Generalists vs. Specialists

Specialization has led to great economic gains over the course of civilization. But specialization as such is an economic imperative, not a humanistic or evolutionary one. Evolution, as this article argues, may strongly favor the generalist capabilities of a species. And it rewards individuals with its humanistic benefits, if not in material gains.

As an unrepentant generalist across many disciplines, I especially appreciate the intangible benefits and payoffs (if not the monetary tradeoffs!).

I’m reminded of the academic distinction: a generalist is somebody who knows nothing about everything, while a specialist is one who knows everything about nothing.

The Generalist Specialist: Why Homo Sapiens Succeeded

By Gemma Tarlach | July 30, 2018 10:00 am

 

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Being a generalist specialist, a unique niche, is the hallmark of our species, say researchers — and the reason Homo sapiens (left) are still around but other hominins, including Neanderthals (right), are not. (Credit: Wikimedia Commons)

Some animals are jacks of all trades, some masters of one. Homo sapiens, argues a provocative new commentary, are an evolutionary success story because our ancestors pulled off a unique feat: being masterly jacks of all trades. But is this ecological niche, the generalist specialist, the real reason our species is the last hominin standing?

When paleoanthropologists and archaeologists define what makes our species unique, they usually focus on our use of symbolism and language, as well as our skills in social networking (long before Facebook) and technological innovation. Those arguments for human exceptionalism have been challenged in recent years, however, as researchers have uncovered evidence that other members of the genus Homo, notably Neanderthals, were capable of similar cognitive processes, from artistic expression to producing fire at will.

But maybe, say two researchers, we got it wrong. What defines our species, and has allowed H. sapiens to survive and even thrive after all other hominins went extinct, is not about making better stone projectiles, or networking, or sprucing up the cave walls with a little ochre artwork. We’re the last hominins on Earth because we’re really good at adapting to a huge range of environments, including the extreme.

Over The River And Through The Woods (And The Tundra, And The Desert…)

To make their case, researchers mapped out the likely ranges of archaic members of the genus Homo according to current fossil, paleoenviromental and archaeological evidence. Being a fan of the scientific method, I think it’s worth noting here that this map almost certainly will change as new finds turn up. But for now, working with the best body of evidence we’ve got, it’s clear that early H. sapiens, once they left Africa, seemed to explode across the Old World, moving into territory previously occupied by one or at most two other hominin species.

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A map of the estimated ranges of archaic members of the genus Homo, spanning the period H. sapiens emerged in Africa and dispersed across the rest of the Old World, roughly 60,000-300,000 years ago. (Credit: Roberts and Stewart, 2018. Defining the ‘generalist specialist’ niche for Pleistocene Homo sapiens. Nature Human Behaviour. 10.1038/s41562-018-0394-4)

To be clear, there is good evidence that other hominins called extreme environments home. Denisovans appear to have adapted to high-altitude life in Central Asia, for example, while diminutive H. floresiensis was at home in equatorial island rainforests. It’s been argued, heatedly (no pun intended), that Neanderthals were high-latitude specialists. But only H. sapiens turn up in all of those environments. What might not be immediately evident from the map is that early H. sapiens dispersal wasn’t just about setting foot on a new continent; it was also about moving into new and often extremely challenging environments, from deserts to arctic climes, from treeless, high-altitude plateaus to dense tropical rainforests.

Nevertheless We Persisted

It’s the “unique ecological plasticity” of our species that’s our defining trait, argue the researchers, and it’s what gave us a leg up on surviving, whether moving into new territories or adapting to changing climate conditions. While this conclusion may seem obvious to us now, it’s only been possible to reach it thanks to the flood of new evidence that’s revised the timeline of human evolution and dispersal.

The new research has shown our species evolved earlier than once thought (our start date is now at least 300,000 years ago) and spread beyond Africa sooner than expected: Consider, for example, the first H. sapiens fossil found in the Arabian Peninsula — once thought inhospitable to early humans — and described earlier this year, or a H. sapiens partial jaw from Israel that’s 177,000-194,000 years old.

The key to proving their hypothesis is correct — and to understanding how this ecological plasticity arose in our species — will be acquiring not just more evidence of a H. sapiens presence at different sites, but also strong paleo-enviromental data, particularly in Africa where the earliest H. sapiens lived.

