External Analysis

The analytical frame of mind seeks to break a thing apart to look at elements, mechanisms, or internal structures to understand how it functions. But I often find that an “external analysis” of boundary conditions, contexts, inputs and outputs — really just treating the thing as a “black box” — can answer questions without having to delve into the inner workings.

Of course, I don’t necessarily mean physical things. It could be anything from a job description you are writing to an economic theory. An example of an external analysis might be the design of fire-retardant chemicals. Since the purpose is to make something that won’t burn, if you succeed, it won’t oxidize easily or perhaps not even break down at all. From that simple external assessment, it is pretty clear that such a chemical will likely be a potential environmental contaminant, since it would hang around for a long time. Its toxicity would depend on other features, of course. Polychlorinated biphenyl (PCB), for example, is very stable because the active sites on the hydrocarbon frame (two benzene rings) are occupied by chlorine atoms. (This is internal analysis now.) The molecules are chemically inert, but the chlorine atoms are very electronegative. These two facts — that the molecules are inert, and that they have electronegative sites — explain the carcinogenic properties. The PCB molecules hang around in the body long enough to find their way into the cell nuclei where they can disrupt DNA replication. So the internal analysis explains the particular mechanism of one particular chemical (PCB), but the external analysis (characteristics of a fire retardant) are enough to warn you that it may be dangerous.

I had to dig deep into my thirty-five-year-old memories of organic chemistry class to come up with that example, but here is another one that is of more general interest: supply-side versus demand-side economics. Part of the fun of external analysis is that it can be quite simple-minded and still be useful. A fundamental “law” of economics is that of supply and demand, which is actually a theory about how prices are determined in an open, competitive market. (In a controlled market, prices are either set by a government or a monopoly/oligopoly.) The idea is that when demand equals supply, prices will be at an equilibrium. Viewed externally, it is easy to imagine that in a demand-driven economy supply is lagging demand, so there is upward pressure on prices. In a supply-driven economy, supply is ahead of demand, so prices are softening. (External analysis saves us from having to do any math here.)

It makes sense that when Ronald Reagan was elected he was wanting to implement supply-side policies: inflation was in double digits and investment was weak. Now, after decades of supply-side policies, we see the specter of deflation all over the developed world while capital exceeds legitimate investment opportunities — flat growth, flat markets! So perhaps we need policies that stimulate demand. “Austerity” has the opposite effect: it is deflationary. Time for some long-overdue fiscal stimulus a la Keynes.

Posted on by Kirk

Independence

I read something a long time ago by the 20th century evangelist E. Stanley Jones that so impressed me that not only did it stick, it has guided my thinking ever since. We are all born completely dependent on others for our survival. As adolescents we naturally must exert our independence — physically, mentally, socially. But as adults, when we are fully mature in our understanding, we come to see that we are interdependent. Individual humans are weaker than other species, but together we dominate the planet. The greatest achievements of humankind are not individual acts of heroism, but the creation of civilizations that are vast and complex webs of specialization and interconnection.

It seems natural that one’s political orientation might evolve along with these stages of development. Early in life we might wish to be taken care of. Later, when our strength is greatest, we seek to sharpen our blades against brave challenges. But sooner or later we encounter failure, bad luck, or simply our own limitations. We gain the perspective that there is really no such thing as a “self-made man.” We come to see that we all have different capacities at different times in our lives, and virtually none of us could survive long in the absence of the contributions of others. A mature political outlook sees society as a vital shared resource. Yes, it imposes burdens and obligations, but without the public goods it offers, very little economic activity could occur. Nurturing and protecting the common good becomes a priority. On the other hand, a political view that clings to adolescent notions of liberty and independence — especially decrying the burdens of regulation and taxation — is not just immature, it is literally anti-social.

Posted on by Kirk

No, I Would Not Kill Baby Hitler

“Knowing what we know today, would you go back in time and kill baby Hitler if you could?”

Every time I hear this question I cringe a little. I find the presuppositions underlying it highly dubious. Leaving aside the paradoxes of time travel (I will save the discussion of the incoherence of the concept for future posts), the belief that you could change history in a meaningful way by adding or subtracting a single person is highly problematic: social forces play a bigger role than any individual. There is a feedback loop between the individual and society, each shaping the other. When conditions are ripe for a movement, a person will emerge to be its standard-bearer. That person is less unique than we are apt to think.

