Isegoria

There are two kinds of revolutionaries, Balaji Srinivasan argues, technological and political, and there are two kinds of backers, venture capitalists and philanthropists. There aren’t term sheets between philanthropists and political revolutionaries, with “exits” to the tune of billions of dollars, but impact certificates could fix that, Scott Alexander suggests.

Arnold Kling doesn’t want that “fixed”:

Profit-seeking investment is driven ultimately by what consumers want. Philanthropy is driven ultimately by what donors want. Unless you think that donors are morally superior to the rest of us, you should not be rooting for more philanthropy.

One can speculate that one of the causes of increased social tension is the rise in philanthropy. Our “cold civil war” is funded by George Soros, Peter Thiel, Tom Steyer, and the like. Universities are among the most popular “charitable causes,” and their bloated administrations are the shock troops of the culture war.

We are better off with Soros speculating on currencies and Thiel trying to take businesses from zero to one. We are better off when university alumni invest their money in search of profit.

[…]

A lot of philanthropy goes to colleges and universities. Much of this goes to fancy new buildings. I think that Scott would agree that this does not help poor people. But were the donors who funded buildings trying to help the poor but lacking skills at effective altruism? Obviously not.

The challenge is not to make philanthropists more efficient at getting performing-arts centers and sports complexes built on campus. The challenge is to change the focus of donors toward something more worthwhile.

On the other hand, over the years Wal-Mart has hired many low-skilled workers and lowered the cost of living in many poor rural areas. Wal-Mart did not set out to help poor people, but that was the result.

More generally, markets have been shown over time and across countries to reduce poverty. The market does not produce the results of a benevolent omniscient quasi-deity. But donors themselves are neither benevolent, omniscient, nor quasi-deities.

I think that there is too much money to be made nowadays in non-profits dedicated to causes. Think of people making money as “activists.” I worry that “impact markets” could lead to even greater investment in arms races between opposing advocacy groups.

Is financial innovation a good thing?

In the context of a free market, innovation is a positive-sum game. The innovations that survive — most don’t — are the ones that conserve resources and improve quality. In the case of financial innovation, improving quality could mean better risk management.

But financial innovation does not take place in the context of a free market. Our financial system is permeated with government guarantees. Some guarantees, like deposit insurance or pension guarantees, are explicit. Other guarantees, like “too big to fail,” are implicit.

These guarantees can be exploited by firms that take on excessive risk. If a gamble pays off, the gains go to owners and managers of the firm. If the gamble turns out badly, some of the losses go to taxpayers. Even though managers might not consciously be searching for ways to game the system, the competition for returns will push them in the direction of doing so.

Innovative financial instruments and practices can facilitate gaming the system, without regulators realizing it. Clever innovations can enable a bank to comply with the letter of a regulation while violating its spirit. Sometimes, even the executives of the bank are fooled. They do not realize that their profits are coming from this “regulatory arbitrage,” rather than from real business skill.

Many money managers who had bought Russian bonds in the past had purchased credit insurance from other companies:

This insurance was supposed to pay off in case those bonds lost value, which they clearly have as a result of sanctions.

Under terms of some of these contracts, some money managers have been able to collect insurance claims. But other insurance contracts stated that in order to be paid, the money manager had to transfer the bonds to the insurer. But the sanctions will not allow the bonds to be transferred! Once again, innovative financial instruments proved to be fragile in ways that were not anticipated.

Arnold Kling thinks that people perceive government bonds as if they were wealth:

The government borrows $1 from me and spends it on you. You have a new dollar. And I think I still have a dollar, because the government owes me a dollar. Neither of us thinks that we will have our taxes raised next year, when the government has to pay me the dollar.

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I assume that people are myopic and just look around and say “I got paid $x by the government” or “I lent $y to the government and got a $y bond in return” without thinking about what comes next.

The working class may have suffered the most in the past decades, but the angriest class in America may be the small business and property-owning class, Joel Kotkin says:

National chains and online services are replacing many traditional Main Street businesses — the insurance and travel agencies, the local banks, the High Street retailers and restauranteurs. To make matters worse, local smallholders increasingly find themselves dependent on what analyst Mike Lind calls “toll booth” companies like Facebook, Google, and Amazon, tech megaliths which are able to coerce small businesses to give up their data. Amidst the supply chain crisis, firms like Amazon and the big box stores use their bargaining power to minimize delays in deliveries in ways not available to smaller businesses.

The traditional yeomanry — like the “kulaks” or wealthy peasants in Stalin’s day — is losing out. As executive compensation reached the stratosphere at the big tech and finance firms, small businesses faced what Harvard Business Review described as “an existential threat.” Experts are warning that one-third of small businesses, which comprise the majority of U.S. companies and employ nearly 50 percent of all workers, could ultimately shut down for good.

Perhaps, Arnold Kling suggests, we are now living in the New Servants economy:

Tyler Cowen has a series called “those new service-sector jobs.” My favorites include Coffin Whisperer and Wedding Hashtag Composer. The demand for such services can only come from people with excess wealth, and the supply comes from people who realize that their best source of income is to cater to those with excess wealth. This is very different from the age of mass consumption, when Henry Ford tried to manufacture cars that his workers could afford.

Actually, I think that the biggest engine of the trickle-down economy is the nonprofit sector. I don’t have data on this, but I suspect that if you ask the next 10 young professionals you meet where they work, at least 3 of them will reply that they work for nonprofits.

[...]

I would much rather see billionaires invest in businesses in minority communities than fund nonprofits that donate to BLM.

Humans are social learners, Arnold Kling reminds us:

We have to trust other people in order to gain knowledge and to make decisions. Our social epistemology will not get better by simply showing less deference to people who have a reputation for expertise.

I believe that the fundamental issue in social epistemology is the process by which people climb the status hierarchy. If the process is meritocratic, as in a chess tournament, it is a good idea to trust the people at the top. If the process is corrupted, by rules that are unfair or easily gamed. then the high-status people are not so worthy of our trust. But the solution to corruption is to improve the process, not (just) to belittle high-status people.

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How do I determine that you are knowledgeable in a field? If I knew enough to independently verify your knowledge, then I would not need your expertise. Since I cannot personally evaluate your knowledge, I rely on a signal. The fundamental social challenge is to make sure that these signals are accurate.

Incumbents with high status in a field usually participate in setting up and operating the signaling system in their field. To at least some degree, this is desirable. You want doctors involved in the system that decides the qualification for who becomes a doctor.

But you also need a system that is open to innovation and capable of discarding conventional views that turn out to be wrong. If there is insufficient competition, an entire field can decay. I saw this happen in macroeconomics in the 1980s, as Stanley Fischer all but monopolized the placement at prestige universities of young macroeconomic specialists. Students who did not want to conform to Fischer’s approach ended up avoiding macroeconomics and/or accepting low-status placements. The result, in my opinion, was the atrophy of macroeconomics.