WikiLeaks is free speech

It's little surprise that WikiLeaks founder Julian Assange has found himself in trouble. People in high places like to keep their secrets. But secrecy is incompatible with democracy and an open society. Maybe that doesn't mean there should be no secrecy. But it does mean there should be people fighting relentlessly to bring the truth out into the open.

It's revealing that the same people that promoted corporate funding of independent political broadcasts as free speech deny the same label to WikiLeaks.

I'm reminded of what happened to Eliot Spitzer when he pissed off the wrong people. He was taken down by a hooker scandal after a bank reported a suspicious wire transfer.

• WikiLeaks at the Guardian
• The Beginner's Guide to WikiLeaks
• How to Think About WikiLeaks
• Julian Assange and the Computer Conspiracy; “To destroy this invisible government”
• A defense of WikiLeaks: Some inconvenient facts

Will India's growth outpace China's?

The Economist's cover this week makes the claim that India's growth will outpace China's. India will be experiencing the demographic wave that other asian countries have ridden to prosperity in which a high percentage of the population falls within working age. Prevalence of English is an extra bonus. Further, India's democracy and entrepreneurial culture give it a flexibility unmatched by China's state dominated economy.

The conventional wisdom is that India's boom in the service sector is leaving a big chunk of the population stranded in poverty. This is because high skilled jobs like engineering or medicine -- even moderately skilled jobs in call centers -- require education and therefore are available largely to the children of the established middle class. In many countries, manufacturing has been the traditional stepping-stone out of subsistence agriculture. For example, a chinese factory girl might be the daughter of farming peasants from the countryside. These missing bottom rungs of the ladder have resulted in rising inequality. Amartya Sen warned that India risks becoming "half California and half sub-Saharan Africa".

Also working against India is it's crappy infrastructure and low literacy rates, 66% vs China's 93%. India's primary schools perform poorly and, the world-class IIT schools notwithstanding, its university system is undersized. The result is a chronic shortage of skilled workers. And business dealings involving land, natural resources and government contracts are riddled with corruption.

On India's cacophonous democracy, they quote a western banker as waying, "It's much easier to deal with the well-understood 'org chart' of China Inc than the freewheeling chaos of India.", which probably says a lot about western bankers.

I'd love to see India, with all it's contradictions, bust out and rival China. Based on Indian multinationals like Tata or Infosys, or the "frugal innovations" like $2000 cars, you might believe it possible. Whether the "freewheeling chaos" of democracy can function in a country of 1 billion; whether democracy is compatible with productivity; whether India can get its act together; those are some serious open questions. I hope the answer is yes.

• India's surprising economic miracle
• A bumpier but freer road
• relationship between China and India
• Economist country profile on India
• Amartya Sen on Radio Open Source
• Amartya Sen's Nobel prize autobiography
• Lakshmi Mittal

Bill Clinton on the Tea Party

If you have an ideology, it means everything is determined by dogma and you’re impervious to evidence.

They’re saying that Barack Obama represents the spearhead of this vast socialist conspiracy to have government swallow up the fabric of American life and he’s going to crush our individualism, and our freedom, and the vitality of small business ... They tell us that they they represent America the way it used to be, self-reliant, virtuous individuals and small businesses. And the truth is, what they want to do is dismantle government so corporations, big corporations will control our destiny.

Beware of Greeks Bearing Bonds

Americans should be ashamed. We're amateurs at corruption. Ok, well, Wall Street excepted. Anyway, the Greeks are pros. Michael Lewis, of Liars Poker and The Big Short writes Beware of Greeks Bearing Bonds in Vanity Fair.

In 2001, Greece entered the European Monetary Union, swapped the drachma for the euro, and acquired for its debt an implicit European (read German) guarantee. Greeks could now borrow long-term funds at roughly the same rate as Germans—not 18 percent but 5 percent. To remain in the euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of G.D.P.; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs...

• Tim Bray reviews The Big Short.
• The rats have certainly gotten into Greece
• Michael Lewis’ Big Short and Our Appetite for Apocalypse on Radio Open Source

Let the Bush tax cuts expire

Has the Wall Street Journal gone totally right wing nutballs or has it always been that way? A recent article on the expiration of the Bush tax cuts gives cause for concern.

In the summer of 2007, Rupert Murdoch prevailed upon the Bancroft family and sucked the WSJ into the media empire of News Corp. Murdoch's other properties include Fox News and the New York Post, neither of which are exactly monuments to journalistic integrity. As a very occasional reader, I can't say whether or how much the WSJ has changed since.

