Interest rates are closely connected to the amount of money in circulation. And by money I don't mean the M1 supply (physical money) but all of the money in the economy, most of which is created by commercial banks through fractional reserve banking and the practice of lending out money that then gets deposited in another bank and then lent out again, multiplying the base currency by the "money multiplier" that's determined by the reserve requirement. The bigger the money supply is, the lower the "price" to borrow money is, ie the lower the interest rates. The smaller the money supply is, the higher the interest rates. This is how the Fed controls interest rates. Yes, they directly set the rates that they charge commercial banks for loans through the discount window, but the main way they achieve a targeted interest rate is by buying or selling government securities on the open market, pumping new money directly into the economy or extracting it out. So if you were to make some kind of objective assessment about what the interest rates "should" be it would have to depend on how big the money supply is, but that's what's controlled directly by the Fed.
Now let's return to the concept of "normal profit" for a moment. We've already seen that abnormal profits are unearned and simply due to someone being in a pre-existing position of privelege compared to someone else. But can normal profits be justified? They are typically justified by today's neoclassical economists by the concept of "opportunity cost". But if you think about it, this is somewhat of a circular justification. Let's assume company A returns a normal profit to their investors, that is 0 economic profit. If you ask what value it was that the investor added to the final goods the company produced and sold to its customers, the answer is supposedly "the investor could have used the money to invest in company B which also would have yielded a normal profit--the value added was that the investor gave up the right to invest in company B". But then if you ask what the value added was from an investor who did invest in company B, the answer is that the investor could have invested in company A which returns a similar profit. It all seems like a circular justification aside from the size of the money supply, which is set by government policy. If the money supply is large then interest rates are low and the bar for a "normal profit" correspondingly gets set lower, therefore more money is invested and more business ventures happen. If the money supply is small then the interest rates are high and the bar for a normal profit gets higher, so less business ventures happen and more people are laid off. Hence there is a constant struggle between wealthy investors who want profits to be as high as possible and therefore interest rates as high as possible, and employees who don't want to get laid off who want interest rates to be as low as possible which makes for more business ventures and less unemployment but thinner profit margins. Whoever can lobby the government more easily for their side of the story ends up winning out, and the interest rates get set somewhere in between.
I think the only other part of this whole thing I had intended to mention originally which I haven't yet is the idea of "economies of scale". I wrote an entry in April 2010 about the origins of profit and said that I thought "it takes money to make money" is a central principle behind it. You can see that with interest rates as well--if you have money, you get paid more on a regular basis for having it, even if it is just sitting in the bank.
I likened the principle of "it takes money to make money" to a group of bullies ganging up to have more leverage against smaller cliques on the playground. But defenders of capitalism would call the same thing "economies of scale". Sometimes it is cheaper to produce something when you are producing a whole lot of them than if you are just producing one. And this sounds reasonable, until you realize the connection between this and the idea of "barriers to entry" and the deviations from the perfectly competitive market we mentioned earlier. The more economies-of-scale come into play, the bigger the barrier to entry for other firms and hence the higher the profit margin. If anybody can produce each item at the same cost then the market is highly competitive. But the more it takes a huge amount of capital to get started, the closer the market becomes to a monopoly and the further it gets from the capitalist's ideal of free competition. So an economy of scale makes the capital the investors can raise more valuable, but only because it pushes the market further from free and more towards monopoly. So it's not clear that this is in the end any different from what I described initially, where pooling money together allows you to make more money in the same way that a group of people are stronger than an individual and therefore can more easily team up on smaller groups or individuals, having more bargaining power to get their way.
Bottom line is, our system of fractional reserve banking makes profits possible and economic growth possible, but maybe the Koran has it right in terms of fairness, and neither profits nor interest are really fair in any sense other than "might makes right". Which after all, is the basis for evolution. Is it really a surprise that capitalism, based on social Darwinism, has to rely on a similar justification? The fundamental paradox of capitalism seems to be that, if the market were free then there would be no economic profits, and yet the only thing that can convince people to start businesses and drive growth is economic profits. So capitalism necessarily involves coercion, and there is no such thing as a truly free or fair market where value is exchanged for value.