In the meantime, the researchers have coined a novel niche for the intrepid early H. sapiens: the generalist specialist. The team looked at the ecological niche profiles of specialists, such as pandas, and generalists, like the trash panda (aka the raccoon). They concluded that H. sapiens’ unique generalist specialist niche allowed early members of our species to adapt to, and specialize in, living in wildly different environments.

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Pandas are considered specialists because all individuals utilize a single food web. Raccoons, on the other hand (paw?), are generalists adept at exploiting whatever food web they can find, as anyone who has left an unsecured trash can out at night probably knows. Our species has often been considered a generalist, but the authors of today’s commentary propose a new ecological niche for us: the generalist specialist, with different populations capable of adapting to and specializing in a wide range of environments and resources. (Credit: Roberts and Stewart, 2018)

While occupying the unique niche of generalist specialist will no doubt appeal to fans of H. sapiens exceptionalism, it’s unclear that it provides what the researchers describe as a “framework for discussing…how our species became the last surviving hominin on the planet.” Specialists tend to face extinction, for example, only if their specialized ecological niche is wiped out — or they are out-competed by an invasive species. Ahem.

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Networks and Hierarchies

This is a review of British historian Niall Ferguson’s new book titled The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power. It’s interesting to take the long arc of history into account in this day and age of global communication networks, which might seem to herald the permanent dominance of networks over hierarchies. That history cautions us otherwise.

Ferguson notes two predominant ages of networks: the advent of the printing press in 1452 that led to an explosion of networks across the world until around 1800. This was the Enlightenment period that helped transform economics, politics, and social relations.

Today, the second age of networks consumes us, starting at about 1970 with microchip technology and continuing forward to the present. It is the age of telecommunications, digital technology, and global networks. Ours is an age where it seems “everything is connected.”

Ferguson notes that, beginning with the invention of written language,  all that has happened is that new technologies have facilitated our innate, ancient urge to network – in other words, to connect. This seems to affirm Aristotle’s observation that “man is a social animal,” as well as a large library of psychological behavioral studies over the past century. He also notes that most networks may reflect a power law distribution and be scale-free. In other words, large networks grow larger and become more valuable as they do so. This means the rich get richer and most social networks are profoundly inegalitarian. This implies that the GoogleAmazonFacebookApple (GAFA) oligarchy may be taking over the world, leaving the rest of us as powerless as feudal serfs.

But there is a fatal weakness inherent to this futuristic scenario, in that complex networks create interdependent relationships that can lead to catastrophic cascades, such as the global financial crisis of 2008. Or an explosion of “fake news” and misinformation spewed out by global gossip networks.

We are also seeing a gradual deconstruction of networks that compete with the power of nation-state sovereignty. This is reflected in the rise of nationalistic politics in democracies and authoritarian monopoly control over information in autocracies.

However, from the angle of hierarchical control, Ferguson notes that failures of democratic governance through the administrative state “represents the last iteration of political hierarchy: a system that spews out rules, generates complexity, and undermines both prosperity and stability.”

These historical paths imply that the conflict between distributed networks and concentrated hierarchies is likely a natural tension in search of an uneasy equilibrium.

Ferguson notes “if Facebook initially satisfied the human need to gossip, it was Twitter – founded in March 2006 – that satisfied the more specific need to exchange news, often (though not always) political.” But when I read Twitter feeds I’m thinking Twitter may be more of a tool for disruption rather than constructive dialogue. In other words, we can use these networking technologies to tear things down, but not so much to build them back up again.

As a Twitter co-founder confesses:

‘I thought once everybody could speak freely and exchange information and ideas, the world is automatically going to be a better place,’ said Evan Williams, one of the co-founders of Twitter in May 2017. ‘I was wrong about that.’

Rather, as Ferguson asserts, “The lesson of history is that trusting in networks to run the world is a recipe for anarchy: at best, power ends up in the hands of the Illuminati, but more likely it ends up in the hands of the Jacobins.”

Ferguson is quite pessimistic about today’s dominance of networks, with one slim ray of hope. As he writes,

“…how can an urbanized, technologically advanced society avoid disaster when its social consequences are profoundly inegalitarian?

“To put the question more simply: can a networked world have order? As we have seen, some say that it can. In the light of historical experience, I very much doubt it.”

That slim ray of hope? Blockchain technology!

A thought-provoking book.

 

 

 

 

 

 

 

 

 

 

 

 

How the Enlightenment Ends

A Financial Crisis Is Coming?

