create institutions that allow us to compare and calculate our actions and measure our results from citizen to bureaucrat.
If you want to start somewhere. THat’s where you start. Not by perpetuating the falsehood of executive compensation, which, while ridiculous, is no more ridiculous than the pay we accord to members of sports teams, movie actors, entertainers, and others who give us what we want. Our nation is full of those who tilt at windmills and call themselves wise for having vanquished a slow moving vane.
Its past time for windmills of Law, Socialism, Democracy and Monetarism.
Note To Self:
Pareto class 1 Residues – collective property – Priests and Public Intellectuals – the clerical class – speech and fraud
Pareto class 2 Residues – concentrated property – Soldiers and Nobles – the military and craftsman class – action and violence
Pareto class 3 Residues – diverse property – Merchants and Bankers – the trade, manufacturing and shopkeeper class – trade and honesty