In the weekend edition of August 28, 2010 an unsigned editorial titled The $31 Billion Revenue Fantasy complains about the plan to let the Bush tax cuts expire. They make the claim that the Bush tax cuts were not a windfall for the rich. After the particularly piercing argument "Yada, yada, yada," (really, they said that), they throw up a bunch of numbers. It's not that surprising to find a sermon to the anti-tax faithful in the WSJ. But, the totally bogus and deceptive line of argument they use has a real Fox News ring to it. For example:

The IRS data show that in 2003 those with incomes above $200,000 paid $313 billion in income tax. By 2007 they paid $610 billion. When the recession hit, the payments fell to $537 billion in 2008. But even accounting for that decline, payments by the rich were still 65% higher five years after the rate cut that was supposedly a giveaway to the rich. The share of federal income taxes paid by the $200,000-a-year club was 42% in 2003 but 52% in 2008. (The IRS doesn't adjust these annual numbers for inflation.)

Inflation is only one reason why these numbers are not very meaningful. According to CPI numbers, 100 2003-dollars is about 117 2008 dollars. So, even if incomes only track inflation the pool of 200k-plus tax-payers grew. Also at the same time, the economy was expanding (and bubbles growing in housing and finance), which also lifts people into the higher income bracket. Tax receipts at all levels go up with the economy. Tax receipts from higher brackets go up more. Finally, high-income earners (for example those already over the 200k line) saw their incomes increase at a rate greater than the economy as a whole, thus paying more taxes.

These numbers are completely consistent with the story that the rich got richer while being taxed at a lower rate. As the New York Times put it:

Though tax cuts for the rich were bigger than those for other groups, the wealthiest families paid a bigger share of total taxes. That is because their incomes have climbed far more rapidly, and the gap between rich and poor has widened in the last several years.

- NYT “Tax Cuts Offer Most for Very Rich”

In 2003, 450 economists signed a statement (Economists’ statement opposing the Bush tax cuts (2003)) opposing the Bush tax cuts on the grounds that they would fail as a growth stimulus, increase inequality and worsen the budget outlook. Even Alan Greenspan thinks these tax cuts should expire as do former Treasury Secretaries Robert Rubin and Paul O'Neill.

The real question the editorial is trying to address is what degree of progressivity do we want in our tax system. Should those who have benefited most, in turn, support the system most? That's a fair and legitimate question. As economist Russ Roberts puts it, “Should we be more like France or less like France?”

What disappoints me about the WSJ article is this: Shouldn't the readers of the WSJ - educated businessmen, rather than tea-party loonies - be able to think this through soberly and logically? Given the audience of the WSJ, we're left with the scary conclusion that many of the wealthy are lying to themselves to justify their own sense of entitlement. Either that, or they're trying to arm themselves with deceitful and self-serving arguments to manipulate those less savvy than themselves.

There are common features to be found in several species of voodoo economics from the Laffer curve and trickle-down economics to "starving the beast" to the claim that letting the Bush tax cuts expire would stifle the recovery. Numerical quackery obscures policy that always seems to favor the rich at the expense of the common good.

What about what's good for the country? Shouldn't the country's business elites have a few ounces of patriotic blood in their veins? And might that lead to pursuit of goals that are good for America as a whole; strategies that grow the pie for everyone rather than tactics for capturing an ever bigger slice?

Related stuff

• Businessweek says: The debate over extension of the Bush tax cuts is the opening salvo of a generation-defining fight. With Medicare and Social Security spending set to balloon as baby boomers retire and grow old, the terms of the conflict are crystallizing: What do Americans expect from their government? How much are they entitled to, how much are they willing to contribute—and what are they willing to do without?
• One of the few things I like about the Bush tax cuts is the cut in the rate for dividends. Dividends are a healthy thing for the economy. They are a stabilize force in the stock market. They encourage investment and, by paying out slowly over time, they encourage a longer-term perspective. Dividend tax cuts are regressive but have redeeming social value.
• A Washington Post piece by William Gale, Five myths about the Bush tax cuts
• CBO's estimates of average federal tax rates (tax rates as a percentage of income) paid by households in various income categories
• Wikipedia on Economic policy of the George W. Bush administration
• Years ago I came across a dissertation about welfare, in which I found an interesting idea. While welfare for the poor may be corrosive to the work ethic, welfare for the rich is much more destructive because the wealthy are in a position to influence the political system, setting up a vicious cycle of increasing entitlement and plutocracy. The closest thing I could google up is this: Welfare for the Rich.

Paul Romer's Charter Cities

In The Politically Incorrect Guide to Ending Poverty July's Atlantic profiles economist Paul Romer and his current project, “Charter Cities”. NYTime's Freakonomics column asks Can “Charter Cities” Change the World?.

Erik Desmazières, Ville Imaginaire II (1998)

In a nutshell, the idea is to build new cities with new rules in developing countries. The cities would be administered by first-world powers. One might be tempted to respond that people generally didn't like colonialism the first time around. But, people may come to the new cities or stay away as they please and are thus free to vote with their feet. Taking Hong Kong as an example, "dysfunctional nations can kick-start their own development by creating new cities with new rules" that "slough off debilitating customs and vested interests".