A provocative article in USNWR. We’ve been warning about unsustainable asset prices built on unsustainable debt leverage for the past 8 years (which only means we were waaaaay too early, but not necessarily wrong!) For all this time we’ve been focused on growing total debt to GDP ratios, which means we’re not getting much bang for all that cheap credit, trying to borrow and spend our way to prosperity.

The PE ratios of equities and housing reflect a disconnect with fundamental values based on decades of market data. For example, one cannot really pay 8-10x income on residential housing for long, or pay near to 50% of income on rents, as many are doing in our most pricey cities.

Nose-bleed asset prices on everything from yachts to vacation homes to art and collectibles to technology stocks and cryptocurrencies are indicative of excessive global liquidity. Soaking up that liquidity to return to long-term trend lines will be a long, jarring process. Nobody really knows whence comes the reckoning since we have perfected a particularly successful strategy of kicking the can down the road.

A Crisis Is Coming

All the ingredients are in place for a catastrophic economic and financial market crisis.

By Desmond Lachman Opinion Contributor USNWR, Feb. 14, 2018, at 7:00 a.m.

MY LONG CAREER AS A macro-economist both at the IMF and on Wall Street has taught me that it is very well to make bold macroeconomic calls as long as you do not specify a time period within which those calls will occur. However, there are occasions, such as today, when the overwhelming evidence suggests that a major economic event will occur within a relatively short time period. On those occasions, it is very difficult to resist making a time-sensitive bold economic call.

 

So here goes. By this time next year, we will have had another 2008-2009 style global economic and financial market crisis. And we will do so despite Janet Yellen’s recent reassurances that we would not have another such crisis within her lifetime.

 

There are two basic reasons to fear another full-blown global economic crisis soon: The first is that we have in place all the ingredients for such a crisis. The second is that due to major economic policy mistakes by both the Federal Reserve and the U.S. administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. That in turn is all too likely to lead to rising interest rates, which could very well be the trigger that bursts the all too many asset price bubbles around the world.

A key ingredient for a global economic crisis is asset price bubbles and credit risk mispricing. On that score, today’s financial market situation would appear to be very much more concerning than that on the eve of the September 2008 Lehman-bankruptcy. Whereas then, asset price bubbles were largely confined to the U.S. housing and credit markets, today, asset price bubbles are more pervasive being all too much in evidence around the globe.

 

It is not simply that global equity valuations today are at lofty levels experienced only three times in the last one hundred years. It is also that we have a global government bond market bubble, the serious mispricing of credit risk in the world’s high yield and emerging market corporate-bond markets and troublesome housing bubbles in major economies like Canada, China, and the United Kingdom.

 

Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.

 

Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

The reason for fearing that the U.S. economy will soon overheat is not simply that it is currently at or very close to full employment and growing at a healthy clip. It is rather that it is also now getting an extraordinary degree of monetary and fiscal policy stimulus at this very late stage of the cycle.

Today, U.S. financial conditions are at their most expansionary levels in the past 40 years due to the combination of very low interest rates, inflated equity prices and a weak dollar. Compounding matters is the fact that the U.S. economy is now receiving a significant pro-cyclical boost from the unfunded Trump tax cut and from last week’s two-year congressional spending pact aimed at boosting military and disaster-relief spending.

 

Today, in the face of an overheated U.S. economy, the Federal Reserve has an unenviable choice. It can either raise its interest rate and risk bursting the global asset price bubble, or it can delay its interests rate decision and risk incurring the wrath of the bond vigilantes who might sense that the Federal Reserve is not serious about inflation risk. In that event, interest rates are apt to rise in a disorderly fashion, which could lead to the more abrupt deflating of the global asset bubble.

 

This time next year, it could very well turn out that today’s asset price bubbles will not have burst and we will not have been thrown into another global economic recession. In which event, I will admit that I was wrong in having been too pessimistic about the global economic outlook. However, I will fall back on the defense that all of the clues were pointing in the opposite direction.

G–gle Culture

DO NO EVIL

 

These excerpts are from a recent online interview by Stefan Molyneux of the fired Google employee James Damore explaining himself:

Generally, I just really like understanding things,” he said about his reasons for compiling his argument. “And recently, through interactions with people, I have noticed how different political ideologies divide us in many ways. I wanted to understand what was behind all that.”

“I read a lot into Jonathan Haidt’s work, a lot about what exactly is the philosophy behind all of these things. And that led me to the beginning of the document,” he explained. 

He described his crystallizing moment as: “I could see that all of us are really blind to the other side, so in these environments where everyone is in these echo chambers just talking to themselves, they are totally blind to so many things.We really need both sides to be talk to each other about these things and trying to understand each other.” 

