To Each According to His Needs?

A recent study by the Boston Consulting Co. says that 60% of private wealth in China is concentrated in the hands of 0.6% of the population.
—J. Christoph Amberger, executive publisher of the Taipan Group's "Dynamic Market Alert"

(By comparison, the wealthiest 1% of Americans had 33.4% of the United States's net worth in 2001, and 39.7% of America's financial wealth. Not sure what this proves, but interesting nonetheless.)

(Addendum: the figures in the above link that the esteemed G. William Donhoff is hyperventilating over, it seems to me, simply illustrate the 20/80 Rule, i.e. that 20% of people account for 80% of the results in any setting. This should hardly come as a surprise to him.)


The Incompleteness of the Free-Market Model

When dealing with complex human interactions, people have often found it useful to construct simplified models which, while they do not capture the full intricacies of a given interaction, are close enough so that one can abstract away from the human and draw conclusions based on mathematics or logic. In international relations one find the Realist model, which posits that all nations are unitary actors that have the same basic motivation, to become more powerful. This allows an analyst to construct scenarios in advance, which can be used to establish baselines for states' behavior when real crises erupt. (That this model becomes disastrous when academics confuse Realism with reality, unfortunately, is another matter.)

The trick when building such models is that they have to be simple enough to use, yet must include enough moving parts to do a good enough approximation of the real world. When your simplification is too simple, it will inevitably lead you down the wrong path.

In market economics, the standard model consists of two groups of actors: buyers and sellers. They engage in positive-sum interactions to their mutual benefit, efficiently allocating resources and creating a veritable paradise of industry and affluence. No formal place in this model is given to governments or analogous actors, despite their omnipresence. Governments are seen as intruders into the market to the extent that they are involved at all, spoiling with their touch the pristine operation of pure economics. Governments are expected to keep the peace and leave it at that.

As pleasant as such a vision might be for some, it bears no relation to reality, anywhere. The point need not be belabored; governments everywhere intervene in the market routinely. And not just governments, either; increasingly, elements of civil society act when they perceive a threat from seemingly unrelated transactions, for example when farmers will protest the construction of factories that could pollute their water.

The truth is, economic transactions do not occur in isolation. Third parties have an inherent and inalienable interest in the outcome of market interactions. First, such transactions could have incidental effects (such as pollution, or the disruption of established industries, or consuming common resources such as roads) that directly impact third parties. Second (especially with regard to governments), economic transactions cause power shifts. For a government (or an established company or community) to allow the free market to increase the power of an adversary, incidental to its normal operation, would be foolhardy; this is why we have blockades and trade embargoes.

Interested third parties, far from being intrusions onto the free market, are an integral part of that market and always will be. Market transactions will only occur once their expected utility outweighs any opposition put up by third parties. Sufficiently motivated third parties can disrupt markets entirely. That being the case, the typical market model is flawed for neglecting interested third parties.

An improved model would ideally take into account two additional factors: direct incidental impacts on surrounding parties, and changes in relative power. Can this be done without being bogged down in excessive complexity? I don't know. But thinkers who venerate the austere genius of the free market should acknowledge that their model is critically deficient in the same way that political Realism is, and it is equally naĆ­ve to rely exclusively on either.


Quote of the Day

If five firemen get killed fighting a fire, what do you do? Let the building burn?

I wish people in Washington would totally get Vietnam out of their system.
—Lt. Col. "Duke" Christie, Special Forces, quoted in Robert Kaplan's Imperial Grunts, p. 82


Jewlicious Thoughts

Long-time readers of this blog willl know that I have frequently complained about what I saw as a declining interest in fine arts within the Jewish community, at least those parts of it I interacted with. Well, Rabbi Yonah and the crew at Jewlicious decided to do something about it. I was blown away by the whole shabbaton, but most of all by the incredible collection of talent, Jewish and non-Jewish, that was put together for us. Not only did they perform, but they led jam sessions and workshops with the students. The spoken-word poetry workshop run by Besskepp and a friend of his (I forget the name) was especially noteworthy, as students writing on short notice produced some incredibly powerful poetry.

