Too many corporations wait too long before firing the boss

Friday, January 22nd, 2010

Too many corporations wait too long before firing the boss, Robin Hanson says:

Consider Michael Eisner at Disney, Carly Fiorina at HP, Jack Stahl at Revlon and Scott McNealy at Sun. All of these chief executive officers were kept on long past the point when a rational owner of the companies in question would have told them to leave.

Why are boards so slow to fire the chief? One reason is that they don’t have enough skin in the game. They own few shares and therefore don’t feel obligated to protect their investment from an out-of-touch boss. Besides, most of them owe their cushy jobs to the chief executive.

Hanson suggests a solution though:

Set up two new stock markets where investors would be making not outright bets on the future of a company but conditional bets. In one market the trades are consummated only if the current chief executive remains in place at the end of the current quarter. In the other market the trades are consummated only if the incumbent is bounced out by the end of the quarter. The price spread between these two markets would send a signal about whether the boss should stay or go.

The directors’ job then would be to listen to the markets, and, if a wide enough spread opens up in favor of a departure, get out the pink slip.

Hanson believes that such fire-the-CEO markets could evolve into a political tool superior to one-vote-per-person democracy — something he calls futarchy. Mencius Moldbug, no fan of democracy, is no fan of futarchy either and dismisses it out of hand as too easy to manipulate. Hanson retorts:

In the debate, I suggested we start by trying fire-the-CEO markets, and only gradually rely more on them in CEO decisions as such markets collect good track records. Moldbug seems to accept wide trading in ordinary stock markets because he doesn’t think any decisions depend on them, but strongly advises against allowing non-employees to trade in fire-the-CEO markets, due to manipulation concerns. But even a track record showing that firms which followed market advice do better on average than firms that do not would not persuade him.

In fact, Moldbug the “engineer” says no data anyone could collect in the lab or in any organization smaller than a nation would be relevant, and even with nations he doubts we’d see hidden manipulation. Nor does any data collected in the last century test his belief that the best governments are single rulers running city-sized polities with iron fists and complete discretion. It is not even clear what prior data makes his case — apparently it can’t be summarized in any concise form; you have to just read dozens of books and have a feel for it.

Not only does Moldbug know such iron fists would rule best, allow emigration, not cheat their investors, and never ever accept manipulator payola, he apparently knows this deductively, as a noble philosopher, not like we data-addicted pansy social scientists. And he has no interest in improvements in the status quo below his philosopher-deduced-best pinacle.

What more can one say to such a person?

Biology and Justice

Tuesday, January 12th, 2010

An anonymous liberal biorealist — yes, it’s hard to imagine — takes a first cut at biology and justice — and Mencius Moldbug offers his advice:

Your project is ambitious, original, invigorating. I hope something comes of it. I would love to see your real identity disclosed one day in the Times Book Review. Keep it up.

That said, here is the basic problem I see: you are trying to reason your way outside the many logical and factual contradictions of 19th and 20th-century Anglo-American liberal democratic thought, more or less from Bentham to Rawls, using only your own philosophical muscles.

Well, you have no shortage of those! A strong man can wrestle an alligator and win. A marathoner can outrun a horse at distance.

Still, if I have to wrestle an alligator, I’d rather have my .45. If I have to race a horse, I’ll make sure I bring my BMW. That is — if my goal is victory, rather than entertainment.

The BMW or .45 in this case is the enormous corpus of pre-liberal and non-liberal thought, ten times as old and at least as massive. (Despite all the subsidized logorrhea of the 20th.) Denied this corpus, you are struggling with great energy to reconstruct it on your own. You would like to see farther, but without standing on any giants — whose existence, in fact, you deny.

So far as I can discern, your only reason for eschewing pre-liberal thought is that its believers were defeated politically and militarily in the 19th and 20th centuries, and it is therefore no longer studied or at least officially sponsored.

This is an excuse, not a reason. Let’s take this .45 and see what it does to your alligator.

For instance: you start with the highly contentious (really almost Orwellian) Rawlsian definition of “justice” — ie, fairness, assuming a basically Christian concept of charity.

Now the word “justice,” of course, is Latin. Predating all this Jesus stuff. And the classical and Continental authorities (originally Ulpian, I believe) give us a two-word definition of “justice” that satisfies me perfectly: suum cuique, “to each his own.” If this two-word formula strikes you as too much the tautology, there’s an equivalent three-word chestnut — pacta sunt servanda — “promises are to be kept.”

Going down this path gives us a definition of “justice” which is not moral, but legal. Of course this is in keeping with the actual origin and meaning of the term, which is why I feel free to regard the Rawlsian redefinition as contentious at best, Orwellian at worst.

Note also that this formal definition strikes us as intuitively correct, as can be seen when we consider its negation. If promises are not kept, if each does not receive his own, we recognize this instantly as a case of injustice. Moreover, in what way can we find injustice, when each receives his own, when all promises are kept?

Here is the .45. Now, let’s shoot that alligator.

You and Rawls are wrestling with the charitable responsibilities of the State. Under your moral definition of “justice,” this is a knotty problem indeed.

The fundamental question is: does the State owe payment X to recipient Y? (The State may also deliver services, but substituting monetary payments is a Pareto optimization.)