He critiques both the left and right for not working together: “The easiest way of understanding the left is: It is very open, it is looking for changes. While the right is more closed, and wants more stability. There are definitely advantages to both of those. Sometimes there are things that need to change, but you actually need a vision for what you want. There is value in tradition, but not all traditions should be how they are.”

“We create biases for ourselves. This is particularly interesting, when we talk about how it relates to reality,” he said.

“Both sides are biased in a way, they have motivated reasoning to see what they want out of a lot of things,” he continued. 

This happens a lot in social science, where it is 95% leaning to the left. And so they only study what they want, and they only see the types of things that they want, and they really aren’t as critical of their own research as much as they should. The popular conception is that the right doesn’t understand science at all, that the right is anti-science. It is true that they often deny evolution and climate science, climate change, but the left also has its own things that it denies. Biological differences between people — in this case, sex differences,” he explained. 

He described the experience of diversity training at Google, which inspired him to write: “I heard things I definitely disagreed with in some of the programs. I had some discussions with people there, but there was a lot of just shaming. ‘No you can’t say that, that’s sexist, you can’t do this.’ There is so much hypocrisy in a lot things they are saying. I decided to just create the document just to clarify my thoughts.

I have often recommended Jon Haidt’s research presented in his book, The Righteous Mind. It’s worth a read because much of what is happening in social and political discourse these days reflects a psychological pathology that should be completely unnecessary. But getting out of our own way in politics is a difficult challenge.

I find nothing particularly mendacious about Mr. Damore’s document or his intentions to clarify what is basically an empirical puzzle concerning gender differences. Of course, this was all blown way out of proportion because it challenges some unscientific political agenda.

As a scientist, I assume that all empirical phenomena should be open to skepticism and challenges. I’m not sure how we progress intellectually any other way. The attack on Mr. Damore is an attack on science and for me can only reveal an indefensible political agenda. This is sad, if not dangerous, to say the least.

My own approach in this blog has been to suggest analytical frameworks to help understand how human behavior aggregates up into social behavior that defines our civilization; past, present and future (see Common Cent$). The universe is constantly changing, and survival depends on successful adaptation. Unsuccessful adaptation leads to extinction. Thus, the problem for all species is how to successfully adapt.

It seems to me our knowledge-base in the biological and social sciences, and in the arts and humanities can help us humans out here and I can’t understand why anyone who wants to survive would ignore or discount anything we can learn from that wealth of knowledge. Yet, some would choose to ignore anything that might challenge their world-view, even when they know it is false. G–gle seems to have succumbed to that pressure. That’s a shame, but not a path any of us have to accept.

What’s G–gle’s motto again?

 

 

 

 

QE Pains and Gains

Reprinted from Bloomberg.

The Unintended Consequences of Quantitative Easing

Asset inflation doesn’t have to be bad. Flush governments could invest in education and infrastructure.
August 21, 2017, 11:00 PM PDT

Quantitative easing, which saw major central banks buying government bonds outright and quadrupling their balance sheets since 2008 to $15 trillion, has boosted asset prices across the board. That was the aim: to counter a severe economic downturn and to save a financial system close to the brink. Little thought, however, was put into the longer-term consequences of these actions.

From 2008 to 2015, the nominal value of the global stock of investable assets has increased by about 40 percent, to over $500 trillion from over $350 trillion. Yet the real assets behind these numbers changed little, reflecting, in effect, the asset-inflationary nature of quantitative easing. The effects of asset inflation are as profound as those of the better-known consumer inflation.

Consumer price inflation erodes savings and the value of fixed earnings as prices rise. Aside from the pain consumers feel, the economy’s pricing signals get mixed up. Companies may unknowingly sell at a loss, while workers repeatedly have to ask for wage increases just to keep up with prices. The true losers though are people with savings, which see their value in real purchasing power severely diminished.

John Maynard Keynes famously said that inflation is a way for governments to “confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Critically, inflation creates much social tension: “While the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at the confidence in the equity of the existing distribution of wealth.”

Asset inflation, it turns out, is remarkably similar. First, it impedes creative destruction by setting a negative long-term real interest rate. This allows companies that no longer generate enough income to pay a positive return on capital to continue as usual rather than being restructured. Thus the much-noted growth of zombie companies is one consequence of asset price inflation. Thus also the unreasonable leverage and price observed in real estate, with the credit risks it entails for the future.