Romer explains his idea by way of an analogy:

Large corporations operate according to an internal set of rules that we sometimes call a corporate culture. A natural question to ask is what mechanisms lead to improvement in the rule-sets that prevail in all the corporations in an industry. If you think of an industry like computing, it is immediately evident that much of the change comes from the entry of new organizations. They have new rule-sets that attract resources away from the existing ones.

I like the emphasis on the dynamics of the situation. "Moving from bad rules to better ones may be much harder than most economists have allowed." The path from one political-economic system seems often to be bloody, so it's probably worth studying non-violent but effective means of change.

Here's another piece of thinking I like:

Cities are components - modules - that are relatively self-contained. They have some interfaces that they use to connect with the rest of the world - container ships, fiber optic cables, airport.

The idea that the rules and norms of a culture are a technology and are critical to growth seems related to an idea that I'm fond of. Due to the fungibility of power and money, separating politics and economics is an impossibility. My favorite illustration of this is the castles on the Rhine River. These homes of the original robber barons overlook the river, extracting tolls from passing merchants and travelers and threatening to rain cannonballs on those that decline to pay.

Romer's work in the private sector also seeks to break down toll gates of another sort. Romer's company Aplia was an attempt at refactoring the textbook in light of the web, not entirely different from Scott McNealy's new project, Curriki.

Not everyone likes this idea: Paul Romer is a brilliant economist – but his idea for charter cities is bad. The idea reminds me a little of various attempts to recreate new silicon valleys in other places around the world, like Malaysia's Cyberjaya. None of the attempts is entirely successful. Silicon valley and Hong Kong both grew organically out of their unique situations. A million subtle factors would need to be captured to reproduce either one.

Also, I don't know who the super-technocrats are that are going to run these new cities. Ever since western capitalism did a face-plant on the pavement, I'm not sure who's going to be lining up to let a western country run one of their cities. Considering the state of our (US) politics, you'd have to be desperate or nuts to trust us to be the administrator country. Still, it's probably too easy to dismiss Romer as dreaming of utopian Disneylands. I certainly understand the appeal of a clean slate, when it seems things are so intractably screwed up. Maybe we can find some hyper-intelligent martians to run a city in our country?

• On the Econ Talk podcast: Romer on Chart Cites, April 2010 and Romer on Growth, August, 2007
• Economic Integration and Endogenous Growth, Luis A. Rivera-Batiz, Paul M. Romer, 1990.
• You might think of a squatter settlement as a bottom-up approach to a charter city. They certainly operate by a new set of rules. Shadow Cities is Robert Neuwirth's book on shanty-towns.
• Maybe Dubai's fate is informative? See Good-bye to Dubai in the New York Review of Books.
• Chilecon valley - Chile's effort to become South America's innovation hub

Andy Grove: How America Can Create Jobs

Andy Grove: How America Can Create Jobs, July 1, 2010

In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the '70s and '80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

While pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

The rats always find a way in

I have a theory. In spite of all the moral and idealogical bullshit about different forms of government, there's one determining factor that leads to their eventual failure. That factor is susceptibility to corruption. Some systems are more resistant than others, but all nations get sucked down sooner or later. It's just a question of how long it takes.

• How real-world corruption works

I've got a fat finger for ya, Wall Street

Just when you thought it couldn't get any weirder out there...

The DOW dropped almost 10% in 7 minutes. Some stocks even went to zero. For a while they were trying to blame a "fat finger event" in which someone typed "billion" rather than million into a sell order. Another theory is that high-speed trading got out of control -- the rise of the machines scenario. Positive feedback, anyone?

This bit from Tech-Ticker Trader Goes Bonkers is priceless.

I can picture it clearly. A Goldman executive in immaculate pinstripes saying, "This is the new HAL 9000. It's going to do all our trading for us based on precise mathematical models at millisecond speeds. What could possibly go wrong?" Later, the same executive, pleading with the computer, "Stop! Stop! The market's plunging!" HAL 9000 calmly says, "I'm sorry, Lloyd, I'm afraid I can't do that." And, then becoming frantic and agitated, "Tell Ben Bernanke to kiss my silicon ass! Fuck your pod bay doors!! Suck my Extended Binary Coded Decimal Interchange Code! Your shit's going to ZERO, BITCHES!!!!"

Of course, the conspiracy theorists are going wild. But, if you did manage to snap up a chunk of blue chip at a penny a share, don't look now. They're canceling orders deemed by the exchanges to be "clearly erroneous". Fuckers.