The answer is: has the State promised payment X to recipient Y? If so, then X is Y’s own; promises must be kept; failure to pay would be an injustice. If not, no payment is owed; payment is an injustice, a robbery of the State.

Now, we can separate State payments into two categories. One is payments that are fundamentally debts, ie, promises of future payment exchanged for present value. For instance, I would put Social Security in this category, although the Supreme Court disagrees. Insurance claims, of course, are also financial debts. Is it just for the State to pay its debts? Of course it is just.

There is another class of promise and payment, however, which represents a condition of paternal dependency between State and citizen. As non-liberal authorities from Aristotle to George Fitzhugh will tell you, this relationship is fundamentally analogous to that between (a) parent and child, and (b) master and slave.

Thus, it is just for me to buy milk for my daughter, because I have accepted the obligation of caring for her as a dependent. In return, dependency always implies authority: because I feed my daughter, I get to tell her what to do.

Historically, you will find it another of your human universals that dependency without responsible authority leads directly to moral degradation, often literally dehumanizing. Of course we see this everywhere in the 20th-century welfare state, unique in history as a charitable system utterly unconcerned with the well-known degrading impact of dependency.

Thus, under the cold light of Ulpian, we see that all payments of the welfare state resolve into two categories: debt payments, and paternal dependency. Both of these are entirely just, because they are promises fulfilled.

The English word for an adult unrelated dependent is “slave.” The transfer of the bulk of the African-American population from the control and responsibility of private masters, to the State, is not a freeing of the slaves. It is a nationalizing of the slaves. (With a brief window of actual independence, not coincidentally the golden age of African-American civilization, between the Freedmen’s Bureau and the Great Society.)

Moreover, in “welfare reform,” we actually see a recognition of this fact. Even liberals realized: since we have nationalized the slaves, we have to make them work. Otherwise, their human condition becomes unmentionable. Fact. Somewhere, Carlyle laughs.

Sacrificing the permanent interests of the country to the immediate advantages of the proletariate

Monday, January 11th, 2010

Macaulay, the celebrated English historian, thanked the American author of A Biography of Jefferson for sending him a copy of his book — in a letter dated 1857 and included in Edmond Scherer’s Democracy and France (1884) — and included his thoughts on democracy sacrificing the permanent interests of the country to the immediate advantages of the proletariate:

I am certain that I never wrote a line, and that I never, in parliament, in conversation, or even on the hustings,—a place where it is the fashion to court the populace,—uttered a word indicating an opinion that the supreme authority in a state ought to be entrusted to the majority of citizens told by the head; in other words, to the poorest and most ignorant part of society. I have long been convinced that institutions purely democratic must, sooner or later, destroy liberty, or civilization, or both.
[...]
But the time will come when New England will be as thickly peopled as Old England. Wages will be as low, and will fluctuate as much with you as with us. You will have your Manchesters and your Birminghams, and in those Manchesters and Birminghams hundreds of thousands of artizans will assuredly be sometimes out of work. Then your institutions will be fairly brought to the test.

Distress everywhere makes the labourer mutinous and discontented, and inclines him to listen with eagerness to agitators, who tell him that it is a monstrous iniquity that one man should have a million, while another cannot get a full meal. In bad years there is plenty of grumbling here, and sometimes a little rioting; but it matters little, for here the sufferers are not the rulers. The supreme power is in the hands of a class, numerous indeed, but select, of an educated class, of a class which is, and knows itself to be, deeply interested in the security of property and the maintenance of order.

Accordingly, the malcontents are firmly but gently restrained The bad time is got over without robbing the wealthy to relieve the indigent. The springs of national prosperity soon begin to flow again; work is plentiful, wages rise, and all is tranquillity and cheerfulness I have seen England pass three or four times through such critical seasons as I have described. Through such seasons the United States will have to pass in the course of the next century, if not of this. How will you pass through them?

I heartily wish you a good deliverance. But my reason and my wishes are at war, and I cannot help foreboding the worst. It is quite plain that your government will never be able to restrain a distressed and discontented majority, for with you the majority is the government, and has the rich, who are always a minority, absolutely at its mercy.

The day will come when in the state of New York, a multitude of people, not one of whom has had more than half a breakfast, or expects to have more than half a dinner, will choose a Legislature. Is it possible to doubt what sort of Legislature will be chosen? On one side is a statesman preaching patience, respect for vested rights, strict observance of public faith. On the other is a demagogue ranting about the tyranny of capitalists and usurers, and asking why anybody should be permitted to drink champagne and to ride in a carriage while thousands of honest folks are in want of necessaries. Which of the two candidates is likely to be preferred by a working man who hears his children crying for more bread?

I seriously apprehend that you will, in some such season of adversity as I have described, do things which will prevent prosperity from returning. Either some Caesar or Napoleon will seize the reins of government with a strong hand, or your Republic will be as fearfully plundered and laid waste by barbarians in the twentieth century as the Roman empire was in the fifth, with this difference, that the Huns and Vandals who ravaged the Roman empire came from without, and that your Huns and Vandals will have been engendered within your own country by your own institutions.

Searching for Hari Seldon

Sunday, January 10th, 2010

Mencius Moldbug has been searching for Hari Seldon in “the awesome, humbling lost library that is Google Books”:

With more or less the entire Victorian corpus, modulo a bit of copyfraud, the Hari Seldon game is to enquire of this Library: which writers of the 19th would feel most justified, in their understanding of the eternal nature of history, humanity and government, by the events of the 20th? Whose crystal ball worked? Whose archived holograms delivered the news?