Second, it also generates artificial winners and losers. The losers are most found among the aging middle class, who, in order to maintain future consumption levels, will now have to increase their savings. Indeed, the savings made by working people on stagnant wages effectively generates less future income because investable assets are now more expensive. The older the demographics, the more pronounced this effect. Germany, for instance, had a contraction of nearly 4 percent of gross domestic product in consumer spending from 2009 to 2016.

The winners are the wealthy, people with savings at the beginning of the process, who saw the nominal value of their assets skyrocket. But, as with consumer inflation, the biggest winner is the state, which now owns through its monetary authority, a large part of its own debt, effectively paying interest to itself, and a much lower one at that. For when all is accounted for, asset inflation is a monetary tax.

The most striking similarity between consumer price inflation and asset inflation is its potential to cause social disruption. In the 1970s workers resorted to industrial action to bargain for wage increases in line with price increases.

Today, the weakened middle class, whose wages have declined for decades, is increasingly angry at society’s wealthiest members. It perceives much of their recent wealth to be ill-gotten, not resulting from true economic wealth creation [and they are correct], and seeks social justice through populist movements outside of the traditional left-right debate. The QE monetary disruption almost certainly contributed to the protest votes that have been observed in the Western world.

The central banks now bear a large responsibility. If they ignore the political impact of the measures they took, they will exacerbate a politically volatile situation. If, on the other hand, the gains made by the state from QE can be channeled to true economic wealth creation and redistribution, they will have saved the day.

This is entirely possible. Rather than debating how and how fast to end quantitative easing, the central bank assets generated by this program should be put into a huge fund for education and infrastructure. The interest earned on these assets could finance real public investment, like research, education and retraining. [That’s fine, but it does little to compensate for the massive transfer of existing wealth that is causing the political and social dislocations, such as unsustainable urban housing costs.]

If the proceeds of QE are invested in growth-expanding policies, the gain will help finance tomorrow’s retirements, and the government-induced asset inflation can be an investment, not simply a tax.

Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.

 

A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.

 

The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

 

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.

 

The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

 

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.

 

The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

 

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.

 

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

 

Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.

 

Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

The Bubble Economy

This is where the easy credit goes. A slush fund for Wall St. and Silicon Valley…

Full article here.

Money, money, money: Silicon Valley speculation recalls dotcom mania

Venture capitalists and private equity investors keep the bubble going with their millions

by Rana Foroohar

Financial Times
July 17, 2017

…It’s a bubble that is different — but the same — as the last time. In 2000, start-ups like pets.com were able to go public and jack up share prices even as they were losing hundreds of millions of dollars. The digital ecosystem has since grown, changed and deepened. Today it is harder for companies to receive funding just by sticking “.com” behind their names.

But now, as then, you do not necessarily need profits or paying customers to draw investor interest but rather “users” in a hot market niche. Compelling narratives develop around these sectors (wearables, electric cars, the “sharing” economy). Companies send market signals about their own “value” with announcements that play off these narratives, for example, Uber’s $680m purchase of self-driving truck firm Otto).

Venture capitalists and private equity investors keep the bubble going by buying into it at higher and higher valuations. The smartest ones guarantee their own success by taking rich advisory fees along the way and exiting before disaster via the secondary market for private shares. And this is, as behavioural economist Peter Atwater recently pointed out to me, unusually liquid thanks in part to central bank-enabled easy money.

The virtual money, generated by valuations that are based as much on narrative as fact, is used to salaries: it can cost upward of $2m in cash and stock options to recruit a driverless-car engineer in the Valley. These then distort the price of property, services and labour. You’ll weep when you see the prices of depressing ranch-style homes off Highway 101, which runs through Silicon Valley. The whole cycle is straight-up “madness of crowds”, as described by Charles Mackay in 1841.

Leviathan State

From the point of view of political economy and policy, this is the best and most relevant essay I’ve read in awhile. The Administrative State (or Deep State), no matter how much good it does, is antithetical to individual liberty, justice, and, I would argue, long-term economic and political security and stability. Be careful what you wish for with free health care or an imperial POTUS!

Reprinted from the WSJ:

The Tyranny of the Administrative State

Government by unelected experts isn’t all that different from the ‘royal prerogative’ of 17th-century England, argues constitutional scholar Philip Hamburger.

