Category: History

Every era’s monetary and financial institutions are unimaginable until they’re real

That is the column subtitle, the actual title is “The Lesson of Bretton Woods.”  Note that yesterday was the 75th anniversary of the signing of the final agreement.  Here is one excerpt:

The Bretton Woods arrangements also seemed highly unlikely until they were in place. They involved a complicated system of exchange rate pegs, capital controls and a “gold pool” (and other methods) to control gold prices and redemption ratios. What’s more, the whole thing was dependent on America’s role as global hegemon, both politically and economically. The dollar still was tied to gold, and the other major currencies tied to the dollar, but as the system evolved it required that no one was too keen to redeem dollars for gold (the French unwillingness to abide by this stricture was one proximate cause of the collapse of Bretton Woods).

I don’t think a monetary economist from, say, 1890 could have imagined that such an arrangement would prove possible, much less successful. Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth for both the U.S. and Western Europe.

At the same time, once Bretton Woods ended in the early 1970s, few people thought it was possible to turn back the clock. The system required the U.S. to be a creditor nation, to hold much of the world’s gold stock, and for countries such as France to defer to American wishes on gold convertibility. Once again, the line between an “imaginable” and “unimaginable” monetary arrangement proved to be a thin one.

As I point out in the piece, today’s arrangements of fiat currencies and (mostly) floating rates were unimaginable to most previous thinkers, including Keynes.  Here is the column’s closing bit:

So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.

*Escape from Rome*

The author is Walter Scheidel and the subtitle is The Failure of Empire and the Road to Prosperity.  Imagine a whole book on what he calls “the second Great Divergence,” namely that China developed a large, relatively unified hegemonic state early on, while Europe remained (mostly) politically fragmented.

Have you ever wondered why the Roman empire did not, in some manner, re-form in the Western part of Europe?  And how did it matter that China had a tradition of having to defend against the steppe while Europe did not?  Here is one brief excerpt:

…East Asia was characterized by a unipolar or hegemonic political system for 68 percent of the years between 220 BCE and 1875.  This pattern presents a stark contrast to the prevalence of a balanced system in Europe for 98 percent of the years from 1500 to 2000, or indeed at any time after the demise of the mature Roman empire.

And:

Remoteness from the bulk of the Eurasian steppe was a constant, invariant across Europen history.  Just as it did not matter if Latin Europe’s states were weak, it also did not matter if a large empire was in place.  Unlike Chinese dynasties, the Roman empire did not bring forth a nomadic “shadow empire”: there was no ecological potential for it.  The Pontic steppe, where Sarmatian tribes might have coalesced in response to the inducements of Roman wealth, was too detached from the Roman heartlands that lay behind the Carpathians, the Alps, and the Adriatic.  To the west of the plains of Eastern Europe, both components of the “steppe effect” were conspicuous by their absence: and so — at least after Rome — was empire-building on a large scale.

If you wish to read a book to ponder the second Great Divergence, this is the one.  You can pre-order it here.

*The Body: A Guide for Occupants*

That is the title of the new Bill Bryson book, and it delivers in all the ways you would expect a Bryson book to do.  Here is one sample paragraph:

Before penicillin, the closest thing to a wonder drug that existed was Salvarsan, developed by the German immunologist Paul Ehrlich in 1910, but Salvarsan was effective against only a few things, principally syphilis, and had a lot of drawbacks.  For a start, it was made from arsenic, so was toxic, and treatment consisted in injecting roughly a pint of solution into the patient’s arm once a week for fifty weeks or more.  If it wasn’t administered exactly right, fluid could seep into muscle, causing painful and sometimes serious side effects, including the need for amputation.  Doctors who could administer it safely became celebrated.  Ironically, one of the most highly regarded was Alexander Fleming.

By the way:

…the average grave is visited for only about fifteen years…

You can pre-order the book here, I would be interested to read more about Bryson’s work, writing, and research habits.

My Conversation with Neal Stephenson

Here is the transcript and audio, and here is the CWT summary:

If you want to speculate on the development of tech, no one has a better brain to pick than Neal Stephenson. Across more than a dozen books, he’s created vast story worlds driven by futuristic technologies that have both prophesied and even provoked real-world progress in crypto, social networks, and the creation of the web itself. Though Stephenson insists he’s more often wrong than right, his technical sharpness has even led to a half-joking suggestion that he might be Satoshi Nakamoto, the shadowy creator of bitcoin. His latest novel, Fall; or, Dodge in Hell, involves a more literal sort of brain-picking, exploring what might happen when digitized brains can find a second existence in a virtual afterlife.

