For the pointer I thank Michelle Dawson.
By the Very Revd John Drury. I mentioned the book favorably in passing once before, but I don’t think I drove home how much I liked and learned from it. For me it is a clear choice for best book of the year so far.
Here is a pithy bit from Amazon:
Though he never published any of his English poems during his lifetime, George Herbert (1593–1633) is recognized as possibly the greatest religious poet in the language. Few English poets of his age still inspire such intense devotion today.
I was not interested in Herbert per se, so that is further testament to the quality of Drury’s achievement. This volume passes at least one bottom line test for book quality, namely whether I ordered many other books by the same author. I did.
You can order the book here. You can find Herbert’s poems here. This book also shows how much overly restrictive copyright law damages other works of literary criticism, Herbert of course is fully in the public domain.
Nick is a philosopher at Oxford and he has worked with Larry Temkin and Nick Bostrom. He typed up his version of our conversation (pdf), it starts with this:
Purpose of the conversation: I contacted Tyler to learn about his perspectives on existential risk and other long-run issues for humanity, the long-run consequences of economic growth, and the effective altruism movement.
Here are a few excerpts:
Tyler is optimistic about growth in the coming decades, but he doesn’t think we’ll become uploads or survive for a million years. Some considerations in favor of his views were:
1. The Fermi paradox is some evidence that humans will not colonize the stars.
2. Almost all species go extinct.
3. Natural disasters—even a supervolcano—could destroy humanity.
4. Normally, it’s easier to destroy than to build. And, in the future, it will probably become increasingly possible for smaller groups to cause severe global damage (along the lines suggested by Martin Rees).
The most optimistic view that Tyler would entertain—though he doubts it—is that humans would survive at subsistence level for a very long time; that’s what we’ve had for most of human history.
People doing philosophical work to try to reduce existential risk are largely wasting their time. Tyler doesn’t think it’s a serious effort, though it may be good publicity for something that will pay off later. A serious effort looks more like the parts of the US government that trained people to infiltrate the post-collapse Soviet Union and then locate and neutralize nuclear weapons. There was also a serious effort by the people who set up hotlines between leaders to be used to quickly communicate about nuclear attacks (e.g., to help quickly convince a leader in country A that a fishy object on their radar isn’t an incoming nuclear attack).This has been fixed in other countries (e.g. US and China), but it hasn’t been fixed in other cases (e.g. Israel and Iran). There is more that we could do in this area. In contrast, the philosophical side of this seems like ineffective posturing.
Tyler wouldn’t necessarily recommend that these people switch to other areas of focus because people['s] motivation and personal interests are major constraints on getting anywhere. For Tyler, his own interest in these issues is a form of consumption, though one he values highly.
Tyler thinks about the future and philosophical issues from a historicist perspective. When considering the future of humanity, this makes him focus on war, conquest, plagues, and the environment, rather than future technology.
He acquired this perspective by reading a lot of history and spending a lot of time around people in poor countries, including in rural areas. Spending time with people in poor countries shaped Tyler’s views a lot. It made him see rational choice ethics as more contingent. People in rural areas care most about things like fights with local villages over watermelon patches. And that’s how we are, but we’re living in a fog about it.
The truths of literature and what you might call “the Straussian truths of the great books”—what you get from Homer or Plato—are at least as important rational choice ethics. But the people who do rational choice ethics don’t think that. If the two perspectives aren’t integrated, it leads to absurdities—problems like fanaticism, the Repugnant Conclusion, and so on. Right now though, rational choice ethics is the best we have—the problems of, e.g., Kantian ethics seem much, much worse.
If rational choice ethics were integrated with the “Straussian truths of the great books,” would it lead to different decisions? Maybe not—maybe it would lead to the same decisions with a different attitude. We might come to see rational choice ethics as an imperfect construct, a flawed bubble of meaning that we created for ourselves, and shouldn’t expect to keep working in unusual circumstances.
I’m on a plane for much of today, so you are getting Nick’s version of me, for a while at least. You will find Nick’s other conversations here.
Do you know the Oxford University Press “very short paperback books” series? This is the latest entry, by Avinash Dixit, self-recommending.
3. A 2004 MR post on g > r and the dangers of crude extrapolation, “What happens if we extrapolate current trends to 2050? What will debt to gdp ratios look like around the world?…Among the current Eurozone countries, Germany would fare the worst with a ratio of 307 percent.” Ireland appeared to be in good shape.