But before I say something about interest, let me make one more comment about capital gains. Based on my previous post, you might think that, if you believe interest is fair and therefore normal profits are fair, then maybe most capital gains involve normal profits, and are therefore fair. I'd have to look this up to be sure, but I wanted to point out that I *think* the case is exactly the opposite. Most profit levels are abnormal, not normal. Normal would be the break-even point where a business was just on the edge of going out of business. If they slip below the normal profit level then they're not going to find any more investors because the investors will shift into companies making abnormal profits. Also, consider the fact that the long term yield of investing in the DJIA is consistently much higher than the yield on bonds, and yet if the companies that compose the Dow were only making normal profits, you would expect the only difference to be a small risk premium accounting for the possibility that the entire stock market collapses. This doesn't seem to be the case at all, from what I can tell.
Moving on to interest, what is it? Interest can be broken down into a sum of several things. One is inflation, which is interesting in itself but not terribly relevant here. Another is a risk premium which depends on how likely it is that the borrower will default on the loan. Another is a liquidity premium which depends on how easy it is to immediately demand your money in the form of cash (for example, you will get a higher interest rate on a money market than a checking account because it's harder to get the money back immediately, and an even higher rate on a CD where it's almost impossible to get the money back ahead of time). And then left over after all of those factors in the sum is just a raw number which seems to indicate something like the compensation for a person "not using" their money, and instead letting someone else use it for a while.
If you make an analogy to rent, then this leftover factor seems to make sense. If you're not using your house, you can rent it out to someone else for a while and they will make regular payments. So why not do the same for your money? But two things should be mentioned here. First, even rent was considered by many classical economists, including Adam Smith I believe, to be "unearned income". And in light of more modern economics, it seems only fair to the extent that the person has legitimately acquired the house through their own blood sweat and tears. If instead they simply inherited the estate (whether house, land, or money) from their ancestors, as tends to happen within many rich families from one generation to the next, then it's not true that they did anything to earn it although perhaps their ancestors did. And if you trace the ancestory back far enough, you may find that the land was acquired by conquering some other people, or that the wealth was built up through slavery or other unfair practices.
But even assuming that all of the ancestors at some point legitimately built up the wealth or the land from their own labor power, and assuming modern neoclassical economics (at least at the micro level), it still seems like there might be something a bit different about money than land. If I own a house, then there is some tangible good that I could otherwise be getting real use out of, raising a family in it perhaps or starting a clothing factory. But if I own money, all I have is a number in my bank account, or at best a physical piece of paper. It's not anything anyone can use directly, its only use is supposed to be as a placeholder for value. It's supposed to be something that I can trade for something with actual value that I can use. Money is not something tangible, it's more like a right or an agreement. Money is a legal document that gives me the right to have power over other people or over my environment. It's something that grants someone more freedom. When I then take that and use it to convince someone else to give me even more money, but I don't have to give up the original money in the end... what just happened other than using your power over someone else to extort them into giving you even more power?
Marx criticized capitalists for reifying money into something tangible and I think there's both something insightful about that but also something that seems shortsighted. I want to say that there shouldn't be much of a difference between tangible assets and intangible assets, as society becomes more and more virtualized. The lines between physical and virtual are disappearing, and for the most part that seems like a good thing, not a bad thing. But there's also something naggingly right about the basic point. Is it fair or is it not fair to use your money to get even more money from someone else and keep all of the original money? And once you have more than the basic amount of money required to live a comfortable life, are you actually giving up anything by investing the rest of it to get even more of it? It seems like a no-brainer that you would.
Then there is the awkward and bizarre issue that if interest is really some sort of compensation for giving up something, then there ought to be a relatively straightforward way of determining what the "fair" interest rate is to charge. And yet, interest rates are not really determined by the free market, they are simply set by the Federal Reserve. What rate they get set to depends on what the people in charge want the economy to do, not on any measure of fairness... if the fairness of capital gains depends on the fairness of interest rates but the interest rates are not set based on fairness, where does that leave us?
Continued in part 4...
But there is a bit more to it than that. First, there is the question of whether between the buying and the selling, you've done something to add more value to it. And second, there is the question of time. If there was a long time which elapsed between when you bought it and when you sold it, perhaps it doesn't make sense to just directly compare the two prices, some adjustment is needed. I'll address these 2 points in order.
On the question of adding value to it in between the transactions, I think this is what my college friend was getting at by saying that perhaps I'm not considering thinking to be work. He's imagining that there is some thinking done that increased the value of the commodity and therefore, "added value" to it. For example, if an entrepreneur starts a business with some of his own capital, and hires a bunch of workers, and then after he's paid all of his workers he finds that his total costs were less than his revenues, perhaps the extra "profit" that he keeps has to do with the thought that went into organizing the business and managing the employees.