• Washington's War With Wall St. to Blame for Panic Selling

Update 5/13/2011: Donald MacKenzie writes in the London Review of Books in How to make money in microseconds: (edited)

The bulk of the research also suggests that automated trading makes the buying and selling of shares cheaper and usually easier. What needs weighing against this, however, are the implications of one strange and disturbing episode that lasted a mere 20 minutes on the afternoon of 6 May 2010, beginning around 2.40 p.m. The prices of US shares fell by about 6 per cent in around five minutes, a fall of almost unprecedented rapidity, then recovered almost as quickly. Shares in the global consultancy Accenture dropped to a single cent. Sotheby’s suddenly jumped to $99,999.99.

With the rise of electronic trading, the stock market (especially in the US) has become a tightly coupled complex system. Systems that are both tightly coupled and highly complex, organisational sociologist Charles Perrow argues in Normal Accidents (1984), are inherently dangerous.

The rest of the article is a fascinating look at programmed trading, concluding that the "flash crash" was indeed a case of computers run amok.

Update February, 2012

Looking at millisecond scale market data, researchers found 18,520 sub-950-millisecond crashes and spikes. According to a Wired article about the study, Nanosecond Trading Could Make Markets Go Haywire. The research, led by Neil Johnson, a complex systems specialist at the University of Miami, and simulation engineer Brian Tivnan of the University of Vermont, is published under the wonderful title, Financial black swans driven by ultrafast machine ecology. Johnson says:

“There’s this whole world below 650 milliseconds. It’s like landing on another planet,”

“We are certainly witnessing one of the major transitions in the history of financial markets,” said automated trading researcher John Cartlidge of the University of Bristol, who was not involved in new study. “Economic theory has always lagged behind economic reality, but now the speed of technological change is widening that gap at an exponential rate. The scary result of this is that we now live in a world dominated by a global financial market of which we have virtually no sound theoretical understanding.”

Book review: The Tipping Point

Malcolm Gladwell's book The Tipping Point (2000) is mostly about viral marketing and social networks. I'm surprised I read a book about such things, but it wasn't bad. It's written to be easy and popular rather than rigorous, so if you're familiar at all with the theory of networks, then there might not be a lot of truly new information here. The charming anecdotes that illustrate the ideas are the reason for its popularity.

I found myself recalling, with dread, my high-school years; navigating various social cliques, trying to emulate the cool kids, then shortly there-after consciously trying to be as opposite as I could. There's a lot of ugly stuff wired into our instincts as a tribal animal. But, like it or not, that's how we are.

MG identifies three special types of nodes in these social networks. Most obviously, there are connectors, people who seem to know everybody. They are the classic highly connected nodes. Messages propagate quickly through social networks with the help of connectors. Mavens are experts in some area who act as information brokers. Salesmen are charismatic persuaders. Due to the special properties of these personality types, MG derives the "Law of the Few", which boils down to this: Get connecters, mavens and salesmen on your side and the sheep will follow. Well, OK, he doesn't come right out and say, "Sheep".

• connectors, highly connected people
• mavens, people who are especially rich in information and who act as facilitators
• salesmen, persuaders

Many of the folks we know and love in technology fit these personality types. The maven appeals most to me because they have a genuine interest in being helpful and in subverting the hype and finding the real deal. Most of us engineers are a little more cynical about the salesmen.

Messages themselves have properties that help them spread. Stickiness might come from the message itself or its packaging. Our psychology is such that we're much more receptive to ideas delivered in the right context, as exemplified by the broken-windows theory of law enforcement.

Most of MG's examples are from fashion and marketing. Two are about trendy shoes. DeeDee Gordon, a marketer that helped the Airwalk brand gain popularity in the 1990's sounds like the role model for William Gibson's cool-hunter Cayce Pollard from the novel Pattern Recognition. Now that I mention it, that's another book I might not have read if I knew how much it had to do with marketing, but a good one.

Just for the record, I rode a skateboard and never owned a pair of Airwalks, though I don't imagine I'm immune to manipulation. And it is manipulation because it's seeking to influence you for someone else's gain, rather than your own. That's the parasitic aspect of marketing.

MG tries to transcend marketing. He brings in suicide, smoking cessation, and cancer awareness. But, he keeps circling back. Even the one political theme he talks about, freeing tibet, worthy cause though it is, is sufficiently distant to be safe. It would be too bad if the main result of these ideas was more effective ways to sell trendy consumer crap to lemming-like mainstream losers. But, I don't mean to sound harsh. It's a good book. I just don't like marketing.

How about tapping our social networks and tribal instincts to spread messages about individual liberty, being a good person, working for justice, living beyond consumer junk-culture, or making the world a better place? Too bad, MG avoids any really revolutionary tipping points.