New York

What’s the greatest threat to liberty in America? Liberals rail at Donald Trump’s executive orders on immigration and his hostility toward the press, while conservatives vow to reverse Barack Obama’s regulatory assault on religion, education and business. Philip Hamburger says both sides are thinking too small.

Like the blind men in the fable who try to describe an elephant by feeling different parts of its body, they’re not perceiving the whole problem: the enormous rogue beast known as the administrative state.

Sometimes called the regulatory state or the deep state, it is a government within the government, run by the president and the dozens of federal agencies that assume powers once claimed only by kings. In place of royal decrees, they issue rules and send out “guidance” letters like the one from an Education Department official in 2011 that stripped college students of due process when accused of sexual misconduct.

Unelected bureaucrats not only write their own laws, they also interpret these laws and enforce them in their own courts with their own judges. All this is in blatant violation of the Constitution, says Mr. Hamburger, 60, a constitutional scholar and winner of the Manhattan Institute’s Hayek Prize last year for his scholarly 2014 book, “Is Administrative Law Unlawful?” (Spoiler alert: Yes.)

“Essentially, much of the Bill of Rights has been gutted,” he says, sitting in his office at Columbia Law School. “The government can choose to proceed against you in a trial in court with constitutional processes, or it can use an administrative proceeding where you don’t have the right to be heard by a real judge or a jury and you don’t have the full due process of law. Our fundamental procedural freedoms, which once were guarantees, have become mere options.” ​

In volume and complexity, the edicts from federal agencies exceed the laws passed by Congress by orders of magnitude. “The administrative state has become the government’s predominant mode of contact with citizens,” Mr. Hamburger says. “Ultimately this is not about the politics of left or right. Unlawful government power should worry everybody.”

Defenders of agencies like the Securities and Exchange Commission or the Environmental Protection Agency often describe them as the only practical way to regulate today’s complex world. The Founding Fathers, they argue, could not have imagined the challenges that face a large and technologically advanced society, so Congress and the judiciary have wisely delegated their duties by giving new powers to experts in executive-branch agencies.

Mr. Hamburger doesn’t buy it. In his view, not only is such delegation unconstitutional, it’s nothing new. The founders, far from being naive about the need for expert guidance, limited executive powers precisely because of the abuses of 17th-century kings like James I.

James, who reigned in England from 1603 through 1625, claimed that divinely granted “absolute power” authorized him to suspend laws enacted by Parliament or dispense with them for any favored person. Mr. Hamburger likens this royal “dispensing” power to modern agency “waivers,” like the ones from the Obama administration exempting McDonald’s and other corporations from complying with provisions of the Affordable Care Act.

James also made his own laws, bypassing Parliament and the courts by issuing proclamations and using his “royal prerogative” to establish commissions and tribunals. He exploited the infamous Star Chamber, a court that got its name from the gilded stars on its ceiling.

“The Hollywood version of the Star Chamber is a torture chamber where the walls were speckled with blood,” Mr. Hamburger says. “But torture was a very minor part of its business. It was very bureaucratic. Like modern administrative agencies, it commissioned expert reports, issued decrees and enforced them. It had regulations controlling the press, and it issued rules for urban development, environmental matters and various industries.”

James’s claims were rebuffed by England’s chief justice, Edward Coke, who in 1610 declared that the king “by his proclamation cannot create any offense which was not an offense before.” The king eventually dismissed Coke, and expansive royal powers continued to be exercised by James and his successor, Charles I. The angry backlash ultimately prompted Parliament to abolish the Star Chamber and helped provoke a civil war that ended with the beheading of Charles in 1649.

A subsequent king, James II, took the throne in 1685 and tried to reassert the prerogative power. But he was dethroned in the Glorious Revolution in 1688, which was followed by Parliament’s adoption of a bill of rights limiting the monarch and reasserting the primacy of Parliament and the courts. That history inspired the American Constitution’s limits on the executive branch, which James Madison explained as a protection against “the danger to liberty from the overgrown and all-grasping prerogative of an hereditary magistrate.”

“The framers of the Constitution were very clear about this,” Mr. Hamburger says, rummaging in a drawer for a pocket edition. He opens to the first page, featuring the Preamble and Article 1, which begins: “All legislative Powers herein granted shall be vested in a Congress.”

“That first word is crucial,” he says. “The very first substantive word of the Constitution is ‘all.’ That makes it an exclusive vesting of the legislative powers in an elected legislature. Congress cannot delegate the legislative powers to an agency, just as judges cannot delegate their power to an agency.”

