Ernest Gellner thought that Islam of all monotheisms was the closest to modernity:

I like to imagine what would have happened had the Arabs won at Potiers and gone on to conquer and Islamise Europe. No doubt we should all be admiring Ibn Weber’s The Kharejite Ethic and the Spirit of Capitalism which would conclusively demonstrate how the modern rational spirit and its expression in business and bureaucratic organization could only have arisen in consequence of the sixteenth-century neo-Kharejite puritanism in northern Europe. In particular, the work would demonstrate how modern economic and organizational rationality could never have arisen had Europe stayed Christian, given the inveterate proclivity of that faith to a baroque, manipulative, patronage-ridden, quasi-animistic and disorderly vision of the world. A faith so given to seeing the cosmic order as bribable by pious works and donations could never have taught its adherents to rely on faith alone and to produce and accumulate in an orderly, systematic and unwavering manner. Would they not always have blown their profits on purchasing tickets to eternal bliss, rather than going on to accumulate profits and more? … Altogether, from the viewpoint of an elegant philosophy of history, which sees the story of mankind as a sustained build-up to our condition, it would have been far more satisfactory if the Arabs had won. By various obvious criteria—universalism, scripturalism, spiritual egalitarianism, the extension of full participation in the sacred community not to one, or some, but to all, and the rational systematisation of social life—Islam is, of the three great Western Monotheisms, the one closest to modernity.

Be ready for a surprise:

This year, 84% of Chinese citizens polled agreed the free market is best. That was the highest approval rating among all countries polled. China. (...) India, too, long a bastion of Third-Way economic planning and regulation, gave the free market a 79% approval rating.

The market has fans everywhere in the emerging economic superpowers: In Brazil, 75% of those polled expressed their approval; in Nigeria, 82% (where all those oilspills are, Ivan). (...) (T)he highest approval rating ever, 96% in 2002, was recorded by Vietnam, i.e., what we used to think of as Ho Chi Minh’s Vietnam but maybe should be rethought of as Adam Smith’s Vietnam (even if 96% is the kind of majority Ho Chi Minh elections used to produce). In the Palestinian territories, the free market polls a vigorous 82%. (...)

(...)

It seems there’s also strong popular support for international trade. Growing trade and economic ties with other countries get 93% approval in China, 90% in India, 87% in Brazil, 84% in Britian, Poland and Nigeria, and so on. (...)

In the United States, worryingly, support for trade is only 66%, which puts that country between Egypt and Mexico in terms of openness to the world. That score is up from a disastrous 53% in 2008. Even so, for the first few decades after the Second World War, the United States was the main engine for worldwide trade liberalization. (...)

Here are the results.

Does anybody ever resign over this?

Big oil spills are no longer news in this vast, tropical land. The Niger Delta, where the wealth underground is out of all proportion with the poverty on the surface, has endured the equivalent of the Exxon Valdez spill every year for 50 years by some estimates. The oil pours out nearly every week, and some swamps are long since lifeless.

 

(...)

 

The oil spews from rusted and aging pipes, unchecked by what analysts say is ineffectual or collusive regulation, and abetted by deficient maintenance and sabotage. In the face of this black tide is an infrequent protest — soldiers guarding an Exxon Mobil site beat women who were demonstrating last month, according to witnesses — but mostly resentful resignation.

Small children swim in the polluted estuary here, fishermen take their skiffs out ever farther — “There’s nothing we can catch here,” said Pius Doron, perched anxiously over his boat — and market women trudge through oily streams. “There is Shell oil on my body,” said Hannah Baage, emerging from Gio Creek with a machete to cut the cassava stalks balanced on her head.

(...)

As many as 546 million gallons of oil spilled into the Niger Delta over the last five decades, or nearly 11 million gallons a year, a team of experts for the Nigerian government and international and local environmental groups concluded in a 2006 report. By comparison, the Exxon Valdez spill in 1989 dumped an estimated 10.8 million gallons of oil into the waters off Alaska.

Keynes, meet Hayek:

1. Try not to think of macroeconomics in terms of equations or in terms of aggregate demand. Try to learn to think in a new language, rather than translate from the Recalculation language to something you are used to.

2. "Economic activity consists of sustainable patterns of specialization and trade." That is the mantra of the Recalculation Story.