Almost around the clock, students were playing music and singing with Rabbi Yonah, Rabbi Leibish, and many other fantastic artists. The best thing was that none of the music was of that excrable "Jewpop" variety (which is all that I heard at YU); while most of the music had Jewish content, the musical styles were either authentic (and good), or heavily influenced by other musical styles such as jazz, acoustic rock, or funk (and good). The incredible concert was opened by the Makkabees, who played death-metal covers of standard Jewish songs like "Shabbat Shalom." Words simply cannot describe.

I really think that the Shabbaton may end up being the catalyst for a new revival of Jewish creativity. Hundreds of students were exposed to truly innovative and electrifying musicians and writers, and many of us went away inspired to do our own work. (I'm not sure if I want to post the poetry I wrote. It was pretty intense. Think Fidelis, but about fifty times creepier.)

For the first time in a long time, I really think that religious Jewish culture is being revitalized. The Jewlicious Shabbaton should stand in our history as a critical event in that process.


Jewlicious at the Beach 2, Coming Soon

I'm typing right now on a Mac that Apple generously donated to the Jewlicious convention in Long Beach, CA. The event has been amazing so far, and I will have an awful lot to write about once I get time. For now, I'll leave you with a quick thought from one of the writers of a short documentary, "The Tribe," which I heartily recommend. He said that the two core aspects of the Jewish identity, shared by Jews anywhere on the religious spectrum, were a sense of being on the outside, and being unusually comfortable with abstraction.

This goes all the way back, of course. Our forefathers were called "Ivri," Hebrew, meaning "those on the other side." And we were unique in the world in that we worshipped a deity without any sort of physical representation. God exists, as a concept, only in our minds and our books (which themselves are only someone's mind captured for eternity). More than that, our tradition says that God is not simply a being, but at the same time a principle. This affinity for abstract principles has served us in good stead throughout the centuries; I suspect that it could be the root of the famed Jewish skill with managing money.

More to come in a few days. In the meanwhile, some additions to the blogroll are going up in just a bit.

P.s.: Matisyahu's baby is really, really cute.


Quote of the Day

The evil of the current [organ-donation] regime is not that innocent people are dying to uphold a principle. Indeed, it is only for principles that people should be compelled to die. It is, rather, that this is a pretentious counterfeit principle.
Lloyd Cohen, writing about his proposal for an organ market.

Electronic Currency

Today's Wall Street Journal reports that the IRS estimates unpaid taxes at roughly $290 billion. That's nearly enough to close the budget deficit on its own if it were collected, without any changes in government policy. Whatever your views on taxation, it is grossly unjust for some people to break the law and let the tab fall more heavily on their fellow citizens. Yet our present system of taxation relies heavily on self-reporting; tax fraud can be discovered in individual cases, but it seems impossible to halt entirely.

Meanwhile, we are moving more and more in the direction of two loosely-connected economies: a cash economy and a cashless economy which runs on electronic transactions. The cash economy is largely the province of lawbreakers of one sort or another, whether it be those who want to avoid what they consider excessive taxation of otherwise-legal activities, or those who actually make and spend their money illegally. The cashless economy as it presently functions can be incredibly convenient for users but often has unreasonable transaction costs, especially for businesses. (For example, here are the fees paid by the merchant for each Visa transaction.)

Additionally, the proliferation of payment schemes can make recordkeeping and budgeting far too complicated. This is compounded by the sloppiness with which most people manage their money in any event. We as a society depend too much on high-interest credit for our own good, and people far too easily waste their money on frivolous expenses. A daily visit to Starbucks (assuming $3 a day) will set you back $1000 per year. That same money in an investment account could secure your eventual retirement.

Even with the growth in electronic funds transfers, cash has refused to die. This is primarily because individuals have had no convenient way to accept electronic payments. It is hard to match the ease of digging into your pocket for a few bucks. Yet this competitive advantage is beginning to disappear. Paypal, for example, allows low-volume transactions for free. Admittedly the process is still relatively clunky, but that is merely a matter of improving the interface. I could easily imagine someone writing a macro for a cheap handheld internet device that could make Paypal transfers as quick as credit-card transactions are today.