But really this is not a pure example of capital gains, because the entrepreneur in question is acting both as CEO and as investor at the same time. He's supplying both the capital and the management skills necessary to run the company. In a corporation, you can see a more pure example of why this should be split into two different things, where the investors supply the capital and the CEO is treated simply as another hired employee. Yes, the CEO must do a lot of real work to run the company, and yes he has to be compensated for that. But the investors don't do any work, they just supply the money. And yet often, there is still profit left over to give to the investors in the form of dividends. It's this profit that goes down on their tax forms as "capital gains" and it's this profit that I tend to think of as unearned, not the CEO's salary (inflated though it may be in present day).
This brings us to point 2, time. Perhaps the analogy to make here to see why capital gains might be fair is one between dividends and interest. Perhaps the added value the investors are supplying has to do with the fact that the value of the money they use to buy the stock is greater than the value of the money later when they sell the stock. If taken as a literal statement, the previous sentence would only be true if the "real" profit was 0 while the "nominal" profit was non-zero, in other words, the apparent profit was only due to inflation. Obviously, that's not true in most cases. Investors would not be happy, and indeed would not even bother investing, if their real profits were zero. But then, maybe the value the investor is adding is the use of his money for some period of time, so that his compensation in dividends is analogous to the interest that a lender of money is paid on a loan. This is the most deep and interesting part of the whole thing, which would lead into another discussion on whether the whole idea of getting paid interest on a loan is similarly unfair. (And interestingly, there is something called "Islamic banking" which is banking where it's illegal to charge interest on a loan because it's considered unfair and "usary" according to Islam. There were similar laws in
early Christian civilizations, but this ideal soon gave way to the more pragmatic practice of allowing bankers to charge interest.) Unfortunately, I don't feel I understand this one quite well enough to say much about it, so I'm going to skip over it for now. Let's assume for the sake of argument that charging interest on a loan is indeed fair, and that the Koran is a book of lies. I think we can skip over it by again separating out two different parts of the investor's returns, one due to the interest they would have earned if they'd left the money in a bank, and one due to the additional profit they received by choosing to instead invest it in a company.
Interestingly, when I looked this up on Wikipedia, I found that economists and accountants use two different definitions of profit. So the answer may turn out that capital gains are either partially earned or unearned depending on which definition you're using. Accountants tend to consider profit to be simply revenues minus costs, in other words the amount that is actually paid to the investor. Makes sense, but the economists do something similar to what I was suggesting in the previous paragraph and include in the costs one more type of cost which is "opportunity cost". By choosing to invest the money there rather than somewhere else, the investor is giving up the interest or dividends he or she might have earned on the money somewhere else. So the pure profit, or "economic profit"--as economists call it if the word "profit" itself is ambiguous--refers to how much extra money the investor made relative to a typical investment they could have made elsewhere.
And from looking at various Wikipedia pages, I get the sense that it is relatively well accepted that economic profits in a particular market are due to markets deviating from pure competitive equilibrium. In other words, they are always due to some kind of barrier to entry that makes it difficult for new businesses to break into the same market and compete with the existing firms. If it were easy to compete, then somebody would come into the market and undercut the huge profits of the existing firms, gradually driving the profits back down to the equilibrium "normal profit" level. The bottom line is that if anybody is making an economic profit (also called "abnormal profit" sometimes) then they are doing it because they have some privileged position that allows them to exclude others from competing, not because they are receiving the "fair market value" of the goods they are producing. So then the question becomes, what is this normal profit and does it differ from the interest that you'd receive on a risk-free asset like a longterm government bond plus a risk premium? If it doesn't differ, then I think we've come to an answer, namely that normal profits are fair if and only if charging interest on loans is fair, and abnormal profits are always unfair. (If it does differ, then the question is what else is entering the equation here?)
You pay capital gains tax not just on economic profits but on any profits including "normal" profits. So my conclusion is that capital gains are somewhere between partially earned and completely unearned, depending on whether you feel that charging interest on a loan is earned or unearned income. And I do have more to say about that, but as I said interest is something that's a lot more deep and mysterious and therefore my thoughts and beliefs on it are not as well formed or complete.