“Hitler Didn’t Drop Out of a Clear Blue Sky”

The social, political, and economic conditions in Germany between the two phases of the great world war are well known. Alice Miller makes a convincing case in her book, Thou Shalt Not Be Aware, that Hitler was skilfully triggering deeply programmed responses from the German people that had been burned in by the pedagogical norms of the early 20th century. What’s more, the silly brown-shirt fringe group he was leading only gained power after it received the backing of the German military-industrial-financial complex (with help from abroad). Had there been no Hitler, they could have / would have chosen someone else to represent their interests.

The scenario presupposed by the “kill baby Hitler” question seems to assume that Hitler was some sort of demonic presence with super-human powers, not the sick but ordinary man he actually was. It also assumes he had no rivals. Suppose you go back and kill baby Hitler, only to find out later that all you have done is create space for his otherwise unknown rival, Schitler, to rise to power in his place — with the difference that Schitler is slightly less psychologically damaged and slightly more intelligent than Hitler, just enough so to actually win the war?

The idea that you could change history by plucking one person out is like thinking you could end a hurricane just by removing the molecules that form the wall of the eye: other molecules would form a new eye wall almost instantly.

Posted on by Kirk

A ‘Soul’ Is Just a Person (continued)

In my previous post I defined what I mean when I use the word ‘soul’ — it is essentially synonymous with ‘person’. I could just use the word ‘person’, but that word is usually taken to include the whole person, i.e., the body as well. By soul I mean everything about the person except their physical body, with the understanding that the line between body and personality is neither hard nor fixed. I am not suggesting that the soul is some sort of amorphous, nebulous substance that is added to a living body by some sort of higher power. I am philosophizing here, not doing theology. Thus, I want to start by pointing out what is obvious, uncontroversial, and indubitably true: stuff you can see for yourself to be the case.

Try this analogy: by itself a musical instrument is a material object. When I play it, the music that comes out is immaterial, except insofar as structured energy is being transmitted in the form of sound waves (so it is indeed physical, which is not the same as material). The music is not a ‘substance’ in the way that the material of the guitar is, but it is nevertheless real. You can hear it. What the music you hear is to the body of the guitar, so my soul is to the physical body you see before you. The obvious difference is that the guitar doesn’t make music on its own. It is not alive. My body is alive, and the patterns that emerge from my thoughts, words, intentions, actions, etc., comprise my ‘personality’, which I am arguing just is, by definition, what I mean by ‘soul’. It’s really not mystical or anything. Just as you can hear music and know that music is real, you can interact with me and see my soul, even though my soul is not, strictly speaking, a material thing.

There are consequences that immediately follow from the approach I am taking:

  1. Any animal has a soul in the sense that I am using the word. Your dog is a ‘person’.
  2. I make no claim whatsoever about the separability of the soul from the body. Quite the opposite, actually, because there are no examples of music you can hear arising without a voice, instrument, or electronic audio production system of some kind producing the sound.
  3. The soul arises naturally from the behavior of the living being as it interacts with its environment and other beings. It comes from just being alive and sentient. It is not added from the outside (no one “gives you a soul” — the soul is you, so it can’t be taken away either).
  4. When the body dies, we no longer see the soul associated with it — “the music stops.” Did the soul die with the body? Did it go somewhere else? I make no claims here in either direction. But it is no longer observable through the behavior of the body.
  5. It seems possible that a body in a vegetative state (i.e., a person is judged to be “brain dead”) might not have a soul, but I urge caution here, because people do come out of comas.
  6. For my purposes, I am going to say that plants don’t have souls, although they are alive. This is just to maintain the distinction between plants and animals: plants can’t walk around, they can be dead and then come back to life, they can be pruned, grafted, cut and propagated. So while a sensitive person may feel as though their plants have souls, because the individuality of plants is less defined I am going to say “no soul in the sense that I mean here.”

A final note: nothing I have said here is to be taken as an “assertion of facts about the soul”. What I am doing is taking things we all know to be the case and then constructing a way of talking about them. I am clarifying how the word ‘soul’ will be used in my writing, and specifically what it will indicate (and what it will not).

