Posts Tagged ‘history repeats’
Money, Finance & Parasitoids

We examined the parasitoid nature of much of our privileged elite here. This post does the same for much of the financial sector. Money quotes being:

Here, instead, is the fable we’ve been offered: Sad as it might be for some workers, towns, cities, and regions, the end of industry is the unfortunate, yet necessary, prelude to a happier future pioneered by “financial engineers.” Equipped with the mathematical and technological know-how that can turn money into more money (while bypassing the messiness of producing anything), they are our new wizards of prosperity!

Unfortunately, this uplifting tale rests on a categorical misapprehension. The ascendancy of high finance didn’t just replace an industrial heartland in the process of being gutted; it initiated that gutting and then lived off it, particularly during its formative decades. The FIRE sector, that is, not only supplanted industry, but grew at its expense — and at the expense of the high wages it used to pay and the capital that used to flow into it.


For more than a quarter of a century the fastest growing part of the economy has been the finance, insurance, and real estate (FIRE) sector. Between 1980 and 2005, profits in the financial sector increased by 800 percent, more than three times the growth in non-financial sectors.

In those years, new creations of financial ingenuity, rare or never seen before, bred like rabbits. In the early 1990s, for example, there were a couple of hundred hedge funds; by 2007, 10,000 of them… Fifty thousand mortgage brokerages employed 400,000 brokers, more than the whole U.S. textile industry. A hedge fund manager put it bluntly, “The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around.”

Wealth comes from production, not its taxation – by government or the financial sector. If money printing dilutes the existing stock of money in relation to goods, effectively “taxing” and devaluing existing money, then the creation of credit money by the financial sector has the same effect. If one is bad, then so is the other. Government might be a poor allocator of capital, but aggregating ever more resources to the financial sector is just as destructive.

The fact the finance can pay so well implies that its rampant growth may be even more damaging than that of government. Finance is more likely to attract the truly talented, who ought to be founding new Microsoft’s, Apples, Fords or curing cancer. Some of them are more likely to pursue such a socially beneficial path if the other option is to become a bureaucrat rather than a stinking rich financier.

Of course the rampant growth of the financial sector is facilitated by the blurring of money with different types of assets. This is an inevitable function of the lived experience of people during a period in the economic cycle. Those who live a different experience during a different part of the economic cycle form a different view. During depressions and crashes the true value of real “money” shines forth. Assets that appeared to be money, even ones as “safe as houses” become worth less, or even worthless.

Those who have recently lived through deflation are likely to instinctively hoard their fiat currency and behave quite differently to those who have recently experienced hyperinflation. Ditto for those with other “lived” experience. “Never a lender or borrower be” can seem obvious or stupid, depending on where people sit in the economic cycle.

Truly to know where we are going and how people and markets are likely to behave it is necessary to know where we have come from. Most economic and financial commentary completely ignores this. Is it any wonder it is so often wrong?


Variable intelligence

Politically correct policies such as quotas and the welfare state make people stupid and negatively impacting them in a whole host of ways. How we perceive the world affects how we act and perform in it. Political correctness negatively impacts peoples perceptions and actions. It spreads the belief that some people cannot improve themselves and their circumstances. They therefore need a hand out and/or some type of legislated assistance.

It matters little if the induced helplessness is supposedly produced through a belief  in genetic deficiency, bad circumstances, poor upbringing, racism or sexism. The effect is the same, it dis-empowers many of those who take it to heart. There are many paths by which welfare creates welfare dependency, as it does with both individuals and corporations.

Some people may not have the innate ability to better themselves. But the vase bulk of the population can,  as in all probability can the vast bulk of beneficiaries of government largess. What holds most “healthy” people back are their own mental conceptions of themselves and the reality in which they live. There is no prison as effective as one we impose on ourselves. Carol Dweck has unintentionally demonstrated how toxic many politically correct beliefs and policies are. Political correctness alters peoples views on their ability and where it comes from:

Individuals can be placed on a continuum according to their implicit views of where ability comes from. Some believe their success is based on innate ability; these are said to have a “fixed” theory of intelligence. Others, who believe their success is based on hard work and learning, are said to have a “growth” or an “incremental” theory of intelligence. Individuals may not necessarily be aware of their own mindset, but their mindset can still be discerned based on their behavior. It is especially evident in their reaction to failure. Fixed-mindset individuals dread failure because it is a negative statement on their basic abilities, while growth mindset individuals don’t mind failure as much because they realize their performance can be improved. These two mindsets play an important role in all aspects of a person’s life. Dweck argues that the growth mindset will allow a person to live a less stressful and more successful life.

This is important because (1) individuals with a “growth” theory are more likely to continue working hard despite setbacks and (2) individuals’ theories of intelligence can be affected by subtle environmental cues. For example, children given praise such as “good job, you’re very smart” are much more likely to develop a fixed mindset, whereas if given compliments like “good job, you worked very hard” they are likely to develop a growth mindset. In other words, it is possible to encourage students, for example, to persist despite failure by encouraging them to think about learning in a certain way.