3. Note how difficult it is to squeeze patterns of specialization and trade into a model of a single representative agent. Robert Solow has more good points.

4. If you cook for yourself and I cook for myself, that is not economic activity. If we eat at each other’s restaurants, that is economic activity. This is true in the national income accounts, and it is justifiable. It is better to have millions of people working for you to produce your food, computers, health care, and so on than to produce them for yourself.

5. Part of the challenge of creating sustainable patterns of specialization and trade can be described as a matching problem. Think of two decks of cards, one with a list of workers with specialized skills and one with a list of occupations that utilize specialize skills. If you draw two cards at random, the chances are that they will not match. The skills of the worker will not match the skills required in the occupation. In that case, the marginal product of the worker in that occupation is very low, and the worker is unemployed.

6. The economy’s calculation problem is to sort the two decks in ways that match workers to occupations in which they have value. This problem becomes more complicated with each increment of technological progress. The number of occupations has increased, because even as some occupations become obsolete, even more occupations emerge as useful. Also, the amount of human capital needed for many occupations has increased.

7. The patterns of specialization and trade are interdependent. In some instances, there is negative feedback. A new pattern that involves automobile production has negative impact on horseshoe makers. In other instances, there is positive feedback. A new pattern that involves automobile production has a positive impact on gasoline refiners.

8. Economic profits are what indicate a sustainable pattern of specialization and trade. Ultimately, the way that we know that we have a good set of matches of workers and occupations is that employers are not losing money.

9. The sustainability of patterns of specialization and trade is always changing. New opportunities emerge, and some older patterns become obsolete.

10. A danger in the economy is that an unsustainable pattern will go unrecognized for a long time. In the recessions of the U.S. between the end of World War II and the 1980’s, excess inventories were accumulated. In the most recent episode, excesses in housing construction and mortgage finance went unrecognized for a long time.

11. If the excesses are merely short-term inventory problems, the old patterns of specialization and trade can be restored once the inventories are worked off.

12. However, if the old patterns of specialization and trade are not sustainable, the economy faces the Recalculation Problem. New patterns of specialization and trade need to be created. While the economy is creating new patterns even in good times, when it faces a Recalculation Problem it cannot create new patterns rapidly enough to prevent widespread unemployment.

13. Government can create temporary jobs for the unemployed. However, that is not the same thing as creating sustainable patterns of specialization and trade. For example, if the government subsidizes a firm that builds solar panels and those solar panels are not efficient, then this does not really represent a sustainable pattern of specialization and trade.

14. The more that patterns of specialization and trade involve government direction of resources, the greater the risk that those patterns are not sustainable.

15. It is possible that lower real wages will help to solve the Recalculation problem. However, generally speaking, when you pick a card from the worker deck and a card from the occupation deck, the match is either a good one or it isn’t.

16. The production process has become more roundabout over the years. Fewer workers are engaged in hands-on production of output. Instead, they are engaged in building what Garett Jones calls organizational capital, as indicated by functions such as marketing communications, management reporting systems, or corporate training. This means that the relationship between output and employment has become looser. It means that patterns of specialization and trade reflect not just what goods and services are produced but how they are produced.

The Recalculation Story does not exclude government stimulus. Paul Seabright writes:

This account, to which I am very sympathetic, also suggests a reason for favoring tax cuts over government spending in fiscal policy interventions (other things equal, of course). This is that private spending is somewhat less likely to freeze existing patterns of specialization, since individuals do not face political lobbying from insiders over how to spend their money, and since individuals benefit from distributed private information about their likely future needs. Of course, if they save the tax cuts they don’t make use of that Hayekian advantage, and their potential contribution to Recalculation evaporates.

(However I don’t mean it is) necessarily a bad thing if the savers saved the tax cut; it’s just that they don’t then make this Hayekian contribution to recalculation, by signaling to the market the kinds of goods they are saving up to buy. Actually almost nobody signals to the market in advance what kinds of goods they are hoping to buy; the market normally does a pretty good job by presuming that the demand for each good tomorrow will be predicted by the demand for it today. When there’s a big recession that mechanism is no longer so reliable. That’s a Keynesian point in Hayekian garb.