So what’s the implicit theology of a simulated world? Might we be living in one, and does it even matter? Stephenson joins Tyler to discuss the book and more, including the future of physical surveillance, how clothing will evolve, the kind of freedom you could expect on a Mars colony, whether today’s media fragmentation is trending us towards dystopia, why the Apollo moon landings were communism’s greatest triumph, whether we’re in a permanent secular innovation starvation, Leibniz as a philosopher, Dickens and Heinlein as writers, and what storytelling has to do with giving good driving directions.

Here is one excerpt:

COWEN: If we had a Mars colony, how politically free do you think it would be? Or would it just be like perpetual martial law? Like living on a nuclear submarine?

STEPHENSON: I think it would be a lot like living on a nuclear submarine because you can’t — being in space is almost like being in an intensive care unit in a hospital, in the sense that you’re completely dependent on a whole bunch of machines working in order to keep you alive. A lot of what we associate with freedom, with personal freedom, becomes too dangerous to contemplate in that kind of environment.

COWEN: Is there any Heinlein-esque-like scenario — Moon is a Harsh Mistress, where there’s a rebellion? People break free from the constraints of planet Earth. They chart their own institutions. It becomes like the settlements in the New World were.

STEPHENSON: Well, the settlements in the New World, I don’t think are a very good analogy because there it was possible — if you’re a white person in the New World and you have some basic skills, you can go anywhere you want.

An unheralded part of what happened there is that, when those people got into trouble, a lot of times, they were helped out by the indigenous peoples who were already there and who knew how to do stuff. None of those things are true in a space colony kind of environment. You don’t have indigenous people who know how to get food and how to get shelter. You don’t have that ability to just freely pick up stakes and move about.

And:

COWEN: What will people wear in the future? Say a hundred years from now, will clothing evolve at all?

STEPHENSON: I think clothing is pretty highly evolved, right? If you look at, yeah, at any garment, say, a shirt — I was ironing a shirt today in my hotel room, and it is a frickin’ complicated object. We take it for granted, but you think about the fabric, the way the seams are laid out.

That’s just one example, of course, but you take any — shirts, shoes, any kind of specific item of clothing you want to talk about — once you take it apart and look at all the little decisions and innovations that have gone into it, it’s obvious that people have been optimizing this thing for hundreds or thousands of years.

New materials come along that enable people to do new kinds of things with clothing, but overall, I don’t think that a lot is going to change.

COWEN: Is there anything you would want smart clothing to do for you that, say, a better iPad could not?

STEPHENSON: The thing about clothing is that you change your clothes all the time. So if you become dependent on a particular technology that’s built into your shirt, that’s great as long as you’re wearing that shirt, but then as soon as you change to a different shirt, you don’t have it.

So what are you going to do? Are you going to make sure that every single one of your shirts has that same technology built into it? It seems easier to have it separate from the clothing that you wear, so that you don’t have to think about all those complications.

There is much more at the link, including discussions of some of his best-known novels…

That was then, this is now

The data came from Facebook:

During Obama’s initial 2008 bid for office, his team had already embraced technology in a greater capacity than any before it, assembling massive email lists and other targeted initiatives that earned Obama historic fundraising tallies. But for 2012, campaign manager Jim Messina wanted to take things even further.

To get there, his staff needed to link what had previously been disjointed databases of voter information (collected by volunteers, pollsters, and other campaign workers) into a single, comprehensive pool unrivaled in detail and scope. Whereas most voter logs used by campaigns often list only names and telephone numbers, Obama’s advanced tool dove into specifics like age, race, district, and voting history: it allowed field workers to rank voters intelligently and not waste time chasing unlikely votes.

Here is the article from The Verge, via the excellent Ben Thompson.  I recall similarly glowing coverage from The New York Times.

British naval commanders were somewhat rational in avoiding battles

Mutual optimism theory holds that mutually optimistic beliefs about outcomes cause international conflict. Because beliefs are unobservable, this theory is difficult to test systematically. Here, I present a clean test of theory that relies exclusively on observable variables by exploiting novel features of naval battles in the age of sail, most notably an admiral’s ability to avoid battle by simply sailing away. Using a formal model, I show that the outcome of mutual naval battles, where either side could avoid battle by sailing away, should not be predictable from observable capability indicators. The outcome of unilateral battles, where only one side could sail away to avoid fighting, should be predictable from these same indicators. I test these predictions against all squadron-level British naval battles from 1650 to 1833. I show that observable strength indicators are substantially less predictive in mutual battles, confirming the core key theoretical prediction.