Governments have a large interest in eliminating cash altogether. If all transactions were electronic, they could be routed through a central government clearinghouse, giving a government realtime data on all transactions using that currency. Aside from the obvious uses for taxation, a record of transactions could also be used to generate economic data, detect and prosecute monetary crimes, or (more ominously) to exert control over citizens by regulating how they can make and spend their money. (Such a scenario is a favorite bugbear of gold-afficionados and black-helicoper types. That does not make it any less plausible.)

Some may argue that governments have no right to control people's money in this way, saying that it represents a dangerous infraction on property rights. Perhaps; on the other hand, money is issued by governments to serve as a symbol for value. It is a crime to deface Federal Reserve Notes; in a real sense, governments never give up ownership of their currencies. Citizens are permitted to use government property as a medium for exchange. A parallel can be drawn with public roads and the like.

It is doubtful that electronic currencies and a centralized clearinghouse would be any greater an infringement of property rights and privacy than our current system. Governments can freeze bank accounts or confiscate cash; governments can demand financial records from banks or investment professionals. The only difference is one of efficiency. In a centralized system, there can be no hope of escaping government scrutiny. But that can work to our benefit, if property crimes and tax evasion are curtailed, and if transaction costs for electronic currencies went down. Additionally, proper recordkeeping would become trivially easy. A large segment of the parasite economy (not in a derogatory sense, just in the sense that tax preparers et cetera add little value to the larger economy) would become obsolete.

In all likelihood, a parallel economy based on barter and private currencies would arise. There are some small moves towards such a system already. But criminals who use such things (as opposed to private citizens worried about government control) would lose their easy interface to the legitimate economy, once anonymous cash is replaced. It becomes more difficult to benefit from your crimes safely.

The question now becomes whether such a system is cost-effective, and how governments who use such a system can be prevented from turning it into a tool for oppression. But if sourced transactions allow us to nearly close the deficit, we should at least take a closer look. (Whether politicians can resist spending beyond their means regardless is another problem.)


Bullish or Bearish on Bombs?

I do a lot of research in stock trading and mutual funds. In the market, everyone tries to guess which way particular stocks are headed. When you guess right, you get rich. When you guess wrong, you can get wiped out. Such are the risks and rewards of playing the market.

Traders can choose between two general strategies when looking at a possible stock trade: fundamental investing and technical analysis. Fundamental investors compare a stock's price with the financial performance of the underlying company. This can be as simple as comparing price with sales or profits or dividend yields, or you can get into arcane ratios such as enterprise/sales or cash flow versus liabilities. Experienced analysts factor in the company strategy and whether it is likely to succeed in the long run. Essentially, the philosophy behind fundamental investing is to find companies that should be worth more than they actually are, or else should perform well in the future, and then buy the stock and hold on until the stock lives up to its potential.

Technical traders, on the other hand, are relatively uninterested in the underlying company. Stock prices are dependent on the behavior of traders alone, they say, and you can learn everything you need to know about a stock by looking for patterns in its actual price movements, or in volume, or in abstract derivatives of both. Essentially, you predict future behavior by interpreting past behavior alone, without looking at the nebulous potentialities of the fundamental investors.

Of course, the wise trader will employ both methods. A pure fundamental investor risks buying a stock that stalls or declines regardless of its potential, and being too afraid to cut his losses when the stock could recover any day now! And the technical trader risks being blindsided by market meltdowns caused by crisis in the underlying company. Conversely, the fundamentalist will often avoid stocks that rack up huge gains from momentum alone, while the technician will be left behind when a company introduces the next miracle technology or new way of doing business.