Broadly speaking, I think the answer is clear. Hari Seldon is Carlyle — the late Carlyle, of the Pamphlets. I consider myself a Carlylean pretty much the way a Marxist is a Marxist. There is simply no significant phenomenon of the 20th century not fully anticipated. Almost alone Carlyle predicts that the 20th will be a century of political chaos and mass murder, and he says not what but also why. And what a writer! Religions could easily be founded on the man — and perhaps should be.

But there’s no reason the Library need contain only one Seldon. Our mission today suggests a different candidate: another titan of Victorian letters, Sir Henry Maine. Here is history’s actual message on Climategate, delivered without benefit of Ouija: Maine’s Popular Government (1885). The Ouija board adds, Glenn Reynolds style: read the whole thing. It’s quite readable, especially if you can tolerate UR.

I will leave you with some samples. What is unique about Maine, even among his fellow Seldons, is that he is not just the greatest Victorian scholar of comparative government; he does not just correctly predict his future and our past; he also predicts our future. At least, in Maine you find many predictions which come true; few which come false; and a few which have not yet come.

First, watch him refine Austin’s understanding of aristocracy and democracy:

The most interesting, and on the whole the most successful, experiments in popular government, are those which have frankly recognised the difficulty under which it labours.

At the head of these we must place the virtually English discovery of government by Representation, which caused Parliamentary institutions to be preserved in these islands from the destruction which overtook them everywhere else, and to devolve as an inheritance upon the United States. Under this system, when it was in its prime, an electoral body, never in this country extraordinarily large, chose a number of persons to represent it in Parliament, leaving them unfettered by express instructions, but having with them at most a general understanding, that they would strive to give a particular direction to public policy.

The effect was to diminish the difficulties of popular government, in exact proportion to the diminution in the number of persons who had to decide public questions. But this famous system is evidently in decay, through the ascendency over it which is being gradually obtained by the vulgar assumption that great masses of men can directly decide all necessary questions for themselves.

The agency, by which the representative is sought to be turned into the mere mouthpiece of opinions collected in the locality which sent him to the House of Commons, is we need hardly say that which is generally supposed to have been introduced from the United States under the name of the Caucus, but which had very possibly a domestic exemplar in the ecclesiastical organisation of the Wesleyan Methodists.

The old Italian toxicologists are said to have always arranged their discoveries in a series of three terms — first the poison, next the antidote, thirdly the drug which neutralised the antidote. The antidote to the fundamental infirmities of democracy was Representation, but the drug which defeats it has now been found in the Caucus.

By “Caucus” Maine means, of course, the modern political party. Note his perfect description of the same paradox we see in Lippmann’s work — the spontaneous appearance of an antidote to democracy, often promoted under the very name of democracy itself. You knew, of course, that representative government was an antidote to democracy; you also knew that progressive scientocracy was an antidote to democracy; you never connected these two points. Or associated them with “the old Italian toxicologists.”

Note also that in 21st-century scientific bureaucracy, we have seen only two of these three steps. We have seen democracy and its antidote. The latter quite toxic itself, and growing only more so. We have not, however, seen the neutralizing drug — yet.

Here Maine explains his theory of aristocratic judgment:

Under all systems of government, under Monarchy, Aristocracy, and Democracy alike, it is a mere chance whether the individual called to the direction of public affairs will be qualified for the undertaking; but the chance of his competence, so far from being less under Aristocracy than under the other two systems, is distinctly greater. If the qualities proper for the conduct of government can be secured in a limited class or body of men, there is a strong probability that they will be transmitted to the corresponding class in the next generation, although no assertion be possible as to individuals.

Whether — and this is the last objection — the age of aristocracies be over, I cannot take upon myself to say. I have sometimes thought it one of the chief drawbacks on modern democracy that, while it gives birth to despotism with the greatest facility, it does not seem to be capable of producing aristocracy, though from that form of political and social ascendency all improvement has hitherto sprung.

But wait:

But some of the keenest observers of democratic society in our day do not share this opinion Noticing that the modern movement towards democracy is coupled with a movement towards scientific perfection, they appear to be persuaded that the world will some day fall under intellectual aristocracies.

Society is to become the Church of a sort of political Calvinism, in which the Elect are to be the men with exceptional brains, This seems to be the view suggested by French democratic society to M. Ernest Renan. Whether such an aristocracy, if it wielded all the power which the command of all scientific results placed in its hands, would be exactly beneficent may possibly be doubted.

Our exact problem in a nutshell — 125 years ago.

The faults to which the older privileged orders are liable are plain enough and at times very serious. They are in some characters idleness, luxuriousness, insolence, and frivolity; in others, and more particularly in our day, they are timidity, distrust of the permanence of anything ancient and great, and (what is worse) a belief that no reputation can be made by a member of an ancient and great institution except by helping to pull it down.

But assuming the utmost indulgence in these faults, I may be permitted to doubt whether mankind would derive unmixed advantage from putting in their place an ascetic aristocracy of men of science, with intellects perfected by unremitting exercise, absolutely confident in themselves and absolutely sure of their conclusions.