Dweck’s views are not just arm chair philosophizing. They are based on 20 years of research and behavioral experiments:

In many of our studies (see Mueller & Dweck, 1998), 5th grade students worked on a task, and after the first set of problems, the teacher praised some of them for their intelligence (“You must be smart at these problems”) and others for their effort (“You must have worked hard at these problems”). We then assessed the students’ mind-sets. In one study, we asked students to agree or disagree with mind-set statements, such as, “Your intelligence is something basic about you that you can’t really change.” Students praised for intelligence agreed with statements like these more than students praised for effort did. In another study, we asked students to define intelligence. Students praised for intelligence made significantly more references to innate, fixed capacity, whereas the students praised for effort made more references to skills, knowledge, and areas they could change through effort and learning. Thus, we found that praise for intelligence tended to put students in a fixed mind-set (intelligence is fixed, and you have it), whereas praise for effort tended to put them in a growth mind-set (you’re developing these skills because you’re working hard).

We then offered students a chance to work on either a challenging task that they could learn from or an easy one that ensured error-free performance. Most of those praised for intelligence wanted the easy task, whereas most of those praised for effort wanted the challenging task and the opportunity to learn.

Next, the students worked on some challenging problems. As a group, students who had been praised for their intelligence lost their confidence in their ability and their enjoyment of the task as soon as they began to struggle with the problem. If success meant they were smart, then struggling meant they were not. The whole point of intelligence praise is to boost confidence and motivation, but both were gone in a flash. Only the effort-praised kids remained, on the whole, confident and eager.

When the problems were made somewhat easier again, students praised for intelligence did poorly, having lost their confidence and motivation. As a group, they did worse than they had done initially on these same types of problems. The students praised for effort showed excellent performance and continued to improve.

Finally, when asked to report their scores (anonymously), almost 40 percent of the intelligence-praised students lied. Apparently, their egos were so wrapped up in their performance that they couldn’t admit mistakes. Only about 10 percent of the effort-praised students saw fit to falsify their results.

Praising students for their intelligence, then, hands them not motivation and resilience but a fixed mind-set with all its vulnerability. In contrast, effort or “process” praise (praise for engagement, perseverance, strategies, improvement, and the like) fosters hardy motivation.

Telling people they can’t get ahead because they are colored, Hispanic, female, gay or whatever will impact on their beliefs and behavior. It disempowers them. Generally if we think we lack intelligence and that intelligence is relatively fixed we will do less well than if we believe we can get better and brighter. Our perspective matters. Undermining our self confidence and the innate potential of the individual is one of the ways the welfare state undermines those it is intended to help.

Malcolm Gladwell popularized some of Dweck’s research in his book Outliers: The Story of Success. The book explains how people’s performance can be influenced by the broader circumstances around them. Living in a country which has experienced many decades of capitalism is far more empowering than living in one which has not. Your options and chances are far greater, as is your life expectancy. It is worth remembering this as we cast aside core components of capitalism in the name of political correctness.

The is  not to deny the role of luck, which is ever present. Rather it seeks to put it into perspective. It is not just luck that resulted in your living in your current society. The society you live in results from decisions of its citizens and their forebears. The opportunities presented to you because of the society you live in do not just result from luck. Arguably if the Whitlam government had continued then Australia could have followed the Argentinian precedent. Given the competence of its current government it may yet do so. If it does decline then people born in a poor rather than wealthy Australia will be wrong to think this is just due to luck. As individuals and collectively as a society we do to some extent make our own luck.

The example uses Australia, but it could apply equally to America under Bush/Obama or a Britain under Brown/Cameron. No nation is automatically entitled to a relatively high standard of living. It has to be worked for. As for individuals? Folk wisdom provides some insight:

  • God helps those who help themselves.
  • The harder I work, the luckier I get

What is interesting is that much of the developed world seems to have chosen particularly poor politicians at the same time. It could be due to random chance, cognitive biases on our part or the politically correct currents which flow across the developed world. It may be a combination of them all. But it seems likely the pernicious effects of decades of political correctness are coming home to roost. Even conservative parties often no longer know the values and culture they should be conserving. No one seems to debate the risks being taking as we trash our cultural intangibles.

The possibility of tides or cycles in the affairs of man is not new. We also touched on it in our post on The Fourth Turning. The current downturn is likely to create a new generational attitude:

The Go-Nowhere Generation: But Generation Y has become Generation Why Bother. The Great Recession and the still wenew ak economy make the trend toward risk aversion worse. Children raised during recessions ultimately take fewer risks with their investments and their jobs. Even when the recession passes, they don’t strive as hard to find new jobs, and they hang on to lousy jobs longer. Research by the economist Lisa B. Kahn of the Yale School of Management shows that those who graduated from college during a poor economy experienced a relative wage loss even 15 years after entering the work force.

Perhaps more worrisome, kids who grow up during tough economic times also tend to believe that luck plays a bigger role in their success, which breeds complacency. “Young people raised during recessions end up less entrepreneurial and less willing to leave home because they believe that luck counts more than effort,” said Paola Giuliano, an economist at U.C.L.A.’s Anderson School of Management. A bad economy can boost a person’s weighting of luck by 20 percent, Ms. Giuliano found.