That is from David Lindsey, via the excellent Kevin LewisAumann theorem for them!

Does Taiwan have the weirdest politics in the world?

That is the topic of my Bloomberg column earlier in the week, here is one excerpt:

Chiang Kai-shek, the first leader of the island, was part of a generation of Asian visionary leaders which is perhaps without parallel. It includes Lee Kuan Yew of Singapore, Park Chung-Hee in South Korea, Mao Zedong and Deng Xiaoping in China, and Ho Chi Minh in Vietnam. Whether you admire these figures or not, theirs  was an unparalleled time for nation building and at a much swifter pace than in European history.

And there is no successful polity that has so many apparently insoluble problems:

Taiwan is also inextricably linked to the economy of the mainland. By one estimate, over 10% of the Taiwanese population lives or works in mainland China, including many of the most ambitious Taiwanese, and China is by far the number one counterparty for trade and investment. Taiwanese real wages stagnated from 2000-2016, in large part because it was more profitable for Taiwanese investors to send their capital to the mainland. The Taiwanese birth rate has plummeted to 1.2 per woman, possibly the lowest in the world.

The Chinese also wish to take them over, by the way.  Finally, I close with some remarks on the forthcoming election.

From the comments, was 1970 an American turning point of sorts?

A lot of things changed around 1970. That year looks like a major historical fulcrum for the USA.

1970 was approximately (within a few years):

1. The year manufacturing employment started to stagnate (later to decline).
2. The Great Compression reached its peak.
3. The Great Stagnation began.
4. Roe v. Wade was passed
5. Women entering workforce en masse.
6. Historic increase in immigration begins.
7. End of Bretton Woods.
8. Beginning of large trade deficits.

That is from Famulus.

That was then, this is now

As he prepared for Apollo 11’s lift-off, Neil Armstrong thought he had a 10 per cent chance of dying during the mission, and a 50 per cent chance of not walking on the Moon. “There was still a debate about if you stepped on to the Moon, would you step into 10ft of dust?” says former Nasa official Scott Hubbard.

The entire mission was vulnerable to a single-point failure: if the service module’s engine had failed, for example, there was no back-up.

Nasa’s whole attitude to risk has now changed. Until recently, each system was built to tolerate any two faults. This is now seen as a blunt approach, treating all components as equally important. So Nasa instead tries to limit the probability of failure. The chance of losing SLS and Orion on its first mission is one in 140, according to the agency’s analysis.

That is by Henry Mance and Yuichiro Kanematsu, in the FT, from their splendid look at the current attempt to drive a moon mission.  And this:

“We do not have time or funds to build unique, one-of-a-kind systems,” William Gerstenmaier, a senior Nasa official, said recently. The agency’s biggest rocket — Boeing’s troubled Space Launch System (SLS) — will use some of the same engines as the Space Shuttle. Blake Rogers, an engineer at the Aerospace Corporation, a government-funded research agency, told the FT: “2024 is really soon. So there’s not a lot of brand-new technology…Today, Orion’s processing power will still be below 500MHz — significantly less than a MacBook.

Recommended, gated but of course you should subscribe to the FT.

Is Democracy Doomed?

Democracies are much richer than non-democracies and their wealth has made them the envy of the world. The close correlation between democracy, high GDP per capita, and economic, military, and cultural power has made modernity appear to be a package deal. When people look at rich, powerful countries they typically see a democracy and they think, “I want that.”

At the same time, however, the academic literature on the causal effect of democracy on growth has shown at best weak results. Here is the all-star team of Acemoglu, Naidu, Restrepo, and Robinson (ungated) in the JPE summarizing:

With the spectacular economic growth under nondemocracy in China, the eclipse of the Arab Spring, and the recent rise of populist politics in Europe and the United States, the view that democratic institutions are at best irrelevant and at worst a hindrance for economic growth has become increasingly popular in both academia and policy discourse. For example, the prominent New York Times columnist Tom Friedman (2009) argues that “one-party non democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. ”Robert Barro (1997, 1) states this view even more boldly: “More political rights do not have an effect on growth.”

Although some recent contributions estimate a positive effect of democracy on growth, the pessimistic view of the economic implications of democracy is still widely shared. From their review of the academic literature until the mid-2000s, Gerring et al. (2005, 323) conclude that “the net effect of democracy on growth performance cross-nationally over the last five decades is negative or null.”

