20100127

Alan Greenspan Is Very Disappointed In You

I know, I know, I'm a computer science major who has no business blogging about the economy. Besides, the banking collapse was what, a year ago by now ? Thankfully, traffic to this website is light so I can speak (mostly) freely without too much scrutiny.

In summary of the banking crisis and subsequent economic collapse which we are still experiencing, Alan Greenspan states :

"I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms"

In other words, "I forgot that people will sacrifice the long term financial stability of their companies for short term personal gain". Deregulation places too much faith in the goodness of human nature and assumes that individual economic incentives average together to achieve a global optimum. They do not.

I sat for 10 minutes in Econ101 at CMU and then walked out forever, on account of student comments and the instructor's attitude. I know a stronger man would have studied opposing viewpoints, but the naivete was shocking. Most players in the free market have no idea what kind of fire they are playing with, and once reality dawns, they are too far in and comfortable to find another way of life.

Everything, literally everything, that goes on today is influenced by market forces. There are countless small connections, bridges from profit motivated systems to the architecture of our society. Profit motives, purely selfish motives, influence our government and cultural system in unfathomable ways.

It is possible for even a incorruptible leaders to fall into the trap. It is a problem of global verses local optimization. Well intentioned leaders may freely seek a local optimum, but face impossible opposition ( and failure to get re-elected ) if they try to go uphill for a time in order to seek a global optimization.

Democratic systems can be crippled when a system of economic incentives creates a local minimum, such that all possible paths to change seem to make things worse in some way. It is hard for individuals to trust the state and say, pay higher taxes, since the benefits, if any, are remote. It is hard to get elected if you can't afford to speak to your constituents. It is sad, but money is easily converted into political power, and all attempts to improve this situation are inherently an up-hill battle. ( note that evolution has decided that horizontal gene transfer : sexual reproduction or assimilation of foreign genes, is the best way to escape local minima. How do you breed two governments ? )

Did you know that the prison guard lobby was one of the strongest proponents for tougher sentencing for drugs users ? That's right, there's a group of people for whom economic self interest directly opposes our ability to deal with medical and mental health problems, and actually impairs our ability to secure our streets.

Did you know that the corn lobby keeps sugar import tariffs high so that high fructose corn syrup is artificially cheap ? Fructose is an intrinsically unhealthy sugar, it is much harder for your body to store as glycogen as it would glucose, and so most of it gets stored as fat. The corn farming companies have an economic self interest to promote obesity and diabetes, and perpetuate poverty in counties that would otherwise export cane sugar to the United States.

ENRON had an economic self interest to keep California in the dark.

Around here in Pennsylvania, you can see all sorts of propaganda from the coal mining companies. The coal companies have an economic self interest to keep the rate of cancer high, and destroy the local environment while continuing to contribute to greenhouse gas emissions and contributing very little net income to the local economy besides low paying jobs.

Did you know that there are people out there selling "police brutality insurance" now, that you can buy to cover the cost of lawsuits when your security forces beat up innocent people ? So, somewhere out there... right now, as I type, is a guy sitting behind a desk thinking "how can I sell more police brutality insurance while minimizing the risk of actually having to pay out?". I can only speculate as to the sort of economic incentives this creates. If we are to minimize risk of lawsuits by say... training security forces properly, and properly scaling force to favor life and human rights over paranoia, well, we wouldn't need the insurance in the first place. Its unclear if the sellers of brutality insurance are thinking as deeply as say, health insurance providers, about how to maximize profits. If they are then we have another economic self interest short circuit that allows profit motives to cause the government to act against the interest of its citizens.

Ladies and gentlemen, economic self interest does not lead to an optimal economy. Rational beings acting in self interest screw over and hurt other rational beings. In this democracy, people vote for themselves, without thought for the complex downstream consequences of their choice.

I realize this is a lot of opinion and the issue is far more complex, and less one-sided than I've made them out to be. If you happen to stumble upon this post, and have some good ideas, let me know. If you just want to contradict my statements that's fine too, but it would be good to attempt to reconcile contradictions ( which is not the same thing as compromise ).


3 comments:

  1. Markets are pretty good at optimizing functions. Ergo, I like solutions where we modify the function that the market needs to modify, such as emissions trading. Another interesting solution along these lines -- and of course I'm not the first to come up with that, either -- is to replace the minimum wage and many labor regulations with a fixed (and sufficient to live on) government payout to any adult, regardless of work status, provided via increases in the progressive income tax. This is, oddly, a market-oriented solution to poverty and crime, at least domestically, and also perhaps to the constant clamoring for economic growth as the only way to square increasing productivity with full-ish employment. Of course, the middle-class moralists will not let this happen anytime soon.

    Anyway, in our peculiar brand of democracy politicians behave in expectation that people will vote their immediate self-interest, which prevents anything from getting done ever. We need a change in attitude (although a system akin to proportional representation might actually help, as much as Jaap hates it.)

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  2. What's an optimum economy?

    That's not a rhetorical question. The fundamental economic problem is allocating scarce resources. Through science and technology, we've increased the abundance of scarce resources to the point where the necessities for life (at least in the 1st world), are in no reasonable sense scarce. But in doing so, we've created an ecological catastrophe of a high energy economy totally dependent on limited fossil fuels, but also more interestingly a human catastrophe.

    People gain value in their lives not by consuming, but by producing, and efficiency has meant that there is less and less meaningful production to do around. A necessary (if impossible) aim would be to create the foundations of a low-energy, production intensive economy with a standard of living amenable to 21st century Americans.

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  3. "Ergo, I like solutions where we modify the function that the market needs to modify, such as emissions trading."

    yes, I like this. ( I wish I had something more clever to say ). The problem is that _free_ markets actually seem to pull us away from global optimization. Find a way to trade carcinogen free air and we'll be well on our way to a solution.

    "We need a change in attitude"

    I wish I knew how. A change in government seems more like a good idea. More socialism please ?

    "What's an optimum economy?"

    When I said optimization, I meant feeding and housing all of you citizens while preserving as many cherished rights as possible, as well as opportunity for advancement and intellectual pursuits. I assume that most governing systems seek this state, but get sidetracked by practical implementation, selfish forces, and problems with contradicting moral imperatives from different cultures.

    "production intensive economy with a standard of living amenable to 21st century Americans"

    I think a do-it-yourself art based culture would work ? Instead of having someone watch the machine that turns oil into salad forks, you have people who carve salad forks or print customized ones on rapid prototyping machines or something. Goods are valued on their uniqueness ?

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