6. Has the capital-output ratio been rising over time? (in French)
I enjoyed this book, which is authored by Jeffrey Towson and Jonathan Woetzel. Here is one excerpt:
Looking at China today, what you don’t see is an integrated continental economy. You don’t see infrastructure connecting each part of the country, like say in the United States. That is likely the future but not yet the present.
If you look at the population and the existing infrastructure, what you actually see is a series of “clusters.” You see local groups of cities with over 60 million people. For example, Beijing/Tianjin in the North is actually a cluster of 28 cities — all tightly interconnected by roads, rail and other infrastructure. Qingdao, well known for its beer, is actually part of a 35-city cluster.
Overall, China has more than 20 of these clusters…and each of these clusters is about the size of a European country. According to government plans, China’s main clusters will cover 80% of GDP and 60% of the population.
The book is compact and useful, but it didn’t take me an hour.
Suresh Naidu writes:
…let me suggest that if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary.One weakness of the book is its focus on the large core economies (the data obviously is better and the wealth is obviously larger). But liberalizing immigration, while not solving the ultimate problem the book diagnoses, can go some of the way by raising growth of both income and population.
Maybe, that will likely improve welfare but in an Alvin Hansen model it can make Piketty-like phenomena (I won’t call them problems) more extreme. In any case there are more straightforward remedies. Social Security privatization is another option, if r > g is truly such a likelihood. Yet Piketty and his boosters won’t mention this. By the way, I am opposed to social security privatization — scroll down in that link — but I probably would favor it if it my views were closer to Piketty’s.
Here is a somewhat biting paragraph on Piketty and policy from my Foreign Affairs review (use “open private window” in Firefox, if need be):
Piketty also ignores other problems that would surely stem from so much wealth redistribution and political control of the economy, and the book suffers from Piketty’s disconnection from practical politics — a condition that might not hinder his standing in the left-wing intellectual circles of Paris but that seems naive when confronted with broader global economic and political realities. In perhaps the most revealing line of the book, the 42-year-old Piketty writes that since the age of 25, he has not left Paris, “except for a few brief trips.” Maybe it is that lack of exposure to conditions and politics elsewhere that allows Piketty to write the following words with a straight face: “Before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income” — which would be the practical effect of his tax plan — “it would be good to improve the organization and operation of the existing public sector.” It would indeed. But Piketty makes such a massive reform project sound like a mere engineering problem, comparable to setting up a public register of vaccinated children or expanding the dog catcher’s office.
Here is another:
Worse, Piketty fails to grapple with the actual history of the kind of wealth tax he supports, a subject that has been studied in great detail by the economist Barry Eichengreen, among others. Historically, such taxes have been implemented slowly, with a high level of political opposition, and with only modestly successful results in terms of generating revenue, since potentially taxable resources are often stashed in offshore havens or disguised in shell companies and trusts. And when governments have imposed significant wealth taxes quickly — as opposed to, say, the slow evolution of local, consent-based property taxes — those policies have been accompanied by crumbling economies and political instability.
The simple fact is that large wealth taxes do not mesh well with the norms and practices required by a successful and prosperous capitalist democracy. It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens. Therein lies the most fundamental problem with Piketty’s policy proposals: the best parts of his book argue that, left unchecked, capital and capitalists inevitably accrue too much power — and yet Piketty seems to believe that governments and politicians are somehow exempt from the same dynamic.
And finally the review closes with this:
A more sensible and practicable policy agenda for reducing inequality would include calls for establishing more sovereign wealth funds, which Piketty discusses but does not embrace; for limiting the tax deductions that noncharitable nonprofits can claim; for deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris; for offering more opportunity grants for young people; and for improving education. Creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality.
Here is John’s new paper (pdf):
The financial crisis was a systemic run. Hence, the central regulatory response should be to eliminate run-prone securities from the financial system. By contrast, current regulation guarantees run-prone bank liabilities and instead tries to regulate bank assets and their values. I survey how a much simpler, rule-based, liability regulation could eliminate runs and crises, while allowing inevitable booms and busts. I show how modern communications, computation, and financial technology overcomes traditional arguments against narrow banking. I survey just how hopeless our current regulatory structure has become.
I suggest that Pigouvian taxes provide a better structure to control debt issue than capital ratios; that banks should be 100% funded by equity, allowing downstream easy-to-fail intermediaries to tranche that equity to debt if needed. Fixed-value debt should be provided by or 100% backed by Treasury or Fed securities.