Gene Healy (vice-president of the solidly right-wing Cato Institute) on the circus that is al Qaeda, and the clown show that was the Bush-administration:

Last week, federal jurors in Brooklyn heard tapes from an undercover informant in what one prosecutor called one of "the most chilling plots imaginable," a 2007 Islamist plan to detonate underground fuel tanks at JFK International Airport.

On the tapes, defendant Russell Defreitas promised "high-tech," "ninja-style" tactics that included releasing rats in the main terminal to distract security. "We got to come up with supernatural things," he told the informant.

Despite his bluster, Defreitas seemed unaware of the technical difficulties involved in igniting hardened underground pipelines, and he never secured explosives.

The JFK plotters’ trial follows May’s attempted Times Square bombing, in which Faisal Shahzad -- trained in explosives at an al Qaeda camp in Pakistan -- failed to set off a bomb made of gas cans, propane tanks, fireworks and nonflammable fertilizer.

You ever get the feeling that some of these guys aren’t the sharpest scimitars in the shed?

If so, you’re not alone. The notion of "savvy and sophisticated" Islamist supervillains is "wildly off the mark," Brookings’ Daniel Byman and Christine Fair write in Atlantic magazine.

Many Afghan suicide bombers "never even make it out of their training camp," thanks to the jihadi tradition of the pre-martyrdom "manly embrace": "the pressure from these group hugs triggers the explosives in suicide vests." (Theological question: Do you get fewer virgins for an own-goal?)

On the American home front, al Qaeda and its sympathizers often don’t look much brighter:

»  In 2006, an FBI sting rolled up the "Liberty City Seven," whose ringleader, the Washington Post reported, "wanted to blow up the Sears Tower in Chicago, which would then fall into a nearby prison, freeing Muslim prisoners who would become the core of his Moorish army. With them, he would establish his own country." Sounds like a plan!

»  2007 saw the arrest of six Islamists who planned to launch an armed attack on New Jersey’s Fort Dix, but were rounded up after they "asked a store clerk to copy a video of them firing assault weapons and screaming about jihad."

»  In 2003, Khalid Sheikh Mohammed associate Iyman Faris went to jail on charges involving a plan to topple the Brooklyn Bridge by severing its suspension cables with a blowtorch.

»  The 2005 Jose Padilla indictment revealed that some Islamic terrorists haven’t quite mastered speaking in code. One of Padilla’s co-defendants insisted he was just talking about sporting goods on the surveillance tapes, but couldn’t explain why he’d asked his co-conspirator if he had enough "soccer equipment" to "launch an attack on the enemy."

Lest you think I’m just cherry-picking particularly incompetent jihadis, recall that the Bush administration once considered Padilla, an American citizen, too dangerous for a civilian trial, and cited Faris’ capture as the crown jewel of successes with its warrantless wiretapping program.

The fact that many terrorists are morons doesn’t mean all are, and even morons get lucky sometimes, so vigilance remains essential.

But the myth that al Qaeda is 100 feet tall has fed dramatic government growth since 9/11. The Washington Post’s new series on "Top Secret America" shows that D.C. has erected vast pyramids in the name of homeland security, with some 1,200 agencies and 850,000 people trolling through e-mail and clear-cutting forests to produce mounds of useless, redundant intelligence reports.

We’ve given al Qaeda power over us they don’t deserve. When we recognize that they’re often inept and clownish, we weaken their ability to sow terror. For the sake of our liberty and security, it’s prudent and patriotic to allow an occasional smirk to cross your stiff upper lip.

From the Washington Post:

Lucas Davis, an energy economist at the University of California, Berkeley, has published a study showing that after getting high-efficiency washers, consumers increased clothes washing by nearly 6 percent. Other studies show that people leave energy-efficient lights on longer. A recent study by the Shelton Group, which advocates for sustainable consumer choices, showed that of 500 people who had greened their homes, a third saw no reduction in bills.

Hans-Werner Sinn explains:

Today the world economy is in the midst of a strong economic upswing, touched off by the newly industrialised countries, and which has fully impacted Germany. The Ifo Business Cycle Clock has now moved into the “boom” quadrant for the first time in more than two years. The majority of the surveyed companies have now finally reported that their current business situation is good. The IMF has estimated that the world economy will grow by 4.2% this year and by 4.3% in 2011 – a pace that is stronger than the average of the past four decades. This is why the recent advice from the US that Germany should stop saving sounds so odd. Now is certainly not the time for new stimulus programmes – now budget consolidation is called for. When, if not now, should the state begin to save?