Posted on by Kirk

A ‘Soul’ Is Just a Person

I had to take a break from blogging to do a thorough reboot. I now feel I have come far enough to be able to write again, but I have to warn you: my posts are going to seem pretty random for a while. That’s because dialogue is impossible without some common framework in terminology and concepts, which I suppose explains why there is so little productive dialogue these days. I want to talk about some key subjects, but I now realize I will have to take a measured approach, carefully laying out what I actually mean when I use a term — especially terms that come with heavy baggage from the past. One such term is ‘soul.’

C. S. Lewis is often quoted as having said, “You do not have a soul: you are a soul. You have a body.” All those childhood discussions about whether or not people have souls, and if so, what are they made of, are completely flipped on their head by this simple remark. Lewis is pointing out that the word ‘soul’ is just a word, and it means person. Consciousness and free will may at the end of the day turn out to be mere epiphenomena, but whomever is being addressed by the pronoun ‘you’ just is a soul according to the definition of that word. Now I understand that some people believe that souls are eternal and indestructible, but that view is by no means universal even among the writers of the Bible (it is thought to be a Hellenistic accretion by many scholars, but I digress). Such discussions are irrelevant to what I am trying to say here.

On the other hand, Nietzsche famously said that we are in the process of discovering that “the soul is just something about the body.” Well, fine, if we drill down to the mechanisms of the organs of the body and it turns out that this thing we call consciousness is a mere physiological cyber-function that happens to pass the Turing test, I am still left with my experience of being a conscious subject. It’s like telling me that my body is essentially a driver-less car: my belief that I am steering it is as cute as the preschooler thinking they are steering the toy fire engine car on the carnival ride. But then, you still haven’t explained who this ‘I’ is who thinks he is driving.

But for the sake of the discussion I want to have it is oh so much simpler than all that. Let’s just approach the thing externally (as the Turing test does, by the way) and say this: there is the body, and there is the soul, and by “the body” we mean that collection of atoms you take to the morgue when the person is dead, and by “the person” we mean everything else about them that animates them and makes them who they are.

Posted on by Kirk 1

Three Big Ideas (Part 2)

Hysteresis

…is a controversial concept, and the answer to the question of whether or not it really is a “thing” will have implications in the ongoing competition between “Classical” and “Keynesian” type theories. (More on that later, of course.) For this first, simple explanation, think of “memory foam.” The question is: does the economy ‘forget’ a downturn after it bounces back to its original path of growth (classical equilibrium model), or does it retain a more or less permanent impression–a new, lower path–going forward (hysteresis, not necessarily accepted by all “New Keynesians” at this point).

The policy tradeoff between the unemployment rate and the rate of inflation (expressed by the “Phillips Curve”) is widely accepted by the economics profession. There are a variety of mechanisms invoked for this relationship, but they result in virtually the same model, where a policy that lowers inflation leads to higher unemployment. Here is one easy intuition: imagine a factory owner is facing a higher sales price for her product (due perhaps to increased demand in the marketplace). She will want to ramp up production, which in the short run will require more workers. (Investments in machinery–including robots–are long-run, not short-run, factors.) As the labor market tightens, it may become necessary to offer more money (wage inflation). This feeds the inflationary pressure on the general price level while lowering the unemployment rate. Now imagine the exact opposite process when demand is dropping: things go on sale (sometimes permanently) while the demand for labor drops. This is a period of “disinflation”, where wages and prices drop while economic output shrinks.

Notice how I have described a microeconomic mechanism while (with a slight of hand) extending it to the entire economy. This is called “giving macroeconomics a micro foundation.” There are many ways to go about this, since economics suffers from the problem (familiar to all scientists) that the data are underdetermined by theory. Which is to say, there are any number of theories that could explain the same result. An alternative theory explains inflation and unemployment rates through “imperfect information” about future price levels, but gets to the same result.

Let’s not play dumb here. It is easy to imagine that a short run variation in demand can lead to quick adjustment to the labor force under normal conditions, and therefore a lot of resilience in supply. We see it happening when a business gives its part-time staff more hours to work when a busy season is underway, then cuts back when things slow down again. But everything could change when the slowdown is deep and long lasting. Imagine the business has to close “temporarily.” People will look for other jobs and may not be available when it is time to re-open. When industries lay off hundreds of thousands of workers for several years at a time, it is unlikely that those same workers (along with their skills) will be readily available if and when the economy gets better.

