the Greek financial crisis

January 28th, 2015

Greece is in dire straits. Unemployment exceeds 25%, youth unemployment is over 50% and public debt is 175% of GDP. Roughly two-thirds of the public debt consists of loans from the eurozone and the IMF.

Martin Wolf, in today’s column on this subject, emphasizes an often overlooked point: Nearly all the IMF/eurozone bailout money went, not to finance government activities, but to prevent the Greek government and Greek banks from defaulting. “A more honest policy would have been to bail lenders out directly. But this would have been too embarrassing.”

What cannot be paid will not be paid. The idea that the Greeks will run large fiscal surpluses for a generation, to pay back money creditor governments used to rescue private lenders from their folly is a delusion.

So what should be done? ….

Creating the eurozone is the second-worst monetary idea its members are ever likely to have. Breaking it up is the worst. Yet that is where pushing Greece into exit might lead. The right course is to recognise the case for debt relief, conditional on achievement of verifiable reforms. Politicians will reject the idea. Statesmen will seize upon it. We will soon know which of the two they are.

Martin Wolf, “Greek debt and a default of statesmanship“, Financial Times, 28 January 2015.

war and religious faith

January 26th, 2015

What is the appeal of war? Best-selling author Karen Armstrong, in a new book, attempts to answer this question. As might be expected from a former nun, she concludes that faith is not responsible for our violent nature. The prospect of killing, she argues, is a substitute for faith, not a complement. These, however, are my words: the vocabulary of an economist. Ms Armstrong uses different words to express the same idea.

I truly hope that violence and faith are substitutes, but doubt they are. In these difficult times, I would welcome more religious ritual and less violent conflict.

The prospect of killing may stir our empathy, but in the very acts of hunting, raiding, and battling, this same seat of emotions is awash in serotonin, the neurotransmitter responsible for the sensation of ecstasy that we associate with some forms of spiritual experience. So it happened that these violent pursuits came to be perceived as sacred activities, however bizarre that may seem to our understanding of religion. People, especially men, experienced a strong bond with their fellow warriors, a heady feeling of altruism at putting their lives at risk for others and of being more fully alive. This response to violence persists in our nature. The New York Times war correspondent Chris Hedges has aptly described war as ‘a force that gives us meaning’. [….]

The warrior, therefore, experiences in battle the transcendence that others find in ritual, sometimes to pathological effect. Psychiatrists who treat war veterans for post-traumatic stress disorder (PTSD) have noted that in the destruction of other people, soldiers can experience a self-affirmation that is almost erotic. Yet afterward, as they struggle to disentangle their emotions of pity and ruthlessness, PTSD sufferers may find themselves unable to function as coherent human beings. One Vietnam veteran described a photograph of himself holding two severed heads by the hair; the war, he said, was “hell,” a place where “crazy was natural” and everything “out of control,” but, he concluded:

The worst thing I can say about myself is that while I was there I was so alive. I loved it the way you can like an adrenaline high, the way you can love your friends, your tight buddies. So unreal and the realest thing that ever happened …. And maybe the worst thing for me now is living in peacetime without a possibility of that high again. I hate what that high was about but I loved that high.

“Only when we are in the midst of conflict does the shallowness and vapidness of much of our lives become apparent,” Hedges explains. “Trivia dominates our conversation and increasingly our airwaves. And war is an enticing elixir. It gives us a resolve, a cause. It allows us to be noble.” One of the many, intertwined motives driving men to the battlefield has been the tedium and pointlessness of ordinary domestic existence. The same hunger for intensity would compel others to become monks and ascetics.

Karen Armstrong, Fields of Blood: Religion and the History of Violence (Alfred A. Knopf, 2014).

HT Delancey Place.


obsolete investment managers?

January 26th, 2015

Will computer trading models replace increasing numbers of investment managers? The head of a leading computer-driven hedge fund thinks so.

Leda Braga, [a Brazilian-born engineer] who runs the $8.9bn BlueTrend hedge fund, said traditional investment approaches might soon struggle to keep ahead of so-called “systematic” computer models, as human fund managers are undercut by cheaper and more efficient technology.

“Right now there is a place for both approaches,” she said. “That is the present. But then we have the future. Does the future hold a world where the systematic approach dominates? I suspect yes.”

She compared it to the world of Swiss watchmaking. “There is still a place for artisanal watches. But if you really want to know the time in an efficient way then you buy a quartz watch.”