America also knows, of course, that the world economy is booming, but it is seeking allies for its own debt policies, which have surpassed any justifiable level. President Obama, at the G20 Summit in Toronto, reluctantly subscribed to a savings policy but has no idea of how he will implement it. Today the US economy is on government life-support. The budget deficit this year will amount to 12.5% of GDP; 40% of the federal budget is credit financed. In 2011 the debt to GDP ratio will exceed 100% and move closer to the Greek’s level as of today. Now that the private securitisation of mortgages is virtually non-existent, 95% of all real-estate credit passes through three government institutions: Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve buys the securities of these institutions with freshly printed money since customers abroad have become scarce. The capital imports of the US have shrunk by half in comparison to recent years. Where all this will lead to, heaven only knows.

(...)

Beyond the overcoming of the crisis there is a responsibility towards future generations, and the present world economic boom has negated all arguments for neglecting this responsibility. Instead it is mandatory that debtor countries such as Greece and the US restore the stability and credibility of their private and public financial systems so that lenders’ confidence can be restored and so they can grant new loans.

The US must reduce government borrowing by improving the creditworthiness of private debtors. To do this they need to develop more reliable securitisation structures, using covered bonds, and require that their banks hold considerably higher amounts of capital.

The most difficult adjustment will be giving up the standard of living financed by foreign capital. This also applies to the southern European countries. There is no way around painful structural reforms for the debtor countries.

Michiel van der Zee (what’s in a name) in de Volkskrant:

(M)et het piratengeld krijgt de lokale en zelfs regionale economie een impuls. Winkeluitbaters kunnen generatoren aanschaffen en krijgen zo vierentwintig uur per dag toegang tot energie – voorheen een ondenkbare luxe buiten de meest ontwikkelde gebieden. In de Somalische wijken in Kenia wordt volop gebouwd. Ook heeft zich een aandelenmarkt ontwikkeld voor het bekostigen van nieuwe expedities, waarbij men opties kan kopen op toekomstige winsten.

Bovendien blijkt uit onderzoek dat de visvangst in Somalië is toegenomen en de visstand herstellende is, sinds de problemen met piraterij zijn uitgegroeid tot een kwestie van internationaal formaat. Dit effect is niet waargenomen in Tanzania, dat met gelijksoortige problemen met de gezagshandhaving in territoriale wateren kampt. Piraterij heeft dus positieve gevolgen.

(...)

Ondanks de chaos heeft Somalië in de afgelopen tien jaar een van de beste telecomindustriën in Afrika opgebouwd. Het wijdverbreide gebruik van Xeer, een eeuwenoude traditie waarin ouderen ter plaatste rechtspreken, leidt tot een redelijk stabiel rechtsklimaat. Ondanks (of misschien wel dankzij?, Ivan) de aanhoudende anarchie. Een wereldwijde gelduitwisselingsindustrie, die makkelijk de concurrentie aankan met bekende namen zoals Western Union, zorgt voor het binnenstromen van buitenlands geld.

In de meest stabiele gebieden zijn er zelfs joint ventures opgezet. De ontwikkeling van de economie zal zich voort moeten zetten, wil er op termijn een einde komen aan de piraterij. Het zal lang duren voor in heel Somalië legale alternatieven zijn voor jonge mannen die geld willen verdienen. En weinig is zo lucratief als piraterij.

(...)

Misschien wordt het tijd voor de Westerse wereld om onder ogen te zien dat een op het eerste gezicht moreel verwerpelijke bezigheid zoals piraterij, meer positieve dan negatieve effecten kan hebben voor een land. Ten slotte gaat het voor multinationals die het losgeld moeten betalen om wisselgeld en zijn zij verzekerd. Voor Somalië betekent het waardevol buitenlands geld dat direct aan de economie wordt toegevoegd.