The classical (non-hysteresis) theory depends on the “natural-rate hypothesis,” where the economy taken as a whole has a certain “potential” at any given moment, a sort of maximum output level where all resources (especially human) are fully utilized. Even at this level of output there will be a “non-accelerating inflation rate of unemployment” (NAIRU), because some people are always between jobs for a variety of reasons. However, the rate of unemployment is not as simple a thing as one might think, since it is a ratio of the number of people who haven’t yet found a job to the number who want a job at any given point in time. It turns out that the workforce participation rate (against which the unemployment rate is calculated) actually changes all the time.

We will see that Larry Summers presents data from the past few decades to show that there do seem to be more or less permanent changes to the workforce with every economic downturn. I will do some of my own drilling into the vagaries of measuring unemployment as well.

Next time: Secular Stagnation

Posted on by Kirk

Three Big Concepts (Part 1)

We are continuing with Larry Summers’ talk at the N.A.B.E. in early 2014 entitled: “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” As gibberishical as that sounds, it is less so than a lot of academic paper titles. Nevertheless, many of my readers will be seeing familiar words used in a new way here, perhaps wondering, “Zero lower bound of what?” and “Hysteresis sounds Freudian,” and even, “Is the earth’s rotation slowing?” I will give a simple definition of each of these concepts in order of increasing complexity, which puts them in the reverse order from Summers’ title. In future posts we’ll explore them at some depth.

Zero Lower Bound:

This refers to interest rates, which must always be above zero if they are to have any meaning. You loan me $100 at 6% interest, and I pay you back $106. A 0% interest rate would mean I pay you back exactly $100. A negative (-6%) interest rate would be when we agree that I will pay you back only $94. The last one doesn’t make any sense: we never see loans with “negative” interest rates.

But actually–when there is inflation–it is possible for an interest rate to be negative in inflation-adjusted terms. Let’s say the rate of inflation is 2% and you loan me $100 at a rate of 1%. Fast-forwarding a year, when I pay you $101 it is worth slightly less now (when adjusted for inflation) than the $100 dollars was worth when I borrowed it. On the other hand, it is worth slightly more than the $100-dollar bill that you stuffed under your mattress, which is now worth only the equivalent of $98.04 in last year’s dollars. By comparison, the $101 I just gave you is worth $99.02. 2% inflation over the past year means that today’s $102 is worth exactly the same as $100 was worth a year ago. To stay even with inflation, you would have had to charge me a nominal interest rate of 2% to match the expected rate of inflation. In that case, the real interest rate would have been 0%. In the case where inflation was 2% and the loan was at 1%, there was a negative real interest rate of 1% – 2% = -1% (nominal interest rate minus inflation rate equals real interest rate). So sometimes interest rates are negative when inflation is taken into account. (You may have figured out by now that for economists, ‘real’ is shorthand for ‘adjusted for inflation’.)

What professor Summers is talking about is a key interest rate for the economy which is set by the Federal Reserve, the “Fed Funds Rate,” which is what banks charge each other for overnight deposits. The Fed can’t control this rate directly–there is no chalkboard at the main entrance with today’s special rate posted. Instead, they influence the rate by buying and selling securities. When they buy securities from the open market, there is more cash “out there.” When they sell them, they are sucking up cash from the market. This adjustment to the money supply leads to changes in the interest rate according to the forces of supply and demand. They set a “target rate” and buy and sell securities until the going rate is close enough to the target. (As an example of how indirect this control is, the Fed Funds Target Rate has been 0.25% for quite a while, but the effective market rate is only 0.13%–they seem to be having trouble getting it up.)

Because banks always have the option of just sitting on cash rather than lending it, it is impossible to get the rate to go below zero. This is a problem for the Fed when the economy is in recession and they want to cut interest rates to stimulate investment. Once they hit the zero lower bound, there is no place else to go.

OK, I am out of time for today, but tomorrow I will take up hysteresis, and probably get to secular stagnation in the post after that.

Posted on by Kirk

The Context of Professor Summers’ Speech

I don’t imagine that the majority of my readers have degrees in economics. Even having one myself (albeit a mere bachelor’s) I am often befuddled by the jargon and mathiness of professional academic papers. I even find myself googling terms and references just reading Bloomberg, the Financial Times, or The Economist. My goal, then, is to fill the gap between the professional economists and my readers who, while intelligent and curious, have other specialties.

