[From Mike Acree (970609.1005 PDT)]
Rick Marken (970615.1950) [sic]
When Californians buy aluminum from Arkansas, why don't we
deplore that as leakage from the California economy?
I guess it depends on where one wants to draw the line around
"an economy". TCP's model assumes that an "economy" is a
collection of produceres who are also the consumers of what they
produce. The US as a whole is probably a closer approximation to
this model than any of its states. But even that US economy
doesn't fit this model to the extent that a significant portion
of GNP is non-domestic.
Yes, that was very much my point. The premise of leakage theory that
income should equal spending at any given point doesn't apply except for
the totality; but, given the volume of international trade, that really
means the global economy. The concept of leakage from one country to
another didn't make much more sense to me than from one state or county
to another. And from that point of view, concerns about "leakage" from
one economy to another seem to me simply an artifact of arbitrary
partitioning of space and looking at only one side of the partition
("ours").
I think that the aggregate producer produces _stuff_ (goods and
services) for the aggregate consumer (which consists of the same
individuals as the aggregate producer itself). I think that, in
principle (all things being equal and all that), each member of
the aggregate producer is entitled to (as a member of the aggregate
consumer) an equal share of what is produced.
By the same token, it really only makes sense, from either an economic
or a moral point of view, to consider the global economy. Income
disparities within the U.S. are trivial compared with those between
nations. From the perspective of most of the world's population, we as
a nation are the great source of leakage in the world; we are the ones
who could not possible manage to spend all our fabulous, unimaginable
wealth. Bill Gates's billions, distributed globally, would amount to
less than a dollar per person. Imagine what a difference that would
make.
But never mind the global or even the national economy: most people
find it difficult to make a communitarian household of even 10
adults--hell, even 2!--work, and they have to choose their fellow
members very carefully. The historical record of such communes among
even the most committed idealists has been very discouraging.
So some produces may be more valuable
than others and I have no gripe with the fact that some people
get a larger proportion of the total value of the stuff produced
than others. I have no idea how the value of each producer could
be determined (it probably can't) but I think it is highly unlikely that
any producer is worth much more that 2 times any other.
Allowing a 2:1 ratio may give you a little leeway, or it may make the
problem worse, by making more obvious the arbitrariness of your division
formula.
My ex-wife and I just bought a house in San Francisco for about 8 times
what it would cost in Hot Springs, Arkansas (where I happen to know
realtors). Suppose a federal law required all houses of a given age,
size, and condition to sell for the same price (or up to your 2:1
ratio). Then we know from PCT, or from experience with rent and other
price controls, what would happen: the introduction of "key" fees,
kickbacks, and various black-market schemes. When "distribution"
doesn't occur on the basis of money, it occurs on the basis of political
connections and comfort in breaking the law--attributes on which people
are also, alas, highly unequal.
It would be the same with legal controls on wages. As Robert Nozick
observed in critiquing the labor theory of value, the reason Rembrandt's
pictures are worth more than mine (more than twice as much, in fact) is
not that he paints pictures that much _faster_ than I do. People and
their work, like geographical locations and everything else, are
differentially desirable. Attempts to enforce any particular value
scheme from on high is going to work about as well as the war on drugs
or poverty.
You seem to have in mind, like the ancients, an objective order of
value, which unfortunately neglects the contribution of consumers to
value. On such a scale, for example, Jorge Bolet would have been rich
and David Helfgott would not. Augustine insisted that a mouse, being
alive, was more valuable than a pearl, and it was a major cultural
upheaval when the emergence of the market economy 700 years later
declared otherwise. Mere merchants could acquire more wealth than the
nobility. The value of everything _is_ being determined, continually;
that value doesn't reflect your own personal ordering, or anybody else's
in particular. Apparently that's intolerable to you, and you're willing
to use force to impose a different ordering, "for their own good." For
my part, if we consider productive geniuses like Bill Gates or Tiger
Woods, I don't see that either they or I have done a thing to entitle me
to a penny of their wealth. It still startles me that you think
otherwise.
2. The recurrent talk of wealth redistribution implicitly
assumes that what anybody produces is ours in principle, and
it's simply up to Congress to decide how much they get to
keep.
As far as Congress deciding how much people can make, I don't think
that's likely (even with an amendment to make it constitutional)
but I wouldn't object if they did.