Daar komt bij dat het om  piraterij van de mildste soort gaat, waarbij aan de kant van de gijzelaars nog geen slachtoffers zijn gevallen. Als de internationale gemeenschap samen met de tegenstanders van Al Shabaab zorgt dat hun macht wordt ingeperkt hoeven de piraten hen ook niet meer af te kopen. Dan gun ik ze het eigenlijk wel. Piraterij voor een eerlijker wereld.

Arnold Kling makes the case:

In my view, the biggest problem with the economy right now is that everyone knows that the housing market and the mortgage market are artificial. The mortgage market is being propped by by Fannie, Freddie FHA, and the Fed. The housing market is being held in a state of suspended animation by government attempts to stave off foreclosures. This policy is keeping the foreclosure crisis in front of us rather than putting it behind us.

If it had been up to me, I would have put in place policies to accelerate getting people out of houses where they don’t belong. I would have given subsidies to underwater borrowers to move, and I would have given them bonuses for leaving houses in good condition. I think that if we had a housing market with a reasonable relationship between where people live and what they can afford, then the economy would be humming by now.

Technology makes it possible to create a Hayekian moment in foreign aid:

In my last post, I argued that the “operating system” used by the current international aid agencies is stuck using IBM punch cards while the rest of the world has moved on to cell phones, laptops, and iPhones.

In the old system, you had to type programs into a stack of hundreds of punch cards, walk them down to the computer center, hand them to an operator, and wait in line for them to be processed. The lower you were in seniority, the longer you had to wait.

Contrast that with today, when hundreds of millions of people have their own computers, and several billion people have access to cell phones. iPhone and Android platforms now provide a way for hundreds of thousands of individuals to create and distribute new software. That software may or may not succeed in the marketplace, but it can be downloaded and used, and the most popular new apps get flagged to other users.

What would an analogous distributed operating system look like for the aid business?  The design of any such operating system has to address five questions:

1. Who decides which problems aid should address?
2. Who comes up with the solutions?
3. Who gives the funding?
4. Who competes to implement the solutions?
5. Who gives feedback on how well the solutions work?

The existing system is closed. It assumes these questions will be answered by experts within one of the “mainframe” organizations like the World Bank, the UNDP, USAID, or one of the big NGOs.

Unlike 60 years ago, the expertise, resources and technology now exist to make a new decentralized and distributed aid system possible. Many more people—and not just experts—have relevant developing country experience (for example, the Peace Corps alone has over 250,000 alumni). Regular Americans give over $25 billion each year to charitable causes abroad—about the same amount as the US official aid budget. And PCs, internet, cell phones and related technologies now make it possible to connect all of these people and resources directly to the people who need help.

(...)

Not all of these new initiatives will succeed.  But within a few years, it will be possible for any person or group in the world to help answer any of the five questions above that form the core of the aid operating system.  If the existing agencies that run closed systems don’t adapt to this new set of conditions, they will become as irrelevant as old IBM mainframes.

Mario Rizzo reports:

In 1932 before John Maynard Keynes’s General Theory was written, these letters appeared in The Times of London regarding the appropriate economic policies for Britain to follow during the slump.  

There are a number of things that catch the eye. First, the letter signed by J.M. Keynes is also signed by A. C. Pigou whom Keynes was later to consider a prime representative of the out-dated “classical” economics. Second, Pigou and Keynes (as well as the other signatories) caution against both private sector and public sector austerity. This is essentially the same stimulus idea that Keynesians are promoting today.  

“Consequently, in present conditions, private economy does not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power and shipping-power, to be turned to a different and more important use, it throws them into idleness.  

Moreover, what is true of individuals acting singly is equally true of groups of individuals acting through local authorities. If the citizens of a town wish, to build a swimming-bath or a library, or a museum, they will not, by refraining from doing this, promote a wider national interest. They will be “martyrs by mistake,” and, in their martyrdom, will be injuring others as well as themselves. Through their misdirected good will the mounting wave of unemployment will be lifted still higher.”  

The letter signed by F.A. Hayek and Lionel Robbins (and others) is noteworthy because, first, it makes clear that “everyone” is in agreement that deflation is not desirable and should be avoided.  

“It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation in itself is desirable.”  

