среда, 11 марта 2009 г.

Arnold Kling on the Relationship between One's Views on Probability and One's Views on Economics


A Nice Anti-Statism Cartoon

Fun. Two Cows Economics

From http://thrandur.net/chitchat/two-cows-economics-world-iceland/

SOCIALISM You have 2 cows. You give one to your neighbour.

COMMUNISM You have 2 cows. The State takes both and gives you some milk.

FASCISM You have 2 cows. The State takes both and sells you some milk.

NAZISM You have 2 cows. The State takes both and shoots you.

BUREAUCRATISM You have 2 cows. The State takes both, shoots one, milks the other, and then throws the milk away…

TRADITIONAL CAPITALISM You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

SURREALISMYou have two giraffes. The government requires you to take harmonica lessons

AN AMERICAN CORPORATION You have two cows. You sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to analyse why the cow has dropped dead.

VENTURE CAPITALISM - AN ICELANDIC CORPORATION You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public thenbuys your bull.

A FRENCH CORPORATION You have two cows. You go on strike, organise a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called ‘Cowkimon’ and market it worldwide.

A GERMAN CORPORATION You have two cows. You re-engineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION You have two cows, but you don’t know where they are.You decide to have lunch. A RUSSIAN CORPORATION You have two cows.You count them and learn you have five cows.You count them again and learn you have 42 cows. You count them again and learn you have 2 cows. You stop counting cows and open another bottle of vodka.

A SWISS CORPORATION You have 5000 cows. None of them belong to you. You charge the owners for storing them.

A CHINESE CORPORATION You have two cows. You have 300 people milking them.You claim that you have full employment, and high bovine productivity. You arrest the newsman who reported the real situation.

AN INDIAN CORPORATIONYou have two cows.You worship them.

A BRITISH CORPORATION You have two cows. Both are mad.

AN IRAQI CORPORATION Everyone thinks you have lots of cows. You tell them that you have none. No-one believes you, so they bomb you and invade your country. You still have no cows, but at least now you are part of Democracy….

AN AUSTRALIAN CORPORATION You have two cows. Business seems pretty good. You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION You have two cows. The one on the left looks very attractive

Thoughts on Operation Cast Lead

Further to the yesterday's debate on the Israeli Operation Cast Lead against Hamas, which I was adjudicating, I would like to put an important argument on the table.

Those who castigate Israel as an agressor usually commit the following fallacy. On one hand, they claim that you cannot punish the Gazans for the activities of Hamas for which they are simply not responsible. On the other hand, they say that Hamas is a democratically elected government which must be treated as a legitimate party in the negotiations process.

However, YOU CANNOT HAVE IT BOTH WAYS. Either the people who have elected Hamas should be held responsible for their choice since they elected Hamas as their representatives, or Hamas is actually not a government and does not in fact represent the Gazans, regardless of the fact of its election.

I tend to favor the second view. For me, the mere fact of a single election won and the ability to control the territory by force does not make a terrorist gang a government.

To excercise sovereignty, such gang should cease terrorist activities and start actually governing, i.e. providing public goods to the population. And the historical experience does not support the view that a terrorist organization may be peacefully transormed into a functioning government. The examples of Hizbollah in Lebanon, LTTE (Liberation Tigers of Tamil-Eelam) in Sri-lanka, FARC in Colombia, Khmer Rouge in Cambodia, and yes, the VKP(b) in the USSR - suggest that terrorists will remain terrorists even under the veil of "government".

Stimulus Thought Experiment

Now let us run a thought experiment.

Imagine a closed economy consisting of 5 members – John, Bob, Mark, Anna and Vera.John’s only function is to govern his small community. John’s debt is owned by a banker down the road (mind the Chinese holders of the US debt) Mark is currently unemployed. And only Bob, Anna and Vera are involved in productive activities (no implied sense here) providing for all the needs of the 5 community members. There will be no increase in the number of members in the community and no increase of consumption of the current resources in the foreseeable future (This is the first unrealistic assumption).

But let us forget about it and suppose the total real wealth of the community is equal to $ 500 and it is stable. On top of this wealth, the economy has $ 500 in financial instruments (money) which circulate in the economy to facilitate exchange among members (This already means that there is no current household debt and that the current real wealth arising from the initial resources will not decrease in the future).

And let us also suppose that due to their animal spirits which have failed them, Mark, Bob, Anna and Vera do not utilize an idle resource, say, a mill. Imagine also that this mill represents all the idle resources in our hypothetical economy.

Now, concerned with the falling public confidence about the future economic growth, John searches through his dusty book shelves and finds (surprise) a Keynesian textbook by, say, Paul Samuelson. He gets inspired and decides that he (the government) must do something to help the economy recover. He decides to stimulate the other members by providing them an interest-free loan (This represents the second assumption that in the future John (the government) will not demand more than $ 100 in real wealth at the moment when the stimulus funds become due). And John prints the needed money on his printer.

Now comes the crucial part of the stimulus story. John distributes the money among members of his community (regardless of the proportion to simplify the case), and this magically makes the community suddenly realize the perfect business opportunity, the gold mine presented by the unutilized mill.John appoints Mark to work on the mill.

Now the problem of unemployment is done away with (Forget that Mark may refuse or be unsuited or unable to work on the mill, otherwise crowding out of the private investment will result from the utilization of the mill because John would need to divert another member of the community from productive activities).

Now let us not forget that in our hypothetical economy no inflation results from the injection of the additional paper money into the economy, otherwise the excess amount of money would be offset by the rise of prices of the initial resources and would not be stimulating enough. The utilization of the mill also does not require diversion of any other real wealth from the economy. The mill can start operating from scratch, the grain used in the mill costs zero. Mark’s needs will still be catered for out of the existing real wealth.

How about Mark’s additional needs for at least more food and water to heroically work on the mill? Well, he will eat grain and drink water from a puddle. He will not need any additional entertainment or other goods which the community does not currently produce.

But unfortunately for the community members, we cannot forget that John will have to have real wealth in the amount of $ 100 to offset the $ 100 deficit he runs because he owns $ 100 of real wealth to the banker down the road who may have the court confiscate part of the community’s real wealth if he does not get payment.

Therefore, simple calculations suggest that the utilization of the mill must miraculously produce a stock of new wealth which will be equal to at least $ 110 to ensure economic growth by the time John demands his $ 100 in real wealth back. Thus, Mark should heroically produce an amount of bread which will be valued as $ 110 by the community members and the banker down the road.

The real wealth of the community is increased by $ 10 - can John declare victory over the animal spirits of his community? Yes, if Mark continues operating the mill at no cost and the increase in the real wealth does not change the preferences of the other community members and many of the assumptions mentioned above remain the case.

Now I did not manage to demonstrate you that John’s (the government’s) victory over recession through economic stimulus is impossible. But the assumptions under which it may materialize, seem anything but realistic. Unrivaled in its bizarreness is the assumption that all that the economic agents need to utilize the supposedly perfectly idle economic resources is the government throwing money at them.