This idea has promise, but overall I am a little confused. I don’t think of illiquid financial institutions as the major problem, as traditional lender of last resort functions of central banks can deal with those dilemmas. The truly gut-wrenching issues in our financial crisis — or that say of Ireland or Iceland — involved insolvent financial institutions. And if these institutions are insolvent, was a “run” really the nut-crusher? Ex post you either nationalize or let them fail or somehow bail them out, no matter what the earlier capital structure had been. The “run” from short-term capital might make some banks insolvent more quickly, but are equity prices really so much slower to react?
One significant effect of an all-equity capital structure would make insolvency more transparent and this in turn might make zombie banks less likely. This may be a good way of forcing the hand of regulators or shareholders. But it is a mixed blessing too, especially if your resolution facilities are highly imperfect. Citicorp arguably has been insolvent a few times since the 1980s, although not transparently so. What if this insolvency had been more obvious the first time around, namely if Citi had been made all-equity? It might have prevented some financial structures — most of all Citi — from becoming too large or too difficult to unwind. That said, in the short run volatility probably would have been higher, if only because a commonly revealed insolvency is indeed messier. And over the longer haul, to the extent share markets overreact to new information, rather than just reflecting fundamental values, greater transparency for the financial sector could in some ways be dangerous.
An all-equity bank would avoid the problem of equity holders taking too much risk at the expense of debt holders, but it does not seem this was a major problem last time around. Rather simple overconfidence seems to have been the culprit. Furthermore this moral hazard problem might be recreated in some form through the evolution of differing forms of equity seniority.
Arnold Kling adds comment.
For the pointer I thank Samir Varma, a loyal MR reader.
My Foreign Affairs review is here. (Open up “New private window” in Firefox, if need be.) I won’t attempt to cover all of the review, but rather will rephrase a few of my points for MR readers, in slightly different terminology:
1. If the rate of return remains higher than the growth rate of the economy, wages are likely to rise and quite a bit. You can find a wonky version of that idea here from Matt Rognlie. But it suffices to apply common sense, namely that capital accumulation bids up wages. Piketty suggests we are headed back to something resembling the 19th century. Well, that was a pretty good time for the average working person in Western Europe, especially once we get past the first part of that century, which had lots of war and a still-incomplete industrial revolution.
Since we today have had some wage stagnation, perhaps it does not feel that kind of favorable outcome is what we will get and many commentators are trading off this mood. But also realize the (risk-adjusted) return on capital hasn’t been that high lately and it has been falling for decades. This combination of variables — low returns and stagnant wages — does not refute Piketty but it doesn’t exactly fit into his mold either.
2. The crude seven-word version of Piketty’s argument is “rates of return on capital won’t diminish.” Is that really such a powerful forecast? I say over the next fifty or one hundred years we don’t have a very good sense of which factors will show diminishing returns and which will not. It is hard enough to make predictions of trend over a twenty-year time horizon. NB: At many points in the Piketty book he seeks to have it both ways: loads of caveats, but then he falls back into the basic model, and he and his defenders cite the caveats when it is convenient.
3. Piketty’s reasons why rates of return on capital won’t diminish are fairly specific and restricted to only a small share of capital. He cites advanced financial management techniques of the very wealthy and also investing abroad in emerging economies. Neither of these covers most capital, and thus capital returns as a whole may not be so robust. Nor is it obvious that either technique will prove especially successful over the next few decades or longer. Again, is there any particular reason to think either of these factors will outrace the basic logic of diminishing returns, or for that matter EMH, relative to other factor returns that is? They might, to be sure. They also might underperform. In any case this is pure speculation and Piketty’s entire argument depends upon it.
4. The actual increases in income inequality we observe are mostly about labor income, not capital income. They don’t fit easily into Piketty’s story and arguably they don’t fit into the story at all.
5. Piketty converts the entrepreneur into the rentier. To the extent capital reaps high returns, it is by assuming risk (over the broad sweep of history real rates on T-Bills are hardly impressive). Yet the concept of risk hardly plays a role in the major arguments of this book. Once you introduce risk, the long-run fate of capital returns again becomes far from certain. In fact the entire book ought to be about risk but instead we get the rentier.
Overall, the main argument is based on two (false) claims. First, that capital returns will be high and non-diminishing, relative to other factors, and sufficiently certain to support the r > g story as a dominant account of economic history looking forward. Second, that this can happen without significant increases in real wages.