Yeah.

Maine misses one small point here: this “ascetic aristocracy” will degenerate in talents, as well as morals. One fact that rings loud and clear from the CRU emails is the basically second-rate nature of these bureaucratic pseudoscientists — not just evil, but also not that bright. Though still aristocrats of unremitting intellectual exercise, to be sure, next to the broad population. We can’t all be Feynman.

And finally — the future:

The question, however, will not long or deeply trouble those who, like me, have the strongest suspicion that, if there really arise a conflict between Democracy and Science, Democracy, which is already taking precautions against the enemy, will certainly win.

This is how bad Sir Henry Maine is. Not only does he tell us about the great battle at the end of time which will pit Democracy against Science, a conflict unthinkable to you and I until this freakish spirit chat with the ancestors, but now perfectly clear and clearly inevitable — but he has no dog in that fight. Bow to the ancestors! For lo, their greatness is palpable.

Frankly, I remain skeptical. In real life, Hari Seldon never gets it exactly right. Science has already proven far more durable than Maine imagined. Its destined foe, Democracy, has never been weaker or more contemptible. Still, if history shows us anything about the latter, it shows us that Democracy can lie dormant and apathetic and seemingly dead for decades, even centuries, then burst out again in volcanic explosions of frenzied mob energy, irrational, irresponsible and irresistible, driving God knows where in a river of heads on pikes.

Should we prefer this? Or the long grim gray decaying reign of Michael Mann, Climate Stalin? Democracy, infinitely stranger and more dangerous; Science, the frozen tyrant we now know. Dear reader, the ancestors have left this one to you.

McCarthyism Failed

Saturday, January 9th, 2010

McCarthyism failed to purge the government of Communists:

The reality behind “McCarthyism” — a good recent history is that of Stanton Evans — was one in which Americans discovered that their government had been employing, in positions of great responsibility, individuals known as “Communists,” who were often extremely capable and brilliant, but who did not seem to have the best interests of Americans at heart, and seemed capable of misleading them with disturbing facility. There are no more Communists — not in the literal sense of the word. But surely the parallel is clear.

In particular, Americans discovered that their own foreign-policy organs, not to mention their own official press, had been consciously and deliberately misinforming them about the nature of events and regimes in Russia and China. Oceans being oceans, these events had relatively little direct impact on Americans. (Except, of course, in the Korean War, where American soldiers fought a major conflict against the Jeffersonian reformers to whom its diplomats had just delivered a quarter of humanity.) However, their effects on Russians and Chinese were dire. Especially the Chinese.

USG, or at least its foreign-policy organs, or certain networks therein, were seen correctly to bear culpability in this matter. (In modern-day historical works, for instance, you can see the correct history in either Jay Taylor’s life of Chiang Kai-shek or Jung Chang’s Mao. Chang doesn’t give a crap about American politics; Taylor is himself a former Foreign Service officer. If you read either work, or any other reliable source, you will come away with the feeling that “George Marshall” is a perfectly sensible answer to the perfectly sensible question of “who lost China?”.)

The basic problem faced by McCarthyism was that McCarthy’s shop itself, run in practice by the freakish legal child-prodigy Roy Cohn, was a tiny dog that had caught a very large car. There was no substantive way to differentiate between a New Dealer and a Communist. After all, between the German invasion of Russia in 1941, and the Anglo-Soviet split of ’45-’48, the two had been essentially the same movement. The two were also littered with homologous doctrinal doxology — starting, but not ending, with “progressive.”

Therefore, McCarthyism had to operate under an essentially erroneous narrative of foreign subversion. Broadly, in general, his specific charges were accurate. The many sub-rosa connections to the Russian intelligence agencies that he uncovered were real. But the meaning of those connections were completely misinterpreted. As a result, a false picture was presented, both by McCarthy’s allies at the time and by his present conservative defenders.

A man like Harry Dexter White did not see himself as a tool of the KGB. A man like Harry Dexter White saw the KGB as a tool of Harry Dexter White. The KGB could put him down in their files as a tool; I’m sure they did; and perhaps, in the end, they were right. But to White and many others like him, America should have been working with the Soviets as with the British, because the two systems were on a path to convergence. No one then or now would think anything of any contact between British intelligence and anyone in Washington.

This is actually not a reassuring conclusion at all. The problem is that it directs complicity in the other direction. Instead of the crime of workin’ secretly fer furriners, ie, Stalin, the FDR administration strikes me as more likely to be prosecuted by history for employing Stalin. Who certainly made quite a steely iron fist. It is neither unusual nor unfair, however, for a leader to be prosecuted for the work of his henchmen. The Boss cannot be expected to have executed his victims personally — as if he were, say, Saddam Hussein.

But I digress. The point is not the accuracy of McCarthy’s charges, but the actual effectiveness of his actual purge. There is no doubt that many Communists and other progressives, across a fairly wide cross-section of American institutions, not entirely sparing even the most elite, were purged as a result of McCarthyism. In that sense, the purge succeeded. The tumor regressed.

A little. And not for long. We can see easily that McCarthyism failed. If McCarthyism had succeeded, McCarthy would today be hailed as a hero, and his victims execrated as villains. Since his victims are hailed as martyrs, and he is execrated as a villain, we can see easily that he lost. Any successes were only temporary. The tumor came back — and prevailed.