Those restrictions on executive power have been disappearing since the late 19th century, starting with the creation of the Interstate Commerce Commission in 1887. Centralized power appealed to big business—railroads found commissioners easier to manipulate than legislators—as well as to American intellectuals who’d studied public policy at German universities. Unlike Britain, Germany had rejected constitutional restraints in favor of a Prussian model that gave administrative agencies the prerogative powers of the king.

Mr. Hamburger believes it’s no coincidence that the growth of America’s administrative state coincided with the addition to the electorate of Catholic immigrants, blacks and other minorities. WASP progressives like Woodrow Wilson considered these groups an obstacle to reform.

“The bulk of mankind is rigidly unphilosophical, and nowadays the bulk of mankind votes,” Wilson complained, noting in particular the difficulty of winning over the minds “of Irishmen, of Germans, of Negroes.” His solution was to push his agenda using federal agencies staffed by experts of his own caste—what Mr. Hamburger calls the “knowledge class.” Wilson was the only president ever to hold a doctorate.

“There’s been something of a bait and switch,” Mr. Hamburger says. “We talk about the importance of expanding voting rights, but behind the scenes there’s been a transfer of power from voters to members of the knowledge class. A large part of the knowledge class, Republicans as well as Democrats, went out of their way to make the administrative state work.”

Mr. Hamburger was born into the knowledge class. He grew up in a book-filled house near New Haven, Conn. His father was a Yale law professor and his mother a researcher in economics and intellectual history. During his father’s sabbaticals in London, Philip acquired a passion for 17th-century English history and spent long hours studying manuscripts at the British Museum. That’s where he learned about the royal prerogative.

He went to Princeton and then Yale Law School, where he avoided courses on administrative law, which struck him as “tedious beyond belief.” He became slightly more interested during a stint as a corporate lawyer specializing in taxes—he could see the sweeping powers wielded by the Internal Revenue Service—but the topic didn’t engage him until midway through his academic career.

While at the University of Chicago, he heard of a colleague’s inability to publish a research paper because the study had not been approved ahead of time by a federally mandated institutional review board. That sounded like an unconstitutional suppression of free speech, and it reminded Mr. Hamburger of those manuscripts at the British Museum.

Why the return of the royal prerogative? “The answer rests ultimately on human nature,” Mr. Hamburger writes in “The Administrative Threat,” a new short book aimed at a general readership. “Ever tempted to exert more power with less effort, rulers are rarely content to govern merely through the law.”

Instead, presidents govern by interpreting statutes in ways lawmakers never imagined. Barack Obama openly boasted of his intention to bypass Congress: “I’ve got a pen and I’ve got a phone.” Unable to persuade a Congress controlled by his own party to regulate carbon dioxide, Mr. Obama did it himself in 2009 by having the EPA declare it a pollutant covered by a decades-old law. (In 2007 the Supreme Court had affirmed the EPA’s authority to do so.)

Similarly, the Title IX legislation passed in 1972 was intended mainly to protect women in higher education from employment discrimination. Under Mr. Obama, Education Department bureaucrats used it to issue orders about bathrooms for transgender students at public schools and to mandate campus tribunals to adjudicate sexual misconduct—including “verbal misconduct,” or speech—that are in many ways less fair to the accused than the Star Chamber.

At this point, the idea of restraining the executive branch may seem quixotic, but Mr. Hamburger says there are practical ways to do so. One would be to make government officials financially accountable for their excesses, as they were in the 18th and 19th centuries, when they could be sued individually for damages. Today they’re protected thanks to “qualified immunity,” a doctrine Mr. Hamburger thinks should be narrowed.

“One does have to worry about frivolous lawsuits against government officers who have to make quick decisions in the field, like police officers,” he says. “But someone sitting behind a desk at the EPA or the SEC has plenty of time to consult lawyers before acting. There’s no reason to give them qualified immunity. They’ll be more careful not to exceed their constitutional authority if they have to weigh the risk of losing their own money.”

Another way of restraining agencies—one President Trump could adopt on his own—would be to require them to submit new rules to Congress for approval instead of imposing them by fiat. The president could also order at least some agencies to resolve disputes in regular courts instead of using administrative judges, who are departmental employees. Meanwhile, Congress could reclaim its legislative power by going through regulations, agency by agency, and deciding which ones to enact into law.