It will be sad if economic realty reinforces distorted views of the capacity of individuals to rise above their circumstances. History is replete with examples of individuals born in dire circumstances who have risen to achieve great things. Necessity is said to be the mother of invention. But this requires people able to conceive of meeting challenges by dint of their own efforts. Absent this and necessity will just leave people hungry. The economy and political correctness could work hand and glove to reduce peoples capability and functioning.

We must not let political correctness undermine potential sovereign individuals. Individuals who know that it is not just intelligence that is mailable. We need more of the caliber of Diedre McKlutsky who embodies our power as true individuals to shape not just our environment, but ourselves. The mess government policies are making is not surprising. McKlutsky has long pointed out that the emperor has no clothes:

 The progress of economic science has been seriously damaged. You can’t believe anything that comes out of the Two Sins. Not a word. It is all nonsense, which future generations of economists are going to have to do all over again. Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad. All my friends, my dear, dear friends in economics, have been wasting their time. You can see why I am agitated about the Two Sins. They are vigorous, difficult, demanding activities, like hard chess problems. But they are worthless as science.

The physicist Richard Feynman called such activities Cargo Cult Science.

While the validity of much mainstream economics may be in doubt, there is no doubt about our malleability and its ability to change our future:

“Watch your thoughts, for they become words.

Watch your words, for they become actions.

Watch your actions, for they become habits.

Watch your habits, for they become character.

Watch your character, for it becomes your destiny.”

Graphic courtesy of Jottings.

Our future?

The global situation appears to be evolving along expected lines. No positive black swans have swooped in to save us from ourselves and whisk us out of our predicament. They may yet arrive, but absent them, I can see no good options. There are only least bad ones.

But we have long lived in the least bad options. As Churchill said “democracy is the worst form of government except all the others”. This can be paraphrased as “capitalism is the worst economic system except for all the others we have tried. So a least bad option for the future is not necessarily an unmitigated evil.

Nassim Taleb portrays the future well. It is a distribution of possible outcomes. Only some of which we know. But any future has a range of like futures around it. For some time it has been apparent that a set of trends in the Western world not only could not continue forever, but were reaching their turning point.

Predicting the future is not possible. For stretches of time we may get some main features reasonably right. Before the GFC it was obvious that economically the world was out of balance. That at some point it would back into a new set of consumption and production patterns and relationships. Any such change involves destruction of capital, both of the hard and soft varieties.

Developed countries have gone to extraordinary lengths to avoid the re-balancing. No doubt in part because the re balancing will involve major changes to their economies. Changes which will include bringing their consumption more in line with their level of production. No country can perpetually consume more than it produces. Eventually whoever is paying for their consumption will get tired of doing so. Printing currency just delays the realization of the issue. As with most problems in life, the sooner they are faced and dealt with the better.

For the last few years I have hoped I was wrong. That those more influenced by Keynes were right. That I was wrong that they were turning a nasty recession into a depression. That they were turning a depression into the greatest depression. But alas the trillions transplanted to the Bankers have not kick started the economy. They have in fact thrown the validity of the system into question in the minds of the people.

They have also made it hard for those of us who appreciate what capitalist incentives have done to defend them. Crony capitalism or the capture of the US government by financial sector vested interests is indefensible. The status quo will not stand. The question is how is it changed and in which direction will it go.

There are multiple precedents that socio and political crisis can follow economic ones. When the central authority of the state crumbles due to its manifest injustices and incompetence, very unpleasant things can happen.

While there may have been nothing inevitable about the exact nature of the 1930’s following the 1920’s some aspects were inevitable. Deflating a credit bubble of that magnitude can not be pleasant. Similarly the exact nature of the 1940’s were not inevitable given the 1930’s. But some aspects probably were.

What is inevitable for us given what we have done? Will our populous meekly accept declining living standards and the need to produce more? Will revolutions overturn existing institutions? Will some of our leaders seek to blame others for their failings. Either persecuting segments of their own population and/or waging war on others?

Given the number of countries going through major restructures it is inevitable that some will take a dark and despotic path. As Jefferson said “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants”.

There is a pattern to history. It may not repeat, but it does rhyme. We are the same creatures through time. We create the similar problems and seek the similar solutions. If we do not learn from history we are indeed doomed to repeat it.

This will not be the first time societies question what form money takes and the role of the banks. It will not be the first time societies have gone from easy money and conspicuous consumption to watching every penny. As Polonius said in Hamlet:

Neither a borrower, nor a lender be : For loan oft loses both itself and friend ; And borrowing dulls the edge of husbandry.1 This above all, — To thine ownself be true ; And it must follow, as the night the day/ Thou canst not then be false to any man. Shakespeare around 1600

Western societies have thrown husbandry out the window in an orgy of debt financed consumption. Our state education system being too busy indoctrinating children to educate them. Leaving society as a whole to learn the lessons of history – one mistake at a time.