Acemoglu et al. continue, “In this paper, we challenge this view.” Indeed, using a multitude of sophisticated econometric strategies, Acemoglu et al. conclude “Democracy Does Cause Growth.” In their sample of 175 countries from 1960 to 2010, Acemoglu et al. find that democracies have a GDP per-capita about four times higher than nondemocracies ($2074 v. $8149). (This is uncorrected for time or other factors.) But how much of this difference is explained by democracy? Hardly any. Acemoglu et al. write:

Our estimates imply that a country that transitions from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years than a country that remains a nondemocracy.

In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea. GDP per capita in the United States is about 20% higher than in Sweden, Denmark or Germany and 40% higher than in France but I don’t see a big demand in those countries to adopt US practices. Indeed, quite the opposite! If we want countries to adopt democracy, twenty percent higher GDP in 25 years is not a big carrot.

As someone who favors democracy as a limit on government abuse, I find this worrying. One optimistic response is that the nondemocracies that adopt the policies necessary to make a nation rich, such as support for property rights, open markets and the free exchange of ideas, may not be such bad places. These beasts, however, appear to be rare. But if they are truly rare there must be more to the democracy-GDP per capita correlation than Acemoglu et al. estimate. So what are they missing? I am uncertain.

If democracies don’t substantially increase growth, why are they rich? Acemoglu et al. don’t spend time on this question but the answer appears to be reverse causality (from wealth to democracy) and the fact that today’s rich democracies adopted capitalism early. But don’t expect the wealth to democracy link to be everywhere and always true, it’s culturally and historically bound. And catch-up is eliminating the benefits of the head start.

If much of the allure of democracy has been higher GDP per capita then the allure has been a mistake of confusing correlation for causation. A fortunate mistake but a mistake. The literature on democracy and growth implies that there is no reason to reject an alternative history in which the world’s leading industrial economy was a nondemocracy. Nor why we could not see some very rich nondemocracies in the future–nondemocracies that would be as on par with the United States as say Sweden, Denmark and Germany are today. If that happens, the case for democracy will look very much weaker than it does now as the correlation between democracy and wealth will be broken and the causal effect more evident even to those without sophisticated econometrics.

Hat tip: Garett Jones for discussion.

*Fentanyl, Inc.*, by Ben Westhoff

The slightly misleading subtitle is How Rogue Chemists are Creating the Deadliest Wave of the Opioid Epidemic.  Why misleading?  So many substance abuse books are a mix of hysterical in tone and a disappointing “paint by numbers” in their execution, but this one really stands out for its research, journalism, and overall analysis.  To give just one example, it is also a great book on China, and how China and the Chinese chemicals industry works, backed up by extensive original investigation.

Start with this:

Americans take more opioids per capita — legitimate and illegitimate uses combined — than any other country in the world.  Canada is second, and both far outstrip Europe.  Americans take four times as many opioids as people do in the United Kingdom.

And this:

For many years, Chinese organized-crime groups known as triads have been involved in the international meth trade.  But experts familiar with triads say their influence appears to be waning in the fentanyl era.  “They’re a shadow of their former selves,” said Justin Hastings, an associate professor in international relations and comparative politics at the University of Sydney…Though ad hoc criminal organizations continue to move drugs in China, major trafficking organizations are rare there, and cartels basically nonexistent.  This leaves the market wide open for Chinese chemical companies, who benefit from an air of legitimacy.

As for marijuana and cocaine, they are used by only about one in every forty thousand individuals in China.  But the book covers the entire U.S. history as well.

Definitely recommended, this will be making my year-end “best of” list for non-fiction.  And yes I did go and buy his earlier book on West Coast rap music.

The decline in American infrastructure proficiency

That is the concern of a new paper by Ray Fair, here is the abstract:

This paper examines the history of U.S. infrastructure since 1929 and in the process reports an interesting fact about the U.S. economy. Infrastructure as a percent of GDP began a steady decline around 1970, and the government budget deficit became positive and large at roughly the same time. The infrastructure pattern in other countries does not mirror that in the United States, so the United States appears to be a special case. The overall results suggest that the United States became less future oriented beginning around 1970. This change has persisted. This is the interesting fact. Whether it can be explained is doubtful.

Is it not the rise of interest in spending more money on medical care?