Too Hot, Too Cold, or Just Right?

Friday, January 8th, 2010

Is our current climate too hot, too cold, or just right?

[I]n the pre-IPCC era, climatologists (such as Professor Lamb) simply took it for granted that the present temperature is well below the optimal point. This can easily be seen in the names they assigned to past periods warmer than the present — such as the Medieval Climate Optimum and the Holocene Climate Optimum. Had they considered this a serious question for debate, it would have been easy to choose a neutral name.

We can easily see the reasoning behind “Optimum” by looking at a more recent historical precursor to the AGW movement: the embarrassing false step of the global-cooling movement. We have always been at war with Eastasia. However, Time magazine has performed the decidedly anti-Orwellian act of making its entire 20th-century archive free, and apparently unexpurgated, on line. So you can click here, and see what Time said when we were at war with Oceania.

One of the things you’ll notice is that much, much less effort is required to conjure disasters due to global cooling, than disasters due to global warming. Crop failures and starvation don’t involve a long chain of fanciful inference.

That 1974 Time article, Another Ice Age?, reads like it was written yesterday — with a few points inverted:

As they review the bizarre and unpredictable weather pattern of the past several years, a growing number of scientists are beginning to suspect that many seemingly contradictory meteorological fluctuations are actually part of a global climatic upheaval. However widely the weather varies from place to place and time to time, when meteorologists take an average of temperatures around the globe they find that the atmosphere has been growing gradually cooler for the past three decades. The trend shows no indication of reversing. Climatological Cassandras are becoming increasingly apprehensive, for the weather aberrations they are studying may be the harbinger of another ice age.

It is a long way from Science to the Federal Register

Thursday, January 7th, 2010

It is a long way from Science to the Federal Register, Mencius Moldbug says, but not as far as many think:

Think of this leg of the decision process — from hockey stick to cap-n-trade — as a slow, arduous, but essentially automatic mechanism, like colonic peristalsis. The various political glands in the pipeline, including Public Opinion Itself, can exert resistance, but not insert independent input. They are brakes, but not motors. They can stall the process, but not stop it, and certainly not turn the wheel and do something else instead.

Money is the bubble that doesn’t pop

Thursday, December 3rd, 2009

Money is the bubble that doesn’t pop, Mencius Moldbug says, as he examines the game theory of central banks and gold reserves:

If you are anyone who has large amounts of money, central banker or no, your goal is to spend that money in a way that does not move the market. Ideally, you would like to buy at a price set by supply and demand (not including you). You would rather not buy at a price set by supply and demand (including you). This is a tricky task in which many are paid much to succeed.

Market-moving purchases — as we’ll see later in the program — pose a special challenge to accounting. They create what George Soros calls reflexivity. Standard 14th-century Italian double-entry accounting, while perfect if you are running a bodega, is not capable of handling this matter. Because central bankers are not used to thinking about monetary game theory, and have no idea how to integrate this with their 14th-century accounting, they fail to see the optimal strategy.

The problem that breaks Florentine accounting is: if I drive the market up by buying, how should I value what I just bought? Should I mark it to the market price? If so, I am marking it to supply and demand (including me)? Or should I mark it to the price I could sell it for? If so, I am marking it to supply and demand (not including me). The larger the position, the larger the difference between demand (including me) and demand (not including me).

Suppose, for example, that you have 50 billion dollars, and you use this stash to buy the entire 2008 and 2009 peanut crops. You triple the price of peanut contracts. Congratulations! Your position is now valued at $150 billion. You’ve made a 200% profit. You’ve made money just by marking to market. You should be a spammer.

This is called “market manipulation,” or more specifically “cornering the market,” and it happens to be illegal. But even if it was not illegal, it would be unprofitable, because you cannot generally profit with this strategy — as you sell, you are driving the price back down. Your peanut contracts are valued at $150 billion — but can you get $150 billion for them? You can’t buy lunch with peanut contracts.

This is called the burying-the-corpse problem, the corpse being the vast quantity of peanuts that you have bought but don’t intend to eat. The accounting profit is indeed a mirage. Unless of course you can bury the corpse — ie, get some other fool to take all those peanuts off your hands, at anything like the inflated price you have created.

There is an easy way to avoid this entire weirdness. Spread it around. Diversify. Don’t make market-moving purchases. For the standard large investor, and doubly for the standard central banker, distorting the market with a purchase is considered a rookie mistake.

Thus the old-school CB answer to gold, now just beginning to fade. When asked why a return to the gold standard is impossible, the standard answer is: “there isn’t enough gold.”

What this means is that the stock of monetary gold is relatively small compared to the number of dollars it would have to absorb, were gold to replace the dollar as the international reserve currency. (Ie, not even considering the awful possibility that ordinary citizens decide to redirect their savings into the yellow dog and 100%-backed instruments, obviating the entire concept of a reserve currency.)

Thus, if CBs buy large quantities of gold, they drive the gold price up. Or more precisely, if they exchange large numbers of dollars for gold, they drive the gold-dollar ratio up. Or at least, so theory predicts. And for once, practice seems to match theory — at least, in China:

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

Indeed. Hu Liaoxian is even trying to jawbone the gold market down:

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”
[...]
However, officials in Beijing are aware that China’s $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line – “buying the dips” in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

Either Mr. Cheng and Ms. Hu do not understand the game theory of monetary formation — or they do and they are playing it close to the chests. If they — or their colleagues — ever figure out the game, God help the dollar.