Most recently this came up again as a friend commented on Facebook to say something about the preferred capital gains tax rate, and how it didn't bother him that certain rich people, such as Mitt Romney or Warren Buffet, pay lower tax rates (because they only pay capital gains) than the middle class. He then went on a rant about how the people who pay only capital gains tax and not regular income tax tend to be the most productive and are contributing a lot to the economy, creating jobs, etc.
I responded by saying that I viewed capital gains as a kind of unearned income, similar to someone who wins the lottery, and therefore if we really wanted the tax code to be perfectly fair, capital gains should be taxed at 100%, not 15%. It's not the kind of income that you have to do any work to get, instead it's just a way to get paid for already being rich and doing nothing. He countered by saying that I was implying thinking was not a type of work, and I assured him that I did indeed consider thinking to be work, but I didn't think most capital gains required thinking to achieve--rather, they just require capital.
This got me thinking again about the origins of profit, and whether what I said at the spur of the moment on FB is really true, or if it's more complicated, or if I'm just dead wrong there, and there is a good reason why capital gains could really be considered to be "earned" in the sense that wages are. (Mind you, I did add a comment that despite not considering capital gains or lottery winnings to be earned income, I do think it is fine for someone to legally keep their winnings, minus taxes. I also acknowledge that making everything perfectly "fair" may have large negative consequences on the growth of the economy, and that if given the choice between the two I may prefer economic growth to fairness.)
Let's start with a definition of "fairness". It's surely a loaded and contentious term, but for my purposes here I think "exchanging value for value" will suffice. In other words, if you can demonstrate that somehow, a person who reports a capital gain on their tax forms gave up something of equal value to the thing they received, then I'd agree that this was a "fair" transaction. If not, surely it was unfair (although perhaps still justifiably legal).
On the face of it, the whole idea of a capital gain seems to violate this principle trivially. By definition, a capital gain is when you buy something at a lower price and then sell it at a higher price. So if there is any real "value" associated with the thing that was traded, it's hard to see how both of these transactions could simultaneously be fair. Of course, this goes back to my related subject of frequent thought this year, the connection (or lack thereof) between fact and value. For someone who believes in objective value, two different exchange values for the same good seems like a direct and immediate proof that there was some unfairness somewhere. For someone like myself who believes in subjective foundational values, the connection is less direct, but it still seems like there is something unfair going on here. Of course, one of the main important shifts from classical economics to neoclassical economics was a shift from thinking about objective value to subjective value, and classical economists like Marx who believed in objective value tended to be a lot more sympathetic to the idea that corporate profits were unfair and unjust, whereas later neoclassical economists tended to hand wave them away because of subjectivity. If all value is subjective, then there really isn't any such thing as "fair" in the first place, which is purely a normative judgement unconnected to any economic facts. Does that mean my intuitions are naive and if I really followed through on the consequences of my subjectivist foundations for value that I'd come to agree with the neoclassical economists? The purpose of writing this post is to explore that.
Continued in part 2...
"For nine years I wrote and I said that Osama bin Laden was not hiding in a cave. I'm not a cave expert, I was just using my common sense. He was a multimillionaire crime boss (using religion as his cover), and those guys just don't live in caves. He had people killed under the guise of religion, and not many in the media bothered to explain that every time Osama referenced Islam, he wasn't really quoting Islam. Just because Osama said he was a "Muslim" didn't make it so. Yet he was called a Muslim by everyone. If a crazy person started running around mass-killing people, and he did so while wearing a Wal-Mart blazer and praising Wal-Mart, we wouldn't automatically call him a Wal-Mart leader or say that Wal-Mart was the philosophy behind his killings, would we?"
[Full text: http://www.michaelmoore.com/words/m
I commented at the time saying that I thought Bin Laden was sincere in his religious beliefs, and it was aweful that Moore tries to sweep the role of religious fundamentalism under the rug and instead draw attention to his wealth, in the interest of re-inforcing Moore's favorite narrative that rich people and their insatiable greed are the source of all problems in the world. Bin Laden attacked the World Trade Centers, which to me seemed like a symbol of American greed, indicating Bin Laden and Moore would have felt very similarly on that issue. A fact Moore would like to obscure. Bin Laden didn't make his fortune doing shady business deals and illegal activities, as Moore's words suggest--instead, he inherited his wealth and used that as a means of accomplishing his other goals. (And yes, he did run some businesses on the side, but that was never the primary source of his wealth.)
Since then I've thought about it more, and read more, about Bin Laden's motivations, and I've come to a somewhat different picture from what I had what I had initially thought. Although still very different from the picture Moore paints.
