What should we really expect?

Kevin Drum is amazed to learn that John Meriwether, founder of Long Term Capital Management, a hedge fund that failed spectacularly in 1998, and founder of another hedge fund which failed last year, is starting a third fund.  And it looks like people will invest in it.  Are people crazy, wonders Kevin? See the whole post for more details on the losses incured, and profits earned by Meriwether in these extremely profitable failures.  What could induce anyone to invest in a fund which is so likely to fail?  How could so many people be so careless with their hard earned money?

I, on the other hand, find this not surprising at all.  This appears to be a case of large number of very wealthy people behaving in an insane fashion.  If you witness a large number of people behaving in a maner that seems irrational given their circumstances, perhaps they are behaving rationally, you've just got their circumstances wrong.

How can people put so much of their hard earned money into such a risky venture, indeed a venture likely to fail?  Perhaps, they are not actually putting in their money, nor is it hard earned.

As I've commented elsewhere (see here, here and here) the federal governmnet of the United States creates a number of extremely valuable services that the people of the United States are bound and determined to give away, at least to extremely wealthy people, for free, or as near to free as our political system will allow.  The Federal Government by licensing the airwaves (and guaranteeing that those using the airwaves will not have their signals meet interference), creating the mechanism for incorporation (by which the risk of running a business is shared by the community, vastly increasing the value of the business), protecting copyrights and definding physical and financial assest provides, as I say, a large number of very valuable services.  The value that these services add to other aspects of the economy is our money.  That is it is value added by us via the legislation passed by our Congress.  Nonetheless, for the past several decades we have been busily increasing the value of these services and decreasing what we charge for them, where the starting point wasn't a very high charge to begin with.  The result is that folks fortunate enough to be running a business that uses these services are pretty much guaranteed a very high income even if you do little work.  Furthermore, we have made clear that this is not going to change much for some time to come. 

The upshot is that we, the people, are generating lots of money and then giving our money away to these people, with no strings attached, no obligation in return, no obligation of any kind. In response, they behave exactly as one could expect. They treat this not as their hard earned gains from past work, but rather as a windfall.  As people tend to do, the money often gets gambled or put to some bizzare, irrational use.  People are not as careful and protective of a windfall, or other people's money, as they are of their own.  Also, keep in mind that we are making sure that this gravey train will not be ended in the future.  As a result these people do not need to worry that their future income and wealth depends upon the success of any current investment.  They have every expectation of their future income being as high or higher than their current.  We will make sure of that.  And they risk this money in exactly the manner that one would expect.

There is another way to look at this issue.  We the people of the United States create these valuable services.  Yet we have so little concern for that wealth that we give it away with no obligation on the part of the recipeint, no demand that they pay us, or do us any service in return.  If we don't care about the proper use of these money, why would we expect the folks we give it to, to care? 

Adam Smith and Taxation

Excellent diary over at Daily Kos by bay of arizona. The subject is Adam Smith and progressive taxation which Smith favored. Smith has a lot more to say in support of progressive ideas than he does in support of conservative ideas, at least the way those ideologies are shaped today. I would urge progressives to read "The Wealth of Nations". Attempting to incorporate Smith's ideas into a progressive ideology would be a huge benefit to progressives and to the world.

Conservative Patriotism

Steve Brenen at The Washington Monthly comments on the unseemly glee expressed by various conservative commentators over Chicago not getting the 2016 Olympics. He notes favorable Rachel Maddow's comment that the right wing explicitly cheering an American loss may well leave an impression far longer than the loss itself. I would note, however, that this is only the latest in a string of such anti-America sentiment from the right, and it highlights what I think is the character of right wing so-called patriotism. From Jerry Fallwell commenting on the 9-11 attacks to John Hagee's comments on Hurricane Katrina, the right wing has always been willing to criticize and blame America. The right have never had a problem with those who criticize America. Rather the act they find intolerable is not criticism of America, it is criticism of Conservatism. America does not matter to them, conservatism and conservatives do. So if the America fails to win an Olympic competition, and that failure fuels conservatism, that to conservatives it is indeed reason to cheer.

Why "Liberal" is a term of abuse.

Mark Kleiman Mark Kleiman has a post recounting comments he recieved after a recent lecture he gave. In his words

Then Tuesday night I gave my crime-control pitch at the California Endowment. It was fairly warmly received. But two of the people who came up afterwards to tell me how much they’d liked the talk said something like, “I’m glad they decided not to have some liberal talk about crime.” When I told them that I was an unreconstructed liberal and card-carrying Obamaniac, they were deeply puzzled.