When a CB buys gold, four things happen. One: the CB insures itself against the chance of gold remonetization. Two: the chance of gold remonetization increases. Three: the gold price goes up. Four: the buyer looks good, because the assets he bought went up.

How is this different from buying the pound, or buying peanuts? Because the price increase in the pound, or in peanuts, is unsustainable. What goes up has to come back down. For their own different reasons, the pound and peanuts are incapable of absorbing total global monetary demand, and acting as a stable international currency. Therefore, a sophisticated investor of large money avoids generating phantom profits by distorting the market in pounds or peanuts.

With gold, it is different. What goes up can go back down, as it did in the ’80s. (In 1980, it looked rather as if gold was to be remonetized. Then Volcker saved the dollar with 20% interest rates. Of course, at the time America was also a net creditor.) But because we know that gold is a viable monetary system, we know that when gold goes up, it does not have to come down. If it doesn’t come down, that means gold has been (re-)monetized. Peanuts cannot be monetized — they cannot become arbitrarily expensive. Gold can. Therefore, the decision calculi for gold and peanut purchases are fundamentally different.

The gold price has been increasing at roughly 20% a year since 2001. Perhaps coincidentally, the global dollar supply is diluting at rates not too different from this. Betting on the continuation of this trend is not difficult — one the way to bet on it is to buy gold. Which causes the trend to continue. Reflexivity! The dollar itself is a bubble, held up by the monetary demand for dollars — and the dollar does not appear to be an especially stable currency.

Thus there is an entirely different Nash equilibrium out there — one in which all the central banks dump the dollar for gold. This causes the gold price to skyrocket, creating permanent profits for all the reserve-accumulating central banks.

Don’t believe me? Think about it. When remonetization is complete, by definition the CBs will be computing their accounts in gold. Since the price of gold in dollars, under this scenario, is much higher than it is today, it will look like the CB made an enormous profit on the transaction: in exchange for green pieces of paper, now of minimal value, it received good gold. Or it was foolish and held on to the green paper, in which case its bankers are lynched in the street.

This is a self-reinforcing feedback loop. The more gold the CBs buy, the more incentive they have to buy gold. Because if the game ends with gold winning, the game will be scored by how much gold you got for your dollars. This will be a consequence of how soon the CB exchanged its dollars for gold. Devil take the hindmost! A classic panic scenario. A melt-up for gold; a melt-down for the dollar.

In other words, when gold is remonetized, the numerator and denominator on the “gold price” are exchanged. The relevant price is now the “dollar price.” What is a dollar worth? How many milligrams of gold can you trade it for? This piece of paper is a financial security, n’est ce pas? Does this security yield gold, own gold, redeem itself for gold, etc? No? If you want it to be worth anything, you might want to change that…

Here is the difference between gold and peanuts. No one will ever ask how many peanuts a dollar is worth, because peanuts will never be a monetary good. For one thing, it is too easy to grow them. Gold can be monetized, and peanuts cannot be monetized, because of fundamental physical differences between gold and peanuts.

Every monetary system is a self-supporting market-manipulation scheme of this type. As Willem Buiter points out, money is the bubble that doesn’t pop. In a free market, a currency is stable if and only if the currency is reasonably watertight and does not dilute much. In this panic — the same panic “John Law” anticipated — we see the “dollar bubble” popping, and a new “gold bubble” forming. If someone finds a way to print gold, of course, the gold bubble will pop and some other good will accept its monetary demand — rhodium, perhaps. Or baseball cards.

So, if Cheng Siwei and Hu Xiaolian understood the game theory, they might go ahead and “stimulate the market.” China cannot prevent her purchases from stimulating the market. But she can ensure that when she stimulates the market, she stimulates it first — thus getting the best price. And thus ending up with the most gold.

Collectively, the central bankers of the world might agree that they do not want gold to be remonetized. Individually, it is in their interest to defect from this consensus. As the American Century decays, individual motivations tend to become more prominent. You and I are not in a free market — but the central banks are.

And there is another individual motivation that CBs might have for remonetizing. Suppose a large exporter, such as China, which undervalues its currency and runs a large trade surplus as a result, takes a huge radical step and goes all the way to a 100%-reserve gold currency. The ultimate hard currency. If this succeeds, China is the new England — the financial capital of the world, forever. Everyone else’s money? In a word: pesos. Hard currency is Chinese currency. China’s natural supremacy over the barbarian kingdoms of the West is restored.

Climate science is a Hydra

Monday, November 30th, 2009

Climate science is a Hydra, according to Mencius Moldbug:

So here is what will happen to climate science if Mann, Jones, et all go to jail: it will become stronger. Considerably stronger. At least, in the near and medium term.

What happens when you kill the top 20 members of al-Qaeda? Everyone in the top 200 joins the competition to replace them. Decapitation is not an effective attack against a disorganized institution. For every Mann or Jones, there are 10 or 20 ex-students trained by a Mann or Jones. Do not these disciples aspire to their mentors’ positions? Damn tooting they do! Moreover, just because they lose their leader, does not mean that leader will be replaced by those who are the most disloyal to him.