Earlier this week, I got into a debate with my neocon friend recently when I posted a link to a Foreign Policy article arguing that the most recent GOP debate is a strong indication that neoconservatism is now as good as dead. The debate was mostly about whether the US should continue to maintain a much larger military force than everyone else in the world and use it to "lead" the world and enforce its values on other countries around the globe. But at some point the discussion turned into a debate about what motivates Islamic terrorism. He argued that the kinds of things Westerners consider "legitimate" motivations for Arab anger against the West (things like our support for Israel or our invasion of Middle Eastern countries) was a minor gripe to them compared to what really fuels their hatred of us, namely that we treat women as equals and share our movies and culture with them. I was arguing that if we weren't so aggressive with our foreign policy that groups like Al Qaeda never would have formed, and they wouldn't be pissed off at us, while he was arguing that they are pissed off at us because they hate our secular lifestyle and see us as having turned our backs on God.
After his comment about "treating women as equals" being what really fuels their rage, I went and googled for Bin Laden's own words about why he planned 9/11. Sure enough, there wasn't a single word in there about how we treat our women. Not only that, but he didn't have even mention any complaint at all about our lifestyles--it seems that was not a part of it at all:
full transcript of Bin Laden's explanation of why he decided to attack the World Trade Center in 2001
The most important paragraph is here:
"The events that affected my soul in a direct way started in 1982 when America permitted the Israelis to invade Lebanon and the American Sixth Fleet helped them in that. This bombardment began and many were killed and injured and others were terrorized and displaced. I couldn't forget those moving scenes, blood and severed limbs, women and children sprawled everywhere. Houses destroyed along with their occupants and high rises demolished over their residents, rockets raining down on our home without mercy."
...
"And as I looked at those demolished towers in Lebanon, it entered my mind that we should punish the oppressor in kind and that we should destroy towers in America in order that they taste some of what we tasted and so that they be deterred from killing our women and children."
This served well to back me up on this argument, but after thinking about it, I realized that even I was a bit surprised at how little religion factored into it. Perhaps the 19 hijackers were in it more for religious reasons (maybe the only way he could convince people to be committed enough to take their own lives during the mission), but clearly Bin Laden was concerned more about human rights (even if he interprets events in the world very differently from how most people from the West would have, and "overreacted" from our perspective) than about what we do in our bedrooms or how we dress our women. The only reference to religion I see in the whole 18 minute speech he gave, explaining his motivations, is a few acknowledgements that God's will has been served, and that's pretty much it--nothing your average American wouldn't say in the same circumstance. The fact that he was caught hoarding porn during his last few years is more evidence that perhaps Moore was right that religion really was more of a cover than the main thing. But Moore was wrong to call him a "crime boss". That paints a picture of someone who is motivated by corruption and greed, and I see even less of that here than the religious aspect. Perhaps he enjoyed the fame and respect he got from taking on the most powerful country in the world, but surely he was intelligent and educated enough to realize how foolish that was. It seems clear from his statements that he was motivated mostly be a sense of revenge for perceived injustice.
This specific example, which I went into in a bit greater detail than I had intended, illustrates a more general principle that I think is true. Very often, when people appear to be motivated by religion, there is some more basic human drive that is motivating them (in this case, revenge) and religion is just an excuse. This explains why there are so many religions in the world, and so many interpretations of each religion. People need excuses for every possible action they might want to take, so they need religion to be flexible enough to be able to justify anything they need justified. Karl Marx had a name for this view of history, he called it "historical materialism", and of all the things Marx wrote about, I think this may be the one he was most correct on. Human actions are motivated by material, physical concerns, and yet our minds project all kinds of spiritual metaphorical meaning onto those base drives.