I did say "keep," not "make." Congress does in fact decide, through the
tax code, how much we can keep of what we make.
Given my expectation that PCTists would be looking for
noncoercive forms of social organization, I'm continually
surprised at the enthusiasm for all sorts of social control
through the police power of the state.
I think there will always be some coercion involved in enforcing
rules agreed on by the collective -- especially rules (like taxes)
that require some sacrifice on the part of each individual. The benefits
of cooperation are not always immediately obvious at the individual
level.
Bill Powers (970605.2335 MDT)
Taxation is a very mild form of coercion, compared to other forms in
popular use around the world.
Any appearance of mildness is due simply to its operating mostly at the
level of threat. The IRS actually operates on the same maxim as Capone:
"You can get a lot farther with a kind word and a gun than you can with
the kind word alone." If I don't "voluntarily" pay taxes, my property
will be confiscated. If I don't "voluntarily" hand it over, I will be
arrested. If I don't "voluntarily" surrender myself for arrest, I will
be killed. It's only the ultimate threat of death that makes the system
work at all. That doesn't fit my concept of "very mild." Nor would it
probably for former Congressman Hansen of Idaho, who introduced a
Taxpayer Bill of Rights a few years ago; the IRS harassed his wife until
he withdrew the bill. You're right that the U.S. government doesn't
engage in physical torture (not counting questionable cases like gassing
children in Waco or injecting people with radioactive substances without
their knowledge), but that's not much of a defense. As for "the
benefits of cooperation," I don't call it cooperation if it's enforced.
You're quite right in saying that coercive methods of getting control of
leakage are not consistent with the sort of world we PCTers would like > to
live in. But they're quite consistent with PCT. If the United States were
being taken over by fascists or communists who were imposing > programs on
us
that caused large amounts of suffering and oppression, the only > natural
thing to do would be to take action against them -- as much action as
necessary to control what matters to us, using any means from strong >words
to strong weapons. That's human nature; it's how all living systems
survive. So if certain economic customs turn out to be threatening our
well-being as a nation, and neither logic nor diplomacy can persuade > the
perpetrators of their errors, what is left but coercion? Suicide?
The last chapter of B:CP contains the most eloquent and brilliant
argument I've ever read for why coercion doesn't work as a way of
getting people to do what you want. I don't recall that it said
anything about the defensive use of force, to which I have no objection
in principle. But I do see the offensive use of force as inconsistent
with PCT (in just that sense, that PCT says it's a poor strategy in a
practical sense), and that's what we're talking about with taxation and
redistribution: the IRS is not collecting taxes from me in self-defense
against my aggression. I don't see any way to eliminate conflict or
coercion as a rule, but the offensive use of force by government is
certainly avoidable. The Constitution, in fact, specifically prohibited
an income tax, and we didn't have one for well over a century. So it
remains intriguing to me how little interest there is among PCTers in
even considering that possibility or the details of its implementation.
Your question about "local leakage" is a very good one. I noticed that
business owners and investors actually talk about it even on such a > small
scale as the economy of Durango, Colorado. They don't call it > "leakage,"
of
course, but they recognize that when a lot of big chains open stores in >
our
little town, this creates a problem with cash flow: money leaves our
economy, and the local businesses notice it. We have a large tourist
business which tends to offset some of this leakage, but the problem > again
is that a good part of this business is owned outside Durango, even >
outside
Colorado. The profits leave the borders of our town and county, > instead of
becoming buying power for the local people and income for the local
businesses. Wages in Durango, by and large, are too low to allow the >
people
who work here to live here. And of course people who live far away > spend
their wages far away, leaving less income for the local businesses, > making
them cut costs even more, and so on.
And your example of Durango is a very good one, partly because I don't
think it's at all atypical. My point, in fact, would be more its
typicality. The economy at any level, at any location, is--or ought to
be--continually in flux, even though that often means hardship for some
people, like the mom-and-pop store whom the loyalty of friends and
neighbors isn't enough to sustain when the national chains arrive.
suppose that ALL
production of widgets is sent overseas, so all the former > widget-making
workers are out of a job, with zero income. What are they going to use > to
buy the widgets? No matter how cheap they are, due to the lower > labor
costs
overseas, the wageless U.S. workers still won't be able to buy any of >them.