Miles Johnson., “Human investment managers risk obsolescence“, Financial Times, 26 January 2015.


da Vinci (science)

January 25th, 2015

Here is the promised second post from Leonard Shlain’s book. Leonardo da Vinci, without doubt, was the very first Renaissance man. He was also, quite possibly, the greatest creative genius to have ever lived.

Leonardo … outright rejected astrology, calling it “that deceptive opinion by means of which (begging your pardon) a living is made from fools.” His stand was, for its time, exceedingly nonconformist. The age was infected with a deeply ingrained belief that the positions of the stars determined whether undertaking earthly ventures on a particular date was propitious or foolhardy. He grasped that Earth was a spherical globe and not the flat tabletop imagined by so many of his contemporaries. One of his notebooks contains the entry “The sun does not move,” strongly suggesting that he knew that the sun, not the Earth, was the center of the solar system. He had a grander vision of our place in the cosmos when he declared that “the Earth was but a speck in the universe.”

Leonardo’s interest included the age of the Earth, which he estimated was markedly older than the four thousand years that had been proposed by the followers of the Bible. ….

Leonardo … also speculated that the various species, like the Earth itself, were the product of ongoing processes. He rejected the view held for the subsequent four hundred years — that the Earth was unchanging and that an omnipotent Creator had lavished all the diverse species of plants and animals upon the Earth in just a few days.

Leonard Shlain, Leonardo’s Brain: Understanding da Vinci’s creative genius (Lyon’s Press, 2014), pp. 120-121.

da Vinci (art)

January 25th, 2015

I recently read a wonderful book by Leonard Shlain on the life, art and brain of Leonardo da Vinci. I would like to post just two small excerpts on the TdJ blog. This is the first, on art. The second will be on science.

In 1473, at the age of 21, Leonardo da Vinci stood on a hill overlooking a valley near his home town of Vinci, Italy, and drew a sketch in his notebook. (See below. Click on the image for a better view.) The subject of the composition was nature, not humankind. This is remarkable because the sketch predates by half a century the work of Albrecht Altdorfer, leader of the Danube School of Bavaria and Austria, who is widely credited with painting in oils the first Western European landscape to exclude humans, animals, and supernatural beings.

Leonardo’s sketch is all the more impressive when one considers that the three monotheistic Western religions, Judaism, Christianity, and Isalam, had a very contentious relationship with depictions of nature. They had supplanted earlier “pagan” religions, each of which worshipped nature and venerated sensuality, fertility, and sexuality. …. Early adherents banished flowers and plants from the interior of any synagogues, churches, or mosques.

It is not a coincidence that the second commandment … proscribes the making of images — and not just graven images, but images of anything:

Lest ye corrupt yourselves, and make you a graven image, the similitude of any figure, the likeness of male or female, the likeness of any beast that is on the earth, the likeness of any winged fowl that flieth in the air, the likeness of any thing that creepeth on the ground, the likeness of any fish that is in the waters beneath the earth. (Deuteronomy 4:16-18)

Authorities representing the principal Western religions considered any likeness created by the human hand depicting any aspect of nature an “abomination,” because it could possibly detract from the worship of an invisible deity. “Though shalt make no images” is the gist of the Second Commandment, and “Thou shalt not kill” is the sixth. Question: Why did the West’s three major religions all rank art more dangerous than murder? ….

Pope Saint Gregory the Great (590-604) effectively annulled the Old Testament’s Second Commandment, but insisted that the Church … play the leading role in censoring what exactly the artists chose as proper subjects for their art. In the midst of the heavy religiosity that still characterized much of the Renaissance, it too a mold-breaking sensibility for an artist to focus on the pleasing arrangement of rocks, hills, trees, and distant vistas.

Leonard Shlain, Leonardo’s Brain: Understanding da Vinci’s creative genius (Lyon’s Press, 2014), pp. 46-47.

Author and surgeon Leonard Shlain died from brain cancer in May 2009, shortly after completing this book.

da Vinci


Adam Smith’s ‘invisible hand’

January 24th, 2015

What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.

When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….

In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….

As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….

Benjamin Walker, “The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.

Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.

In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:

Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]

The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]

His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Emphasis added.]

softening the war on drugs

January 24th, 2015

FT columnist John Paul Rathbone favours legalization of cannabis (marijuana), but recognizes that this brings costs as well as benefits.

The biggest cost will mostly be carried by those who might lose control of their drug use. This is unavoidable, even if the general increase is modest (as in Portugal). Still, while a cannabis habit may be far less destructive than alcohol — which accounts for more problems than all illegal drugs combined — it is still plenty bad if it happens to you, or someone in your family.