*The Narrow Corridor: States, Societies, and the Fate of Liberty*, the new Acemoglu and Robinson book

Due out in September, by Daron Acemoglu and James Robinson, here is an excerpt from the Amazon summary:

State institutions have to evolve continuously as the nature of conflicts and needs of society change, and thus society’s ability to keep state and rulers accountable must intensify in tandem with the capabilities of the state. This struggle between state and society becomes self-reinforcing, inducing both to develop a richer array of capacities just to keep moving forward along the corridor. Yet this struggle also underscores the fragile nature of liberty. It is built on a fragile balance between state and society, between economic, political, and social elites and citizens, between institutions and norms. One side of the balance gets too strong, and as has often happened in history, liberty begins to wane. Liberty depends on the vigilant mobilization of society. But it also needs state institutions to continuously reinvent themselves in order to meet new economic and social challenges that can close off the corridor to liberty.

You can pre-order here.

My Conversation with Eric Kaufmann

Interesting and excellent throughout, here is the audio and transcript.  Eric is political scientist at Birkbeck College in London and the author of the recent Whiteshift: Populism, Immigration, and the Future of White Majorities.  Here is part of the opening summary:

Kauffman’s latest book Whiteshift, which examines how declining white ethnic majorities will respond to these changes, is on Tyler’s list as one of the best books of the year. The two discuss the book and more, including Orangeism in Northern Ireland, Switzerland’s secret for stability, what Tocqueville got most wrong about America, predictions on Brexit’s final form, why Portugal seems immune from populism, how Notre Dame should be rebuilt, whether the Amish — or Mormons — will take over the world, and much more.

Here is one excerpt:

COWEN: Do conservative Muslims also have a much higher fertility rate?

KAUFMANN: The gradient between very conservative and sort of secular and liberal is not as strong in Islam as it is in Judaism or Christianity, but it’s about a twice higher fertility for women who are most in favor of Sharia compared to those who are most opposed to Sharia, in the cities. So I do think there is also this dynamic within Islam, yes.

COWEN: If we look at a country such as Iran, which now has a very low total fertility rate, is that a sign they’re not actually very religious? Or there’s something unusual about religion in Iran? What accounts for that?

And:

COWEN: Which group of French Muslims has assimilated most successfully and why?

KAUFMANN: Well, the outmarriage rate is almost 50 percent for French Algerian men, but even across the Franco-Algerian community, I think it’s in the 40 to 50 percent outmarriage —

COWEN: And they’re marrying ethnically white French women?

KAUFMANN: Right, or men. I think part of this stems from Algeria in its history. You have a large Berber population in Algeria, many of whom are anti the regime. They’re anti the Arab-Islamist regime. So they’re actually quite secular in many ways.

That’s part of it, but even amongst the Moroccans in France, there’s quite a high outmarriage rate of like 40 percent. So yeah, the French Muslims do seem to be melting in better than Muslims even of the same ethnicity. Compared to Moroccans in the Netherlands, for example, there’s a much higher outmarriage in France.

COWEN: And that’s the Berber factor, in your view?

KAUFMANN: I think it is the Berber factor. I don’t think there’s anything magical that the French are doing that the Dutch are not in terms of integration policy. I think too much is made of that.

And:

COWEN: What’s the most plausible scenario for Irish reunification?

KAUFMANN: I think the most plausible scenario is that Northern Ireland Protestants don’t have the same hostility to the Republic that they have traditionally had, so maybe a kind of charm offensive.

In a way, the unionist population is the one they have to win over. They are kind of foursquare against reunification. Somehow, the Irish Republic has to find a way to reassure them. That’s going to be the ticket to reunification, but it’ll never really happen just through economic integration. I think there’s got to be something symbolic that will win over the unionists.

Finally:

COWEN: So there’ll be more of a turn against immigration?

KAUFMANN: Yeah.

COWEN: In Canada.

KAUFMANN: Yes, and immigration attitudes are now very different, depending if you’re a Conservative or a Liberal voter. That didn’t use to be the case even five years ago, so there is more of a politicization of that issue now.

Recommended, and I found all of Eric’s books very interesting as well.

View at Medium.com

*The Impeachers*

This fun book, by Brenda Wineapple, has the subtitle The Trial of Andrew Johnson and the Dream of a Just Nation.  Excerpt:

“The long haired men and cadaverous females of New England think you are horrid,” Johnson’s secretary reported to him.  “I had a conversation with an antique female last night, in the course of which she declared that she hoped you would be impeached.  Said I ‘Why should he be impeached — what has he done that he should be impeached?’ ‘ Well,’ replied she, ‘he hasn’t done anything yet, but I hope to God he will.'”

You can order the book here.