He wonders at this encounter, but I am not nearly so surprised. It is a growing contention of mine that while conservative policies are indeed quite dreadful, horrid really, close on their heels for being dreadful is liberal rhetoric and argument. Liberal policies are, on the whole, quite good, but the arguments we wield, at least those that permeate the public conscientiousness are quite bad. Actually, to be more exact, the leading liberal arguments are often quite mediocre or poor, while much better, liberal arguments are left unstated.

Take crime control and the criminal justice system, for example. I hear often, from liberals, that there is a need to protect the basic rights of the accused, but this is almost invariably presented as a protection for the accused and only for the accused. This is therefore presented as a gift to someone who is accused, that will benefit my neighbors and colleagues only if they are ever accused of a crime, an event that they don't believe will happen. These rights for the accused then come across as a moral obligation my we liberals believe is a moral obligation imposed on my neighbor for the sake of people accused of crimes, the vast majority of whom have, in fact, committed crimes. My neighbor may, therefore be a bit puzzled as to why we have to grant this privilege to these people.

The most persuasive reasons why we need to do this are, oddly, rarely stated, at least in our public arguments. For one thing, the power of the state to prosecute citizens is enormous, and history shows that if that power is not checked then it gets abused. If we grant our magistrates unlimited and unchecked power to prosecute they could then do a much more effective job going after criminals. But they could also, with far less effort to themselves, do a just barely adequate job of going after criminals and use their powers to go after people pointing out their corruption. This later choice is much easier and much more profitable and therefore the one invariable taken. If instead we require that they meet standards of evidence, that they be required to present overwhelming evidence of guilt of an accused defender, they can only accuse someone on the basis of "probable cause" and the other rights of the accused are respected, then our magistrates will need to just go after actual criminals. That is why we want to have these rights respected. If we require the state to respect these rights, then those who do get accused will generally be those who are actually guilty and we will be more secure in the process.

We are also made more secure ourselves, if the state respects the rights of the accused, because it fosters greater faith and confidence in the state and greater willingness to cooperate with police in investigations. By going through the whole process of trial, including the rights of the accused, we make it publicly clear that the state is going after those who are guilty. The rest of us are more likely to be cooperative with such investigations if we have confidence that the state is pursuing people guilty of recognized crimes and not some personal vendetta.

So, in short, the reasons for respecting the rights of the accused include powerful arguments that doing so protects the security of those who do not commit crimes. Indeed, those arguments are sufficient, in themselves, to persuade most everyone that respecting these rights is the correct thing to do. The moral concerns of the fate of the accused, who may indeed be guilty of a monstrous crime, can, and should be, a secondary concern. However, in recent times "liberal" arguments have raised this secondary concern to first place, and left the more significant arguments behind. This, more than anything else, I believe, is the source of "liberal" as a term of abuse.

As I indicated in the first paragraph, I also am coming to believe, that this general tendency for liberals to put weak arguments first and to abandon our strongest arguments is far more wide spread than just the issue of the rights of the accused. More on that in future posts.

Critical Thinking and Its Alternatives

A good article by Lane Wallace in the Atlantic (ht to Mark Kleiman) on certain aspects of human reasoning that have great relevance to today's political debates. People are not, as all agree, perfectly rational. One irrational thing we do is to cling to beliefs even after evidence clearly indicates these beliefs are factually wrong. And I'm not talking about grand spiritual questions here, but things that are clearly subject to resolution based on evidence. Ms. Wallace, for example, discusses the question of who got to the North Pole first, Cook or Peary. There are people still passionately attached to one conclusion or the other, on this question and many other similar questions, long after the evidence supporting their conclusion has been shown to be inconclusive or in error, and other evidence has indicated some other conclusion is correct.

While most of us, most of the time, will base our conclusions on the evidence, and will alter our beliefs based on what evidence there is and how reliable the evidence is (the reliability of the evidence being based on some independent standard), this is not always what we do. In some cases we will work in the opposite direction, basing our beliefs on some gut level reaction and then judging the evidence as being reliable or not based on whether it supports our conclusion. Mark Kleiman has distinguished these as "data based reasoning" in the first instance and "motivated reasoning" in the second. But by this second method we can never escape our conclusion no matter how wrong it is. This then is the irrationality trap that keeps people believing in things long since shown to be false.