Second, Hayek and Robbins stress that the Keynes-Pigou skepticism about private frugality is short-sighted:  

“The signatories of the [above] letter…, however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment. Under modern conditions the securities markets are an indispensable part of the mechanism of investment. A rise in the value of old securities is an indispensable preliminary to the flotation of new issues. The existence of a lag between the revival of old securities and the revival elsewhere is not questioned… [Thus] the sale of securities or the withdrawal of…deposits would [not] assist the coming of recovery. “  

Third, the letter goes on to reject Keynes-Pigou fiscal stimulus on the grounds that expansion of the public debt would increase the frictions that inhibit recovery.  

Finally, Hayek and Robbins conclude: 

“If the Government wish to help revival, the right way for them to proceed is, not to revert to their old habits of lavish expenditure, but to abolish those restrictions on trade and the free movement of capital…which are at present impeding even the beginning of recovery. “ 

It does not take much to see that the issues are basically the same today. The positions of the opposing sides are also the same. As I have said many times before, the great debate is still Keynes versus Hayek. All else is footnote.

John Locke seems to be the only exception:

The labour theory of value has usually been advocated from hostility to some class regarded as predatory. The Schoolmen, in so far as they held it, did so from opposition to usurers, who were mostly Jews. Ricardo held it in opposition to landowners, Marx to capitalists. (But) Locke seems to have held it in a vacuum, without hostility to any class.

(Bertrand Russell, History of Western Philosophy.)

Kevin Dowd:

The benefits of long-term investment over short-term trading are very apparent if one looks at stock market returns over the long term. Over the last 100 years, US stocks delivered an annual average return of 9.6%, of which 5.0% came from earnings growth and 4.5% from dividends, and only 0.1% from changes in the price/earnings ratio. Earnings growth and dividends represent the return from investing, or buying and holding; the change in the P/E ratio represents the return from speculation or trading. Over the long term, the returns from investement vastly exceed those from speculation.

Geert Noels does:

Krugman says that markets are not worried about inflation (TIPS spread), and that  the US government is financing at very low interest rates (<3% !). As a consequence he argues, there are no reasons to worry about more debt and stimulus.

Again, right now the bond market doesn’t seem worried about US solvency. And rationally, stimulus spending shouldn’t change that view: with the long-term real interest rate well below 2 percent, current borrowing has only a trivial effect on the long-run state of the budget.

And so Krugman and others argue that there are no reasons not to accept a new stimulus package.

Seems logic, but is it ?

It is only logical in the debt philosophy that has brought the advanced economy on the brink of collapse. The very tragedy the BIS is talking about in its latest annual report. The Bank of International Settlements has been probably the only central bank in 2000-2007 that has been very vocal about derivatives, debt and leverage risk in the financial system.

The picture below shows the very problem that we should keep in mind: after the outrageous rise in household debt, public debt has sharply risen to come to the rescue. However, this is not a solution, it is just prolonging and increasing the problem.

Looking at the chart above, I had difficulties in recognizing the difference between Spain, the UK and the US…

But the western debt problem is coming at a particular difficult moment: the aging of the western population will start to climb very strongly in the coming years. The impact on public spending will be huge in many countries (ia. the NL and Belgium).

This just confirms that the adding more debt will not only increase the problem, but aggravate the heritage for the next generation.

Why are the markets a bad indicator

Coming back to the other argument of Krugman to increase debt further: markets are not worrying, so why bother.

Well, that is a very weak argument. Markets are strongly manipulated !

* short rates have been put at almost zero percent, thereby exercising downward pressure on long rates

* central banks are massively buying debt that would push interest rates of some countries higher

* this “known” manipulation is completed with currency support, plunge protection teams and other softer support (peptalking, bank support, support buying by government related entities like in Japan, etc etc)

Today, financial markets are not a perfect indication of the general investor sentiment to say the least. Central banks and governments have been manipulating wide segments of the financial markets.

Therefore, the argument about the current low level of interest rates to justify further stimulus and debt spending is just bogus. We are entering the endgame of a long period of reckless monetary and budgetary policy. THe few highlights are the orthodoxy of the German central bank, the agreement of the Maastricht criteria, and the statements of the BIS.

Or put differently: the market signals are manipulated and distorted by all the measures proposed by the Krugman-school. But then claim these false signals as a green light to do even more of the budgetary and monetary derailment is just incredible.