Addendum: Still, it is a very important book and you should read and study it! But I’m not convinced by the main arguments, and the positive reviews I have read worsen rather than alleviate my anxieties. I’ll cover the policy and politics of this book in a separate post. Do read my review itself, which has much more than what is in this blog post.
2. Those new service sector jobs (R. Kelly impersonator sought)
3. Sherpa pay is 2k-6k per season, compared to a median income of $540. Their lives are insured for up to 23k.
4. Join Slate Plus.
If you were going to advise a firm to sacrifice some short-term profits in order to undertake long-term investments, which firm would that be? What investment should it make? Can you be confident that it is short-termism rather than concern about risk that is inhibiting the investment?
Those are from Arnold Kling.
I have written about patent and copyright law primarily from the perspective of an economist interested in the institutions and incentives that maximize innovation. As a textbook author, however, I must deal with copyright law in practice. Dealing with copyright law on the ground hasn’t caused me to change my views but it has made me more frustrated. I have also come to appreciate some of the subtler costs of the system. Two cases in point.
A lot of textbooks hire a photo editor to pick generic stock photos, this simplifies things because the bundlers pre-authorize permissions and prices. But we hand picked every photo in our book to illustrate a point which means that our permissions and legal staff often have to find owners and clear permissions on an individual basis. We are grateful that our publisher is willing to do this to produce a quality product but it sometimes leads to absurdities. For example, the publisher doesn’t like to use public domain images. Why not? What could be better than free? The problem is that the bundlers insulate a publisher from lawsuits but when we use a public domain image the publisher is open to lawsuit if a mistake has been made and that makes them fearful.
The general lesson is that strong IP shrinks the public domain not just because it keeps things out of the public domain but also because it makes the public domain appear to be uncertain and dangerous. It’s as if clean, mountain spring water were freely available but people bought from the bottlers instead out of fear of contamination.
Copyright law is one of the forces behind the rise of the mega-bundlers. Mega-bundlers benefit from economies of scale in cataloging IP but there are also economies of scale in dealing with the legal system and insuring against/for lawsuit. It’s probably no accident that two of the largest bundlers, Corbis and Getty, are owned by Bill Gates and (Getty heir), Mark Getty respectively. (FYI, Piketty should have said more about this kind of 21st century rentier in Capital).
Here is another example. To illustrate the point that, contrary to what is often argued, a rich person might get more from another dollar than a poor person we have in Modern Principles a movie still of Scrooge McDuck swimming in money. We think the image speaks for itself but apparently that is a problem. The rights to the photo are–we are told–not the same as the rights to the characters shown within the photo. Thus, even though we have bought and paid for the right to print the photo, to ensure that the use of the characters within the photo falls under fair use we must discuss, comment on and critique the content of the photo in the text.
The distinction between the photo IP and the what’s in the photo IP is one only a lawyer could appreciate, as is the solution. And I mean that without irony. I am not critiquing our publisher or their lawyers. Bear in mind that this is coming to us from the very highest legal counsel of a multi-billion dollar firm. Thus, I do not doubt that the dangers are real and the legal analysis acute. The problem is copyright law itself.
The episode illustrates more generally how the complexity of copyright law has greatly elevated the power of lawyers. It’s no accident that the permissions director is one of the few people at our publisher whose signature is absolutely necessary before our book, or any book, can be published.
I am reminded of Mancur Olson’s 9th implication in The Rise and Decline of Nations:
The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution.
RULE ONE: Find a place you trust, and then try trusting it for a while.
RULE TWO: General duties of a student: Pull everything out of your teacher; pull everything out of your fellow students.
RULE THREE: General duties of a teacher: Pull everything out of your students.
RULE FOUR: Consider everything an experiment.
RULE FIVE: Be self-disciplined: this means finding someone wise or smart and choosing to follow them. To be disciplined is to follow in a good way. To be self-disciplined is to follow in a better way.
RULE SIX: Nothing is a mistake. There’s no win and no fail, there’s only make.
RULE SEVEN: The only rule is work. If you work it will lead to something. It’s the people who do all of the work all of the time who eventually catch on to things.
RULE EIGHT: Don’t try to create and analyze at the same time. They’re different processes.
RULE NINE: Be happy whenever you can manage it. Enjoy yourself. It’s lighter than you think.
RULE TEN: We’re breaking all the rules. Even our own rules. And how do we do that? By leaving plenty of room for X quantities.
HINTS: Always be around. Come or go to everything. Always go to classes. Read anything you can get your hands on. Look at movies carefully, often. Save everything. It might come in handy later.