In short, any such involuntary circulation of elites will have a notably beneficial effect on the entire movement. The reader of the CRU emails cannot help but fail to notice what was already obvious: as scientific minds, Mike and Phil are most definitely among the second-rate. Why? They are leaders in climate science simply because of their seniority; they got in when paleoclimatology and climate modeling were (as they deserve to be) scientific backwaters; through bureaucratic ruthlessness, they made their field big and powerful.

Therefore, not only do these pioneers have many disciples, but the disciples were attracted to a hot — no pun intended — and growing field. Thus, they are likely to be both more ambitious than their sacrificed former leaders, and more talented. If Mann, Jones et al get the axe and become poison in any position of formal authority, even if they lose their jobs, even if they go to jail, their former students will continue to worship them (and exclude any of their peers who don’t).

Are patriotic Americans allowed to learn from the Nazis?

Tuesday, November 24th, 2009

Are patriotic Americans allowed to learn from the Nazis?, Mencius Moldbug asks:

I think that question was more or less answered when NASA shipped the German ICBM program to Alabama. When SS-Sturmbannführer von Braun‘s spaceship landed on the moon, did patriotic Americans applaud? Or did they shout: “Boo! Hiss! Nazis!” Apollo 11, of course, was not made in underground caves by starving slave laborers. Therefore, it seems that one can copy the things the Nazis did right, and discard the things they did wrong. One can fail in this; one can fail in anything.

America is not the creature it once was

Monday, November 23rd, 2009

America is not the creature it once was, Mencius Moldbug reminds us:

The 19th-century American was an incredibly politicized, democratically engaged, and — not least — macho and violent creature. It is not surprising that in 1861, when a bunch of states tried to secede, the rest broke out in a paroxysm of enthusiasm for a war to save the Union. (It was certainly not a war to free the slaves — not in 1861, anyway.) If you were teleported into that mania, you would speak the language, but you would feel no other cultural connection to the people. You’d feel more or less as if you’d been sent to an insane asylum.

In 2009, or at any later date, what will happen if a state government tries to secede? So long as it has strong internal public support and the support of the state security forces, it will — secede. Nothing at all will happen. The state will simply become an independent country. Washington simply does not have anything like the political energy to coerce a seceding state. It barely has the political energy to coerce a seceding city. Americans simply are not going to shoot at other Americans for this reason. If this assertion is true, as I believe it is, state police with shotguns can easily thwart the entire US military in a secession situation. The latter simply won’t attack. They will not be ordered to. The hate just isn’t there.

The idea that any national force could prevent a state from seceding strikes me as rather like the idea that the US will guarantee Israel against Iran’s nuclear weapons, by promising nuclear retaliation against Iran if Iran nukes Tel Aviv. Frankly, I don’t think the America of today — the America that prohibits its own soldiers from shooting back at the Taliban, if the Taliban are shooting from a house — has the stones to nuke Russia if Russia nukes America (not that it will). The proposition that Washington could or would incinerate millions of Iranians, whatever the Iranian government did to Israel, is ridiculous. It is simply reverse presentism — anachronistic translation of past assumptions to the present. Washington once had an ideology that allowed it to nuke cities for reasons of state, but not now.

Similarly, Washington once had an ideology that allowed it to coerce states, or combinations of states, or even cities, that wanted to be independent. But not now. I would not say the thing is trivial, but any state, or even major coastal city, can almost certainly succeed if it plays its cards right.

I do have to wonder how the federal government would react to a state seceding, because it’s hard to remain apathetic with that much tax revenue on the table.

Spontaneous deprogramming

Sunday, November 22nd, 2009

Our modern political structure receives its guidance from the Cathedral of modern academia and respected media outlets like the New York Times, Mencius Moldbug says, but he expects to see more spontaneous deprogramming in the coming years:

Here is the problem: the Modern Structure is complete. The ancien régime is no more. Therefore, it is simply impossible for the progressive movement to generate anything like the energy it generated in the ’60s. The whole Obama experience, in particular, is a major downer. But this apathy would be growing anyway. It is just increasingly obvious that the ’60s will never be repeated. The logs it burned are ash.

What this means in practice: in practice, for a young person, it is very hard to squeeze any power or status out of the Left. All the institutions of the Left are bureaucratically stable. If you join them, you join them as an intern. If you want to achieve any status through them, you have to suck your way up a very long, greasy pole. It is just not exciting to be a mainstream left-wing activist. The lifestyle is grim and boring. You can be an extreme left-wing activist, like an Earth Firster, which is a little more exciting; but still exudes an ugly flavor of desire and futility.

Young people seek power and status. This is natural. It will always be the case. However, they are young; so they seek not the things that will bring them power now, but the things that will bring them power when they are of age to rule. Not, of course, that this is a conscious strategy; it is more a matter of evolutionary biology. But it still works. The number of former ’60s radicals in positions of power today is remarkable.

Thus, it is better to say that young people seek potential power and status. If an elite is open to new talent, they will seek it in that elite. If an elite is not open to new talent, or if the process of entering it excludes much of that talent…

In this case, we see a prerevolutionary condition. The classic case is late 19th-century Russia. Young elites, instead of being attracted to careers in the administrative or clerical arms of the Czarist state, were attracted to revolutionary activism — plotting to replace that regime. They seek a different path to power — not an existing path, but a potential and hypothetical path.