The benefits, however, include raising state revenues from taxing a global business estimated to be worth more than $380bn a year; freeing up police time to investigate other crimes; reducing (even if not eliminating) revenues to criminal gangs and terrorist groups; bringing on to the right side of the law the 80 per cent of consumers whose drug use is occasional and mostly harmless; and making huge savings on what is now spent arresting and imprisoning drug users and sellers. The US spends over $40bn a year on this alone, making drug prohibition a surprising example of a big government programme. Here it is worth remembering that Milton Friedman, the Nobel-prize winning economist who grew up during Prohibition and concluded that it caused more problems than alcohol itself, saw the war on drugs as a criminal waste of money.

John Paul Rathbone, “The never-ending war on drugs“, Financial Times, 24 January 2015.

Alcohol and tobacco are legal in most countries. Why not cannabis?

American Sniper

January 24th, 2015

FT columnist Gary Silverman reviews Clint Eastwood’s latest film, a tale of the Iraq war that attracted US conservatives and became a box office hit.

Based (perhaps loosely) on a true story, American Sniper has struck a chord in this country by paying tribute to the sacrifices of the Americans who fought in Iraq — and there is no denying Mr Eastwood’s sincerity in this regard. But his sympathies are with the warriors, not the war. Eastwood’s film is ultimately an expression of disgust — with all the fighting, with the Iraqi people, with the whole damn thing, really. The result is hardly a call to arms or a sign of a resurgent right readying itself for military adventures. ….

The battle for Iraqi hearts and minds is portrayed as pointless. Kyle [the hero] describes Iraq as a land of “evil” and its people as “savages”, and Eastwood offers no dissent. Iraqis — men, women and even children — are depicted as implacable, duplicitous foes of Americans. Mr Eastwood largely dispenses with the sentimental conventions of Hollywood war movies: No member of Iraq’s female population notices the leading man’s blue eyes and neither children nor dogs seem to like him very much, either.

Gary Silverman, “‘American Sniper’ shows Eastwood’s soft side“, Financial Times, 24 January 2015.

Mr Silverman, in his weekly “Notebook” column, writes on US political and business issues.


Stiglitz on organizations and economics

January 23rd, 2015

Somewhat surprisingly, most economists have traditionally relegated the study of organizations to business schools, or worse still, to sociologists. …. Many economists argued that there was no need to look carefully into the black box called the firm: firms maximized profits (stock market value); if managers didn’t, they would be replaced; and firms that didn’t maximize value wouldn’t survive.

Joseph E. Stiglitz, “Symposium on Organizations and Economics“, Journal of Economic Perspectives, Spring 1991.

This view is still common, but less now than when Stiglitz wrote this. All issues of the Journal of Economic Perspectives are accessible online at no charge, compliments of the American Economic Association.

State of the Union

January 22nd, 2015

Few newspaper editorials are worth reading. Editorials of the Financial Times, in my opinion, are an exception to this rule. Today’s editorial on President Obama’s State of the Union address is an example of what newspaper editorials should be: clear, informative, concise and opinionated.

Much of what Mr Obama put forward on Tuesday night should be passed on its own merits. The US federal minimum wage is low by historic standards. Community college remains too expensive for many low-income Americans. Seven days of annual paid sick leave is not too much to ask. Marginal taxes on the middle class remain too steep. Yet in failing to acknowledge the scale of his party’s heavy defeat in last November’s midterms, Mr Obama set the wrong tone for a productive Congress. Whatever the merit of its substance — and there was much — it was an ungracious speech.

That said, it was also a coherent one. Mr Obama’s tax proposals make sense on their own terms. Under his plan, he would raise $320bn in the next decade by raising the capital gains tax on high-income earners to 28 per cent — the same level as under Ronald Reagan. He would also close a big loophole that enables many wealthy estates to avoid paying inheritance taxes altogether.

There was also a small surcharge on the liabilities of “too big to fail” banks. The proceeds would be spent on rewards to work, including tripling the child credit to $3,000 a year and raising the benefits to two-earner households. In addition, Mr Obama would step up much needed spending on US infrastructure, which would also boost the middle-income labour market.

Barack Obama sets out case for middle-class economics“, Financial Times editorial, 22 January 2015.

The editorialist mixes praise with criticism of Obama, concluding with these two sentences: “Once again, Mr Obama has shown what a good campaigner he is. The doubts concern his aptitude for governing.”

Registered non-subscribers: Accessing this editorial counts as one of your ten free downloads for the month. (It really is much longer that the paragraphs I copied and pasted above.)