So let’s begin with the title of professor Summers’ talk: “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” I have run these terms by several people and have confirmed that they are meaningless to the average person. I said in my previous post that I would do my best to translate, so here goes.

The general topic is, of course, U.S. Economic Prospects. Dr. Summers has been invited to give a speech to a group of business economists — as opposed to academics. This means they work as economists for companies (think ‘applied math versus pure math’), and as such are always interested in what the current data actually mean for the immediate future. Summers emphasizes his understanding and appreciation of this distinction in the introduction of his speech, saying

Indeed, I think it is fair to say that some of the themes that are today central to discussions of academic macroeconomists, but that had receded from the debate for many years, were always kept alive at the National Association for Business Economics.

Another way of understanding this is that in the world of business, it is more important to be right in a real-world sense than to take credit for having the latest, greatest theory. Which takes us to the bigger question of “what is macroeconomics for?” Summers explains that the world of macroeconomics today is different in substantial ways from that of just a few years ago, thanks to the major disruption to financial markets that began in 2007. Prior to the crash, macroeconomists were convinced that the days of large-scale depressions were in the past, that during recent decades a “great moderation” had taken hold. As if, “we know too much to fall into the errors of the past: our sophisticated models give our central bank the power to use minor tweaks to keep the economy on a steady upward path of growth.” No longer would we be victims of wild swings in the business cycle.

The Great Recession gave the lie to that notion, and rudely at that. So Summers sees the opportunity to question everything: to do meta-macro (as a philosopher might say), or, if you like, macro-macro, where even the business cycle itself comes under interrogation: “As I shall discuss, there is room for doubt about whether the cycle actually cycles.” He doesn’t need to point out to the economists in the room that the “recovery” since 2009 (when the recession technically ended) has been anemic by most measures. The big question he wishes to pose is whether the very slow growth we have seen in the past five years is symptomatic of a gradual rebound from a severe low in the business cycle, or if it is indicative of a “new normal,” a much flatter growth curve going forward. For the latter to be the case there would have to be structural reasons for it, such as shifts in demographics or technology that make the prospects for future economic growth permanently and broadly diminished — secular stagnation.

In my next post I will define the three terms in the speech’s title: secular stagnation, hysteresis, and the zero lower bound, after which we will have to drill into each of them at some depth.

Posted on by Kirk

“Start at the top.”

When stumped, it’s sometimes useful to consult a 10-year-old. I have been gathering material for this blog and sketching out the strategy for the first dozen or so posts, but there is just so much to write about. I have urgent interests in macro-economics, meta-ethics, power dynamics, philosophy of science, and statistics, to name a few. (I also have long-running obsessions ranging from game theory to “the meaning of the word ‘meaning'”). And in just the past few days current events have included the bursting of a stock market bubble in China, the completion of a nuclear deal with Iran, the steamrolling of Greek sovereignty by the “Euro Group”, and a declaration from Pope about the reality of (and moral implications of) climate change. Where do I even begin? Trying to describe my predicament to a nearby 10-year-old, I came up with the metaphor of a “eating a plate of spaghetti the size of this house.” How do you even decide where to take the first bite? “Start at the top,” she replied simply. OK, then.

Having just recently completed undergraduate degrees in economics and philosophy, I have a huge backlog of books and papers to read, as well as a list of topics to explore and write about, accumulated during the past few semesters in the form of “notes to self.”

To start I will be walking through a talk by Larry Summers given to the National Association for 220px-Lawrence_Summers_2012Business Economics in early 2014 (eventually published in their journal as “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”). I think this is a useful starting point for this blog because it raises a wide range of questions and leads to a very interesting conclusion — unfortunately buried near the end. Having been a candidate for Chairman of the Federal Reserve, he speaks in the same “sharp as a feather pillow” language as Janet Yellen, designed perhaps to avoid offending large egos on the one hand and unnecessarily alarming the hoi polloi on the other. I suffer from no such constraints, so I will happily translate for him as well as I am able. The paper is complex enough that it will take as many as a dozen posts just to summarize and explain the points. If you wish to read the paper yourself, it is available on his web site here.

Posted on by Kirk