You seem to imply that the former U.S. widget makers would be left idle
for the rest of their lives, with no more purchasing power. And this
loss purchasing power diminishes the purchasing power of those from whom
they purchased goods and services, and so on in ever-widening circles of
devastation. But the same point would apply to the invention of the
automobile, which threw thousands of saddle makers out of work forever,
with similarly reverberating consequences. But where did the thousands
involved in automobile manufacture come from? Some of the saddle makers
probably went into car upholstering, for one thing. When the
transitions are ironed out, the net effect is usually a gain, in terms
of how much people have of what they want; otherwise the shift--to
Taiwan or to the automobile--wouldn't have been profitable. Your
distress over loss of purchasing power, and over leakage generally,
seems to me to result from looking at only one side.
3. Reading an article recently on "the new classical economics" (an
oxymoronic label almost as off-putting as "rational expectations
theory," by which it is also known)--the work of 1995 and 1991 Nobel
laureates Robert Lucas and Merton Miller, among others--I thought I >>sawan illustration, possibly trivial but nonetheless interesting, >of PCT in
economics. The (rather screamingly obvious) point of the >theory is > that
people take government policy into account in their >economic > planning and
decision making. The first interesting >consequence is that any
predictable change in the money supply-->emphasis on > "predictable"--should
have no effect on output, >employment, or any other economic >
variable--just
because people are >going to compensate for these perceived > errors,
frustrating >government efforts to control their behavior. The secondconsequence is that econometric models cannot in principle predict >>the
consequences of future economic policies: if people were fooled >>once,
they will try to avoid being fooled again, and so the same >policy will
have different consequences the second timearound. A third consequence is that markets are efficient, within >the
given constraints. The evidence is in their having been found >to > behave
as random walks; any potential systematic sources of >variance have > been
instantly exploited (and nullified) by eagle-eyed >speculators like
Niederhoffer.
The "impossibility" of prediction is based on a
lineal concept of cause and effect. When you think in terms of closed
loops, there's no problem with taking feedback effects into account. > When
you think in terms of lineal causation, you run into effects like those
mentioned, where someone reacts to a policy, thereby changing the > effect
of
the policy; this seems to lead to infinite regress and failure of any
analysis. But if you write the closed-loop equations, you can obviously
solve for the resulting state of the system, and analysis isn't > impossible
at all.
Furthermore, when there are policies that have an effect on the _whole
nation_, such as restricting the money supply, there is nothing any one
segment can do to prevent the overall effect. It is simply not true that
the effect of manipulating the money supply is compensated for, or
unpredictable. The effect is highly predictable: every time the supply is
tightened, the growth rate goes down and unemployment rises. And > most
likely, inflation increases. Furthermore, since some time in the 1960s (I
don't have TCP's book right in front of me), the effects of this tightening
have been _irreversible_. The loss in total growth due to the > slowdown is
not made up by later increases in growth rate, as often happened > before
that time. Something has changed to make this "rho leakage" into > "alpha
leakage" -- the kind that you can't make up for.
Of course there are many cases in which government policies are > thwarted
by
clever adjustments on the part of entrepreneurs -- think of the fiasco in
which tax credits supposedly designed to increase production and > wages
were
spent, instead, on leveraged buyouts. But that is only one of the > positive
examples -- there are counterexamples as well. I really hate sweeping
generalizations to which I can immediately think of half a dozen > contrary
instances.
You're right that Lucas's principles are sweeping; that should perhaps
have cued me to a longer latency in clicking the "Send" button. I would
guess that exceptions had more to do with limitations on what people can
compensate for than with the concept of causality, however. The few
speculators who consistently make money do take into account the
behavior of other investors as a major variable; Niederhoffer is a big
enough player that he has to factor in other investors' likely reactions
to _his_ moves. Writing and solving equations to do this would be
hopelessly slow, however. You have to predict correctly not only the
direction of market moves but also timing. Niederhoffer is usually
right in his predictions, but, on his account, often too quick by a
matter of a few hours; he once lost a quarter of his assets in a 2-hour
period as the yen shifted against the dollar in a move too subtle for
most of us to notice.
But suppose for argument that predicting securities markets were simply
a matter of solving equations. Then I think Lucas's point (I say this
having read nothing of original sources) would be that somebody would be
doing that already, and continually, so that afterward--meaning all the
time--there would be nothing but random residual visible to an observer.
Thanks,
Mike