In analyzing geopolitics, we often face a similar choice. The present crisis over Iranian nuclear ambitions is a case in point. Looking at a historical trend, there can be no doubt that Iran wants nuclear weapons and will successfully develop them if given enough time. Similarly, there is a clear historical record of Iran's violence against her neighbors and other countries, whether it be the takeover of the U.S. embassy, the bombing of the Buenos Ares Jewish Community Center, or the continuing support for Hizbullah, Hamas, and Shia militias in Iraq. That record leads us to the reasonable conclusion that a nuclear umbrella would free Iran to do more of the same.

On the other hand, the Iranian regime is notoriously harsh and unpopular with the people. Iran has a large middle class and student body, and a history of revolution. In the past years there have been persistent reports of armed attacks against regime installations, leading many to predict an imminent overthow of the mullahs (Michael Ledeen famously amog them). The recent crash of a jet carrying the senior leadership of the Iranian Revolutionary Guard, and the multiple assassination attempts against President Ahmadinejad, have only made people more hopeful that the end is near.

Complicating the picture are the large costs of a military strike against the nuclear program, to say nothing of the danger of regional chaos. The relative attractiveness of waiting for the Iranians to rise up is hard to argue with. But it is nearly impossible to predict a discontinuous change in the course of Iranian politics, and every day we wait puts the mullahs that much closer to their goal.

Do we bow to the weight of seeming historical inevitability and strike Iran, setting off a firestorm in the process? Or do we put our hope in the Iranian people, and run the risk of waking up one morning to a new era of nuclear blackmail?

Dare we put our trust in miracles?


Thesis Update

Apologies for the nonexistent posting last week. I've been hard at work (some of the time, anyway) on my thesis, and can now proudly report that I have a completed draft. Woo-hoo!

Once I finish drawing up some accompanying diagrams, I get to send it off to my professors. There will almost certainly be some revisions, but I should have a final draft ready soon.

If you need a primer on what's been going on in the last week, just go to the Belmont Club and keep scrolling. Not much good news; but then, the good news isn't what we need to keep up with, is it?


How Government Agriculture Policies Stifle Energy Independence

Today's print Wall Street Journal carries an article examining how Brazil managed to shift its gasoline consumption habits, so that it now relies heavily on diesel and ethanol fuel. Government action was required to build up the retail infrastructure, and Brazil simply mandated that its state-run oil company Petrobras sell ethanol at all of its fuel stations. Another critical component was reducing ethanol's price, relative to gasoline. Most of the price was dependent on the price of sugar, which was heavily subsidized. When Brazil reformed its agricultural subsidies, growers were forced to produce more ethanol with their crop, bringing down the price.

In the United States, we get most of our ethanol not from sugar, but from corn. This is due in no small part to the powerful sugar lobby, which has managed to keep government price supports high at the same time as it has nearly shut foreign sugar imports out of the market, via massive tarriffs and import quotas. Looking at the commodities markets, today's price for international sugar (Sugar #11) is roughly three quarters that of domestic sugar (Sugar #14). These are wholesale prices for raw, unprocessed sugar, which means that the difference for consumers is even greater.

Ironically, the sugar regime is so restrictive that emergency imports were necessary after Hurricane Katrina to prevent domestic shortages; and even these imports were temporary, and did nothing to alleviate the long-term tightness in supply.

Corn production is also affected by sugar subsidies. The price of high-fructose corn syrup, a sugar substitute, closely tracks that of sugar itself. And corn also receives more direct subsidies, which are actually in breach of global trade agreements. The net effect of all this government intervention is to keep prices for sugar and corn higher than they need to be, making ethanol less able to compete with gasoline.

It is true that even with the status quo, ethanol is currently cheaper than gasoline. As of last year's technology, ethanol is price-competitive with gasoline when oil sells for above $50 per barrel, and including the current government ethanol subsidies, is competitive at $32 per barrel. But this does not include the significant cost required to set up the necessary infrastructure. At present, ethanol blends are only sold at about 500 stations, according to the Wall Street Journal article.

Is ethanol a viable alternative to gasoline? Brazil doesn't seem to mind. And at a time when our reliance on petroleum helps support our enemies in Iran, Syria, and Saudi Arabia, it is absurd to restrain the growth of alternatives with corrupt government price controls.