Mr. Hamburger’s chief hope for reform lies in the courts, which in earlier eras rebuffed the executive branch’s power grabs. Those rulings so frustrated both Theodore Roosevelt and Franklin D. Roosevelt that they threatened retaliation—such as FDR’s plan to pack the Supreme Court by expanding its size. Eventually judges surrendered and validated sweeping executive powers. Mr. Hamburger calls it “one of the most shameful episodes in the history of the federal judiciary.”

The Supreme Court capitulated further in decisions like Chevron v. Natural Resources Defense Council (1984), which requires judges to defer to any “reasonable interpretation” of an ambiguous statute by a federal agency. “Chevron deference should be called Chevron bias,” Mr. Hamburger says. “It requires judges to abandon due process and independent judgment. The courts have corrupted their processes by saying that when the government is a party in case, they will be systematically biased—they will favor the more powerful party.”

Mr. Hamburger sees a good chance that the high court will limit and eventually abandon the Chevron doctrine, and he expects other litigation giving the judiciary a chance to reassert its powers and protect constitutional rights. “Slowly, step by step, we can persuade judges to recognize the risks of what they’ve done so far and to grapple with this very dangerous type of power,” he says. The judiciary, like academia, has many liberals who have been sympathetic to the growth of executive power, but their perspective may be changing.

“Administrative power is like off-road driving,” Mr. Hamburger continues. “It’s exhilarating to operate off-road when you’re in the driver’s seat, but it’s a little unnerving for everyone else.”

He says he observed this effect during a recent conversation with a prominent legal scholar. The colleague, a longtime defender of administrative law, was discussing the topic shortly after Mr. Trump’s inauguration.

The colleague told Mr. Hamburger: “I am beginning to see the merit of your ideas.”

Blogger’s Note: I’m a member of the knowledge class and trust me, nobody really knows anything!

Finite and Infinite Games: the Internet and Politics

About two decades ago James Carse, a religious scholar and historian, wrote a philosophical text titled Finite and Infinite Games. As he explained, there are two kinds of games. One could be called finite, the other infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play.

This simple distinction invites some profound thought. War is a finite game, as is the Superbowl. Peace is an infinite game, as is the game of love. Finite games end with a winner(s) and loser(s), while infinite games seek perpetual play. Politics is a finite game; democracy, liberty, and justice are infinite games.

Life itself, then, could be considered a finite or infinite game depending on which perspective one takes. If ‘he who dies with the most toys wins,’ one is living in a finite game that ends with death. If one chooses to create an entity that lives beyond the grave, a legacy that perpetuates through time, then one is playing an infinite game.

One can imagine that we often play a number of finite games within an infinite game. This supports the idea of waging war in order to attain peace (though I wouldn’t go so far as saying it validates destroying the village in order to save it). The taxonomy also relates to the time horizon of one’s perspective in engaging in the game. In other words, are we playing for the short term gain or the long term payoff?

I find Carse’s arguments compelling when I relate them to the new digital economy and how the digital world is transforming how we play certain games, especially those of social interaction and the monetization of value. That sounds a bit hard to follow, but what I’m referring to is the value of the information network (the Internet) as an infinite game.

I would value the internet according to its power to help people connect and share ideas. (I recently wrote a short book on this power called The Ultimate Killer App: The Power to Create and Connect.) The more an idea is shared, the more powerful and valuable it can be. In this sense, the internet is far more valuable than the sum of its various parts, and for it to end as the victim of a finite game would be a tragedy for all. So, I see playing on the information network as an infinite game.

The paradox is that most of the big players on the internet – the Googles, Facebooks, Amazons, etc – are playing finite games on and with the network. In fact, they are using the natural monopoly of network dynamics to win finite games for themselves, reaping enormous value in the process. But while they are winning, many others are losing. Yes, we do gain in certain ways, but the redistribution of information data power is leading to the redistribution of monetary gains and losses across the population of users. In many cases those gains and losses are redistributed quite arbitrarily.

For instance, let us take the disruption of the music industry, or the travel industry, or the publishing industry. One need not lament the fate of obsolete business models to recognize that for play to continue, players must have the possibility of adapting to change in order to keep the infinite game on course. Most musicians and authors believe their professions are DOA. What does that say for the future of culture?

Unfortunately, this disruption across the global economy wrought by digitization is being reflected in the chaotic politics of our times, mostly across previously stable developed democracies.

These economic and political developments don’t seem particularly farsighted and one can only speculate how the game plays out. But to relate it to current events, many of us are playing electoral politics in a finite game that has profound implications for the more important infinite game we should be playing.

 

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