Gene patents are lame

Institute for Systems Biology's General Counsel, Cathryn Campbell, led a discussion on Myriad Genetic's BRCA gene patents. The ACLU and the Public Patent Foundation sued Myriad and Judge Robert Sweet of the Federal Court of the Southern District of New York ruled that "isolated DNA", which "represents the physical embodiment of biological information" is "unpatentable subject matter". Myriad will, of course, appeal.

Sadly, even if the ruling doesn't get overturned on appeal, the legal technicalities are such that rewording the patent claims might be enough to achieve the same effect. This particular ruling which hinged on whether the gene was a "product of nature" which is unpatentable or has been sufficiently transformed in the process of isolating the gene to warrant patent protection. It's encouraging to note that the judge recognized the unique information-carrying role of DNA.

Maybe a better question than whether a gene should be patentable is how do we encourage and reward invention and innovation such that we maximize the benefit to society? The exclusionary nature of patents (and copyrights) imposes a cost. What we get in exchange is a market mechanism to put a price on a given invention. Grants and prizes are another mechanism which avoid the costs of exclusion, but have other disadvantages. Mainly, whoever grants the award needs to be good at "picking winners", otherwise a money gets wasted.

Joseph Stiglitz and John Sulston, both nobel prize winners, write in a WSJ article titled The Case Against Gene Patents:

...we believe the patenting of human genes is wrong as a matter of science and as a matter of economics.

Proponents of gene patents argue that private companies will not engage in genetic research unless they have the economic incentives created by the patent system. We believe that a deeper understanding of the economics and science of innovation leads to exactly the opposite conclusion.

The Economist's Genes and patents: More harm than good?

In addition, the studies published this week suggest that granting exclusive rights over genes may be doing more harm than good. At the request of the American government, a team of researchers from Duke University, led by Robert Cook-Deegan, spent two years examining the country’s markets for genetic tests for diseases ranging from colon cancer to cystic fibrosis. The chief question they sought to answer is whether the intellectual property arrangements involved helped or hindered public access to those tests.

Their conclusion? That the rules hinder access.

What If The Very Theory That Underlies Why We Need Patents Is Wrong? cites Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation, Baldwin and Von Hippel, on the rise of open and collaborative innovation and the fact that patents work against this type of innovation.

This result hinges on the fact that the innovative design itself is a non-rival good: each participant in a collaborative effort gets the value of the whole design, but incurs only a fraction of the design cost.

There's a really clear explanation of the economics of intellectual property in the first lecture or two of the UW's Information Technology & Public Policy, by Steve Maurer of UC Berkeley.

Lawrence Lessig's Coding Against Corruption explains the flaws in the legislative process that have gotten us into this predicament.

Lessig: Coding Against Corruption

Lawrence Lessig, Professor of Law, Stanford Law School, speaks on Coding Against Corruption.

• Fix Congress First
• Making Government Transparent and Accountable
• EFF
• FiveThirtyEight

Consumerism Kills

Value the means of producing wealth more than the wealth itself

Consumerism [is] the natural result of following the money-centric perception of capitalism to its natural end. It is the valuing of money capital and it's power to purchase leisure goods over human capital and it's capacity to produce wealth. It is the notion that having the fancy goods is the goal, rather than being a skilled producer.

Monetary and credit excess and the culture of consumerism form a self-defeating cycle. Consumerism always wants more credit to buy more goods - because goods are the end, and the means by which they are obtained is irrelevant. Excess credit and monetary expansion erode the value of money relative to other assets, causing inflation [...] and this encourages consumerism through motivating spending rather than saving, as well as allocation of capital to hard assets such as real estate and commodities. The cycle eventually defeats itself in a spectacular collapse...

The Future of Money

March's Wired Magazine has an interesting article called The Future of Money.

"...an army of engineers and entrepreneurs is ... hoping to do to the payment world what has already been done to the music, movie, and publishing businesses..."

Alternate payment systems like paypal or even sending payments through Twitter are on the rise. Also, alternate currencies Linden Dollars. The Economist likes to talk about payment systems through the cellular (not free) networks. (see Bling Nation for example)

I heard on an economics podcast that the government has loosened up the rules for issuing your own currency, something that was, up 'til recently, a jealously guarded prerogative of the Federal Reserve. It'll be interesting to see how all this interacts with the declining value of the good old green dollar bill.

• TED talk by Bernard Lietaer on complementary currencies, complexity theory and the financial crisis
• Lietaer on A New Paradigm of Money, monetary blind spots and structural solutions, same as above but more subversive/conspiracy-theory

Joseph Stiglitz

Notes on: Joseph Stiglitz: The Economics of Information, an interview at The Asia Society from February of 2008.

Balance of global power is shifting due to:

• rise of china and india
• financial crisis
• US debt

International organizations designed around the post WWII power structure are out of date and failing due to lack of legitimacy. True of the World Bank, IMF, and G8. Advocates the rule of law between nations and points out that the invasion of Iraq was a violation of international law.