Why? I imagine that, to work and rise in the late Czarist bureaucracy, one had to both swallow and regurgitate some rather stale bagels of the mind. Certainly the literature of the period gives one that impression. Also, Jews were disliked. Rather actively disliked, as a matter of fact. Some of my ancestors left Imperial Russia on account of this nonsense.

The alternative? Communism. Out of the fire, into the frying pan. Or rather — out of the sauna, into the crematorium. Nonetheless, a prerevolutionary condition is a prerevolutionary condition.

The last thing a democratic party wants to do

Saturday, November 21st, 2009

The rule in conventional democratic politics — followed rigorously for centuries — is to be as broad and vague about your ideals and desires as possible, so as to attract the largest possible base:

Consider the tea parties. What were they about? Their namesake — a thoroughly left-wing phenomenon, a mob of vandals who masked their faces like Hamas to ransack a private business whose only crime was obeying the law? A mood, a feeling, a thought? Maybe an agenda, if a negative agenda counts? No to healthcare reform? But not just no to healthcare reform…

It was, and is, nowhere near clear. No surprise. The more people you get, the more powerful you feel. Unfortunately, if those people are milling about randomly in a “big tent” the size of Nebraska, you have accomplished very little in terms of coordinating support. You have not coordinated anything. All you have is a feeling. If you could get a million people behind some defined objective, you might be able to get that objective to happen.

But if the tea parties were promoting an actual manifesto, they would have had a much harder time recruiting. This would just have been weird. When you involve yourself in something like a tea party, you feel that you are contributing your thoughts, your ideas, your dreams, to a collective movement. This is the experience of conventional democratic politics. The last thing a democratic party wants to do is to crush those dreams, brutally, with its own.

Washingtology

Friday, November 20th, 2009

The study of the US government deserves its own department — Washingtology:

Washingtology is an applied discipline, like archaeology. Its mission is simply to study the real Washington. This mission requires no engagement with any of USG‘s PR arms. Washingtology is not journalism. It is the study of what Washington is and does — never what it says. Unless that speech is in some sense an action.

One of the few systematic mendacities that I see across the entire spectrum of American punditry is the convention of writing as if political actors personally wrote, or believed, their lines. Of course, all these pundits know that the speeches are composed by teams of professional writers. Nonetheless, they invariably report these speeches as if they were actually personal productions. They never say: “Today in St. Louis, President Obama read a White House speech which called for…” They never say: “Today in St. Louis, the White House called for…” They say: “Today in St. Louis, President Obama called for…” This is a classic Orwellian abuse of English.

Wing Commander Pink, the Pashtoon Whisperer

Wednesday, November 4th, 2009

Jane Mayer writes in The New Yorker about The risks of the CIA’s Predator drones and “targeted international killings by the state” — which are, it would appear, totally different from hunting down pirates, killing captured spies, etc.

Mencius Moldbug takes this as an opportunity to mention “a relevant little bit of inconvenient history” — Pink’s War:

Jane Mayer, meet Wing Commander Richard Charles Montagu Pink. Which of these people knows more about how to subdue the troublous Pathans? If you wanted to solve the problem, whose advice would you take? And what do ya think Wing Commander Pink would have done with a Predator or two?

He reiterates a point Porphyrogenitus made recently — and goes a few steps further, I suppose:

Reprisal, including reprisal by bombardment, is a perfectly legitimate tactic under classical international law. Moreover, reciprocity holds; the laws of war do not protect those who choose not to observe them. Eg: savage Pathan hill-tribes.

The result is that civilization wins, savagery loses, and wars end. Insurgency is ineffective and basically unknown under these rules, which I suspect would put Margaret [a commenter who called using a Predator drone predatory] out of a job. Instead, people die, and keep dying. And she eats. She is not alone in this.
[...]
You don’t even need a pith helmet and a lisp to understand how a civilized nation can subdue and govern savages and barbarians. You can stay on our side of the Atlantic and our century, and look at the US experience in the Philippines or Haiti. You can read any pre-1945 field manual from the US military. PC-COIN basically consists of taking every known axiom about how to solve the problem properly, and reversing it. Instead of constantly demonstrating strength, for instance, it constantly demonstrates weakness. This masquerades as counterintuitive, which masquerades as smart. Indeed, one cannot defend it without being pretty damned smart.

And it’s not even the willingness to bomb villages from the air, or whatever, that generates victory. Since we have way better gear than Wing Commander Pink, we can be way more subtle. All that is needed is that USG demonstrate to the Afghan people that it has chosen to rule them by force and without their consent, as a result of their actions in harboring Osama, KSM and their nasty friends. Seal the border, register and tax the population, impose indirect rule. Find some modern equivalent of Lord Cromer to run the whole thing.

Instead, we create the ultimate in passive-aggressive goverment. We whine and wheedle and curtsy before the savage tribe, pay it welfare for its misdeeds, apologize at every possible opportunity. At the same time, we hunt it with Predators. It’s like a bad episode of “The Dog Whisperer,” with the Pashtoons instead of the dog. Couldn’t we get Cesar Millan to run Afghanistan for a while? His skin is about the right color, and he could hardly do worse.