So in answer to the question of whether values can come ultimately from religion, I would say for the most part no. They are there inside us already, and religion is primarily something invented to try to justify them. Nevertheless, I also believe the opposite is sometimes true (although less so). Basic notions of fairness and justice can be affected a lot by what environment you grow up in, how you are raised, what early experiences you have, etc. They aren't all just hardwired by genetics. So to the extent religion represents a set of teachings about these kinds of things that are passed down from parent to child, I do think it can affect the values you have. It's in the larger scheme of things, looking at it from the point of view of multiple generations at once, where the purpose of religion is to justify whatever system of values seems to work well for that clan of people. It's a complex process where both can feed back into each other, which is one of the things I guess
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geheimnisnacht was getting at.Another source of confusion related to this question (of whether values can come from religion) is when something looks like a values issue but it's really an issue of different people having different models of the world. Abortion is the most straightforward example that comes to mind. People often refer to it as a values issue, yet it's not. I've never met a pro choicer that doesn't believe in the sanctity of life, and I've never met a pro lifer that doesn't believe in the importance of freedom of choice. Where the difference comes in is in their understanding of the world. Pro lifers believe that there is a soul which God magically inserts into every fetus at the time of conception, and it is this soul that is the core of a person's being, not the body. Pro choicers, on the other hand, understand that this is a fairy tale, and that in reality consciousness grows slowly in all organisms from nothing into a full adult being. Which of these two models of the world you have will almost always determine your position on abortion. If there is a magical soul inserted at the time of conception, then abortion is no different than murder. If there isn't, then abortion is no different than fishing (killing a fish and eating it), since fish have roughly the same level of biological complexity (and presumably roughly the same level of consciousness) as a fetus. There is no difference between the values of one group and the other, it's not that pro choicers love to murder, or that pro lifers hate freedom. They both value the same things, they just see different ways to achieve those values because they have different models of the world. And a specific model of the world is something religion can influence directly, much moreso than values. So a lot of derived values end up being influenced indirectly by religion because it affects your "worldview". I tend to think this is the primary way in which values can be influenced by religion, and that a direct influence of values is a lot more rare. But I do think to what degree people feel comfortable or uncomfortable with certain behaviors (like say, taking someone else's toy without asking) can also be influenced by the culture someone is raised in, which goes hand in hand with religion. So in the end, my answer is "yes and no", it's a subtle influence and indirect in most cases, but it is still there.
I recently read an essay by Bryan Caplan called "Why I Am Not an Austrian Economist". He's a scholar at George Mason University, which is already sort of the "Fox News" of economic schools--namely, they're bought and paid for by rich rightwing propagandists like the Koch brothers, while they pretend to be "fair and balanced" impartial academics. But the biggest crackpots at that school tend to be of the Austrian variety, and even Caplan (who is similarly biased towards a rightwing perspective, although not quite so nutty) admits to having been suckered in by that school of thought in his early years.
I'm not going to go in to any of his criticisms here, but the reason I bring the essay up is just to mention one thing that he mentions, namely that Austrians often jump up and down and make a big deal out of value being inherently subjective. I remember reading that at some point from an Austrian a long time ago and after having laughed at everything else I had read, it gave me pause and made me stop and think "wait a second, maybe Austrian economists aren't so bad if they understand that much!". Truth be told, it's the only thing I've ever read by an Austrian that I've agreed with--which made it seem suspicious to me. Why should they be right about that, which seems like a pretty important fundamental thing to get right, and yet wrong about everything else and all the conclusions they draw from that? I never got around to figuring out the answer to that, but Caplan provided the answer for me in one small paragraph which was the main thing I got out of the essay. He admits that the Austrians are entirely correct in believing that value originates in individual subjective preferences. But he goes on to explains that the scam the Austrians pull is in trying to make you believe that mainstream economists believe in objective value. And that's simply not the case. The last serious school of economic thought that argued for an objective origin of value was the Marxist school of thought which holds that the value of anything is objectively measured by the cost of the labor needed to produce that thing (ie the "labor theory of value", something Adam Smith also believed in, but modern neo-classical economists do not). Marxism is still considered a valid modern school of economic thought in many places, but it isn't a mainstream school of thought, it's every bit as marginal as Austrian Economics. And also, I'm not sure modern Marxists still believe the labor theory of value either--I get the impression they have more sophisticated ways of justifying their ideas by now.