US foreign policy often made for the benefit of campaign donors. Intellectual property rights deals made in secret undemocratically that favor narrow interests in the US. Much of foreign aid is also part of a global military strategy rather than truly for purposes of aid.

Why is China, a non-democracy, growing faster than India, a democracy? Stiglitz claimed that China allows more participation. (really?) China is investing heavily in Africa.

Under what conditions does Adam Smith's invisible hand work? In other words, are markets efficient always or under specific conditions? The financial crisis seems to be a case where the market failed. Market handle some situations poorly: imperfect information, externalities, public goods.

Median income in US lower today (2008) than 7 years ago and among males, lower than 30 years ago. Globalization is only one factor, but an easy target because the blame falls on outsiders. Social protection is not protectionist.

The stimulus package gives little directly to the unemployed, where it would be most effictive, due to being immediately spent. Stimulus should be spent on assets that will increase our future income.

GDP flawed measure. Median income can fall while GDP is rising if inequality is also rising. GDP neglects degradation of the environmental and depletion of resources. Switch from GNP to GDP politically motivated? (example: resource extraction).

Links

• Stiglitz on wikipedia
• Stiglitz's site
• Capitalist Fools
• The Money Man: Super-economist Joseph Stiglitz on how to fix the recession
• Obama’s Ersatz Capitalism

Steward Brand: City Planet

Stewart Brand of the WELL and the Whole Earth Catalog wrote an interesting article back in 2006 called City Planet. He gave a lecture to the commonwealth club which I came across on daviding.wordpress.com. He gave a what appears to be the same talk compressed down to unintelligability at TED, but watch that for some of the visuals missing from the longer version.

The bottom two billion are urbanizing, largely to squatter cities, to find jobs, freedom (especially for women), and education for their kids. He refers to Shadow Cities, by Robert Neuwirth, which I liked quite a bit, Shantaram by Gregory David Roberts, and C. K. Prahalad's The Fortune at the Bottom of the Pyramid.

See also:

• Planet of Slums
• Learning from Informal Urban Economies

Book Review: Shadow Cities, A Billion Squatters, a New Urban World

Here's a review of Robert Neuwirth's book Shadow Cities, A Billion Squatters, a New Urban World that I wrote a long time ago, but left to rot on my hard drive.

Imagine a third world shanty town and likely what you’ll think of is rampant crime and dire poverty; a place most of us would fear to tread. Robert Neuwirth, a reporter from New York City, spent two years living in four different squatter settlements. From the favellas of Rio de Janeiro to the corrugated metal shacks of Nairobi, continuing to Istanbul and Mumbai. His book examines the truth on the ground of shanty towns and the history of squatter communities.

In the shanties, Mr. Neuwirth does indeed find desperation and heavily armed drug gangs straight out of the film City of God. But, he also finds decent people struggling just to get by, facing complex economic and political obstacles with creativity and vitality.

Mr. Neuwirth meets hard-working people who have admirably provided for themselves rather than wait for government, society, or the official economy to provide for them. This, in fact, is the central theme of the book. For their independence and initiative, they are rewarded with perpetual risk of persecution and eviction.

The legal authorities are frequently no friend to the squatter, or the poor in general. In the town of Cuzco, Peru, unless things have changed since I was there, there is a statue outside the courthouse; a big black mountain lion, claws extended, fangs bared in an expression of menace. This is the image the Peruvian justice system presents to its people. In fact, the squatters of Neuwirth’s book fall frequently prey to the whims of government officials or real estate developers.

Favela Rocinha, Rio

The legal limbo in which squatter communities exist is perilous, but not without advantages. The illegality of the squatter’s property serves to some extent as protection from confiscation by the authorities whether for taxation, dept repayment, or plain corruption. And many squatter communities happily pirate electricity and other utilities with relative impunity while they bootstrap themselves into modernity. Cottage industries thrive in the tax and regulation free environment of the unofficial settlements.

Being a software developer myself, the parallels between the squatters rebellion against legal barriers and the debate around intellectual property practically leapt out at me. We are in a period of enclosure of intellectual property similar to the fencing in of the great open spaces. Moneyed interests with allies in the legal system seek exclusive ownership rights. It might not be stretching the analogy too far to think of a shanty town as an open source city.

The economics of the unofficial economy and the interaction of wealth, power, and property rights are interesting and complex. Neuwirth’s book makes something of a hands-on companion to the theories of economist Hernando de Soto. Anyone with an interest in these subjects or a curiosity about the way of life in another world will enjoy Mr. Neuwirth’s book.

The vibrancy and ingenuity that Mr. Neuwirth finds in the slums contrasts vividly with the sanitized homogeneity of suburban consumer culture. It takes only a bit of imagination on the part of the reader to summon the sights and smells of the shanties; to visualize the gulf that divides their world from ours and the humanity that unites us.