The success of some of our intellectual activities over the past several centuries, science perhaps most notably, is due to recognizing this tendency and to keep the process focused on reasoning from evidence to conclusions. A central aspect of the critical thinking process is that conclusions are always tentative. That is, we believe these things are probably true, but keep in mind that that could be wrong. As long as one does so you do not become so attached to that conclusion that you switch to "motivated reasoning".

People vary in how likely they are to select "data driven reasoning" over "motivated reasoning", but the preference for the later can also be encouraged by better education and better explanation of the critical thinking process. There is also a theological argument for preferring the "data driven approach" that those who are more religiously inclined might be advised to present and perfect.

For any given person engaged in reasoning about the world and trying to understand the world about him, we can assume that said person does not posses the wisdom and omniscience of God. Therefore said person will, in drawing conclusions and listening to his gut often come to erroneous conclusions. It is an arrogant affront to assume that any person is incapable of error. But if the person is possibly wrong in his conclusions then by definition his conclusions are tentative. That is the very meaning of the term. Later evidence or experience might show that the conclusions are in error. A person should, if he does not assume that he is equal to God, treat his own opinions and conclusions as tentative.

Note, however, that the above paragraph is open to a possible misunderstanding, which also gums up our arguments. While I say that all conclusions are tentative, they are not all equally so. All conclusions that have been drawn to date might be overturned by some later evidence, might not all are equally likely to. That the Earth is a spheroid in orbit about the Sun is a tentative conclusion is true, but so well supported by the evidence that it would be absurd to act in any way as if it might be proven wrong. The conclusion that the Moon is the result of an impact with the Earth during the formation of the solar system is also tentative, but somewhat more so. It is not absurd to imagine that future evidence might replace that conclusion with some other, or some modified version of the impact theory. The conclusion that there was life on Mars in the distant past is also tentative, but much more uncertain than the other two. It is based on the evidence for liquid water on that planet and the inconclusive evidence from a meteorite discovered on the Earth.

To be able to have rational discourse on any subject, we need to engage in "data driven reasoning". This requires us to make use of the principals of critical thinking which recognizes that our conclusions are tentative, but we must be able to recognize that they aren't all equally so.

Supply-Side Weirdness

Matthew Yglesias comments here on what Matt rightly describes as "Supply-Side Weirdness From Greg Mankiw".  Matt's comments are a good read, but I also found the highlighted part, and Mankiw's and Matt's reaction to it, curious. 

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

So the marginal tax rate in the three decades after World War II was high and the pretax incomes of the wealthy were lower.  That I understand, but the lack of incentive doesn't make sense to me.  Let's say the owner of some enterprise in a low tax environment employs 1000 workers, each of which add $1000 worth of value by their labor in the course of a year.  The owner is making then $1 million, which is sufficient for this particular business owner.  Let us assume also, that like most people, this individual is not working the absolute greatest degree he is capable.  He is effectively taking some of the value he could add to the business in leisure time.  Perhaps he is at the firm 40 hours a week, but is doing only about 30 hours of actual work.  He could employ more people, and thus make more money, but he is, as I say, taking some of the money he could be earning in lower stress or leisure time.  I imagine that this circumstance is not that unusual.

Now let us assume that the tax environmnet changes so that his costs go up and each worker is only adding $500 per year and the owner's profit decreases to $500,000 per year.  Still a tidy income, most folks can live comfortably on that, but he would like to enjoy the higher income as well.  I'm no economist, but it seems to me that one obvious solution would be to expand the amount of work he is doing by employing more people.  If he could increase the number of employees to say 1500, and take on the extra work the management of these extra employees would require, then his income increases from $500,00 to $750,000.  Not the $1 Million he was making, but somewhat closer.  The cost to the owner is the extra hours of work or the extra stress during the 40 hours that he his at the firm. 

Now it is true that in this scenario he is not incentavised to make the million dollars he has making in the lower tax regiem, but he is incentavised to do more work and produce more stuff. That incentive would seem to me to be more productive toward general economic prosperity than the regime where it was easy to make millions. 

Markets and Government

Another voice expressing some ideas I agree with regarding the appropriate role of government in market economics.  As the author makes clear, government is an essential component to having a market economy.  Given the necessary role government plays in the market it is not unreasonable that government intervenes in the market.  In fact the discussion of government intervention in the market is curiously one-sided.  Conservatives who express objections to government intervention display a clear pattern to those objections.  Government actions which clearly intervene in the market, such as enforcement of contracts, copyright protections and the rest, and which provide a material benefit to the the conservative, raise no objection from the conservative.  The only objections expressed are those interventions which require the conservative to do something in recompense for the services which provide a benefit.  This is not any sort of noble principal.