Links

• Squatter City Neuwirth's blog
• Pic of rocinha stolen from here: Johnston Architects: Urban Squatting

Market failure vs government failure

Asking whether the financial crisis was a market failure or a government failure is a misleading question. Considering the market in isolation from the legal and political environment in which it’s embedded is a recipe for error. Adam Smith saw this and devoted a section of the Wealth of Nations to political economy. The same players that compete in the market also compete in the political sphere to influence the rules of the economic game. That feedback loop is the central cause of the crisis. So, it’s neither a market failure nor a government failure. It was a failure of the political economy and it’s causes are obfuscated by ideology on either side and generally are going totally unaddressed in the proposed reregulation. We’ll apparently have to see more of the same before anything real gets done.

For some reason, I was compelled to write the above in response to this.

Great Powers: America and the World After Bush

The Carnegie Council hosts a great lecture series available as podcasts and videos. Military strategist Thomas P. M. Barnett (wikipedia) spoke on February 4, 2009 on his book, Great Powers: America and the World After Bush (audio, transcript).

Barnett's systems diagnostic view of the world

Barnett's basic argument is that globalization is a deliberate strategy on the part of the US to establish a world order in which developing nations can pursue export driven growth. America provides security, stability and a principle market, with the implicit agreement that trade surpluses would flow back into American debt instruments.

This american branded globalization consists of an international liberal trade order, collective security, high transaction network rates; most importantly, a competitive religious landscape. Stability operations are conducted to help establish order that advances U.S. interests and values. Great power war between the European powers or China-Japan-Korea-India has become unlikely. And there is a prevailing "minimal rule-set for connectivity to the global economy" that has moved about 3 billion out of poverty.

Historically, the American revolutionary war was, itself, a separatist guerilla action against the previous order. He credit's Alexander Hamilton's 1791 report on manufacturers as the first grand strategic document of the US. The early America was ruled by a succession of generals and revolutionaries and behaved in its early days much as Russia does now, with the exception that post-revolutionary America exported cotton rather than hydrocarbons. Slavery and ethnic cleansing are a part of America's history. Perhaps the industrialization of America during the robber baron days compares to China now.

Globalization was pursued as a continuation of the economic integration of the American wild west in the post-Civil War era. After the Civil War, through Theodore Roosevelt's time, regional economies were rapidly knit together into a continental economy. As the frontier was closed, economic integration with the outside world was the alternative to stagnation. (See Professor Frederick Jackson Turner's Frontier Thesis of 1893.)

Woodrow Wilson tries to establish an American order after WWI, but without sufficient military might is rebuffed by European powers. Finally, US kills colonialism at the end of WW2 (by Article 7 lend-lease agreement). Bretton Woods 1 established the World Bank, the IMF and the dollar as reserve currency and stabalized Europe during the cold war. Bretton Woods 2, after the demise of the gold standard in 1971 up until recently, underwrote the rise of Asia.

In this view, the US military has two roles - the Leviathan function, meaning the ability to fight big wars, and the system administrator function which maintains sufficient order for the functioning of the global economic network. During the cold war, the forces become overweighted in the Leviathan function to the extent that the integration skills honed on the American frontier deteriorated with visible consequences in Vietnam and Iraq. But, Iraq and Afghanistan are realigning and retraining a new generation of sys-admins.

America should be dedicated to encouraging democracy everywhere but we should be committed to forcing it nowhere.

We are in an age of integrating frontier markets. The major challenge over the next 20 years will be for the West and East to integrate the global south. The great divergence started by the industrial revolution then becomes the great convergence. A global middle class emerges. The high-trust environment of the West is now highly linked to the low-trust developing East. For access to raw materials, the low-trust East is integrating the no-trust countries of the bottom billion.

Economic integration comes before democracy and is better done by voluntary association than coercion. Wealth is the incentive to join the system. Democracy comes when countries are demographically middle class and middle aged. Markets bring this about by increasing income, creating a middle class and lowering birth rates.

To address this, the US military will realign toward system administration as the big war scenarios fade away. Taiwan will integrate Hong-Kong-style with China. Iran will become nuclear. America's tradition allies are demographically moribund, have declining defense budgets, and are increasingly unwilling to act geopolitically, while our new friends, the BRIC nations plus the Next 11 emerging economies, share the general goals of stability and economic interation.

Norman Angell, British philosopher, wrote the book The Great Illusion in 1911. It says: If the empires of the world in Europe went to war, they'd destroy each other and none of them would survive the process; so they're not going to do it because they're not that dumb. Turns out they were that dumb. Turns out they destroyed themselves. None of them are first-tier powers anymore as a result of that process. He gets the Nobel Peace Prize in 1933, sort of the consolation. [...People] say, "You're the second coming of Norman Angell." I say, "Damn straight, but I'm Norman Angell with nukes, and nukes change everything." They really do. And that's the good news.

Questions

Barnett played a role early in the GW Bush administration and supported the Iraq war. And I'm always suspicious when claims are made of a grand strategy after the fact. America is the result of globalization, not its cause. Globalization is the continuation of a process that goes back as far as civilization. This is a fascinating talk, regardless of how much you buy, but I was left with a few nagging questions.

• What's the difference between this and the neocons?
• What exactly does the system-administration function entail and is it best done by the military??
• “America's empire is the first in human history to actually empower and enrich individuals” ...well, it's not the first to claim to do that.
• Is it necessary for America to have the “World's biggest gun”? For one thing, I don't like paying for the world's biggest gun. For another, is our government vastly more trustworthy with such a thing than any other?
• America, along with Europe, had a real chance to reorder the world after the cold war. What might have we done?

Notes:

• BRIC = Brasil, Russia, India, China
• Next 11 = Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam
• The Monks of War
• The Significance of the Frontier in American History, Frederick Jackson Turner

A Splendid Exchange - How Trade Shaped the World

A Splendid Exchange
How Trade Shaped the World
William J. Bernstein

Bernstein tells the story of trade from the dawn of civilization to the anti-globalization riots of 1999 in Seattle. Trade is a historial constant driving the wealth and military expansion of empires. This is a great story well told. The history of these trading empires explains so much about the modern world.

Chapters & notes

1. Sumer

   Trade at the dawn of agriculture.

2. The Straits of Trade

   Athenian trade routes through the Bosphorus. Access to trade drives the Peleponesian wars.

3. Camels Perfumes and Prophets

   Camels, ships of the desert, and trade along the Arab peninsula - south to Yemen for incense, east to the Persian gulf for access to Asia through the Indian ocean.

4. The Baghdad Canton Express

   Voyages of Marco Polo and Ibn Battuta to China. Indian ocean trade routes dominated by Middle Eastern Muslims and Jews. Zheng He leads Chinese naval expeditions into the Indian ocean.

5. The Taste of Trade and the Captives of Trade

   Venice rises to power on mediterranean trade with the Muslim world. Asian spices and silk come to Europe only through trade with Muslims. Islam is governed through the unstable Mamluk system based on slave-soldiers. Venice trades in slaves from the Black Sea coast to the muslims. Crusades are tangled in efforts by the Venitians to protect this trade route from European rivals and to bypass muslim middlemen to access asian goods.

6. The Disease of Trade

   The black plague follows trade routes through Europe and the Middle East.

7. DaGama's Urge

   Vasco DaGama rounded the southern tip of Africa in 1498. The Portuguese established scattered trading colonies through which they brutally dominated the spice trade in the 16th century. Gao, Ceylon, Malacca, and the Moluccas and eventually Macau and Japan.

8. A World Encompassed

   Worldwide trade routes established. Portuguese gradually give way to the even more brutal Dutch in the Indian Ocean.

9. The Coming of Corporations

   The Dutch East Indies Company established monopoly on the spice trade. The Dutch had the most advanced financial markets of the day and invented of many of the tools of modern finance. Cotton, sugar, and tea rise as trade commodities as spices wane in profitability. The English are forced to favor free trade in order to compete.

   

10. Transplants

    Boston tea party compared to an anti-globalization rally. England slowly turns toward peaceful free trade, to its advantage over the Dutch. Coffee. Cotton, fashion and the birth of mass marketing and consumer culture. Tea and sugar. Cane growing in the Carribean. The slave trade.

11. The Triumph and Tragedy of Free Trade

    Breaking of the British East India Companies monopoly on the China trade. Canton, Macau, and Hong Kong. Cotton trade. Opium trade and wars with China. Henry Martyn, Adam Smith and David Ricardo. Comparative advantage. Corn laws - english landed aristocrats lobbied for tariffs on imported grain to their own advantage causing periodic hunger. The corn laws were repealed in 1846 after a long campaign led by Richard Cobden.

12. What Henry Bessemer Wrought

    19th century. Copper mining and smelting in Jerome, AZ in 1882. American civil war free-trade south vs. protectionist north. Abe Lincoln's tariff. Invention of cheap steel. The displacement of sail powered shipping by steam over the 1800's. Rise of rail transport. Erie canal. Ice trade, leading to refridgerated shipping.

More...

• The book's web page on the author's web site.
• Buy on amazon.
• Reviewed in the NY Times article Silk, Spices, Gold and Destiny: Global History Is Part of the Bargain.
• Bernstein twice was a guest on EconTalk, a podcast by George Mason University Professor of Economics Russ Roberts - Bernstein on the History of Trade and Bernstein on Inequality.