I'm currently reading a book called "Super Imperialism: The Origins and Fundamentals of US World Dominance". The author, Michael Hudson, definitely seems to have some Marxist leanings, although I doubt he subscribes to the labor theory of value either. And I'm not sure to what extent his perspective could be classified as Marxist, I think it is more of a mix. The basis of the book is his argument that the US controls the world through its debt, which is the reverse of the traditional way an imperialist nation would control the world (namely, by indebting other nations to itself, and maintaining a creditor status). He argues that the only reason it is able to do this is because it negotiated a very special privileged status for itself after the breakdown of the Bretton Woods system in the 1970's--fixing the dollar as the world's reserve currency. Because the dollar is used to back monetary value everywhere, rather than Gold as was previously used, the US is able to dominate all the other countries, and paradoxically the more the US balance of trade shifts towards the negative side of the balance sheet (imports exceeding exports) the more power it has, because it forces everyone else to lend the US more money by buying up US Treasury bills with all the extra dollars they have lying around. The US then uses the borrowed money to finance its military, which then can be used to enforce its will upon the rest of the world even further, and because of a combination of its superior military might and its special economic situation, nobody can ever require it to pay its debts back. As he puts it, economists of the past who believed that there is "no such thing as a free lunch" have not considered the possibility that a country could become so powerful that they control the entire global financial system and its rules, so they can always rig the system to ensure that they get a free lunch. (Or as I'd put it, the only sure way to get a free lunch is to steal it.) As a means of fighting this perceived injustice, he urges other countries to shift away from the US dollar and move towards coming up with a less biased reserve currency. He even suggests that in many ways, the world was better off with gold as the backer of value, because it didn't give US the special privilege to oppress everyone else that it has now. I can't quite tell (perhaps I haven't read far enough) whether he is implying there that we should consider returning to the gold standard or not.
Ironically, Michael Hudson and the far left are not the only people who think the world was better off with the gold standard. Much of the far right believes the same thing, although for very different reasons. (In the case of the far right, it's more that they are ignorant about economics, and in Hudson's case I think it is just that he's very anti-US).
I've heard people on the far right saying they wish we would go back to a Gold standard because they see it as more of an "objective" standard of value than the "fiat currency" we use today. Whenever I hear that, it just makes me laugh out loud, and it's tied in to at least one of the reasons I shorted Gold, at least emotionally. To me, Gold is one of the worst fiat currencies we've ever had. Unlike some substances whose value is determined primarily by their usefulness for certain practical applications, Gold has the value it does only because other people think it has that value and therefore will accept it. For example, Silicon gets most of its value because it can be used to make transistors which are the foundation of computers which are the foundation of our current Information Age. While there is no such thing as truly "objective" value its value is clearly a lot more objective than the value of Gold. Gold's value originally came from aesthetics, namely that a lot of people thought it looked shiny and pretty, and therefore they liked to wear it and use it for decorations. Of course, not everyone thinks Gold is pretty, I find it rather ugly myself and would always prefer silver in terms of jewelry. But nevertheless, because so many people thought it was pretty, it was easy to trade it for something else. So it led to a natural choice of currency. But once enough people began using it as a currency, its value skyrocketed and since then it now gets most of its value not even from its widespread aesthetic appeal but purely from the expectation that someone else will accept it as valuable if you need to trade it for something else. Silicon is closer to having some kind of quasi-objective value because the price it sells for is determined not from aesthetic appeal nor from its status as a standard fiat currency, but from the material properties of transistors and its scientifically proven ability to power the information economy. Nevertheless, if society shifts away from transistors as the basis for our age, and that becomes yet another trendy fashion in the grand scheme of things, its value could also collapse into the dustbin. In other words, even the value of something like silicon is still subject to the whims and fashions of society, not fully grounded in hard facts and science.
The price of Gold 10 years ago was $300/ounce. Today it is now $1500/ounce, here is the graph of its value over the past 10 years:
If it had a fixed, objective value (what I imagine the far right conjures into mind when they hear the phrase "The Gold Standard") then this graph would be roughly flat (ignoring for the moment dollar devaluation which would tend to increase it slightly, and newly discovered Gold mines which would tend to decrease it slightly). But what's remarkable about this is not even that it's not flat, but how fast the price of Gold has inflated compared to the price of anything else. True, all prices as measured in US dollars go up over time, but the prices of most things go up only by a percent or two each year. The consumer price index (the most commonly used measure of inflation) rose by 28% over the past decade. The price of Gold by comparison got inflated by a whopping 400% over the same period (more than 10 times as much as inflation)! Usually prices don't rise anywhere near that fast, except... oh wait, there was a sector where something like that happened recently. What sector was it? Oh right, the housing market! The prices of houses went through a similar ridiculous exponential growth curve, and what was the outcome? It collapsed and retrospectively, everyone agrees that it was just a bubble. I find it really hard to imagine that we're not in a big ass Gold bubble right now, and that any year now the whole thing is going to collapse.
When will the Gold bubble burst? I don't know exactly, but it will happen when interest rates start coming back up. Once bonds pay more than a few percent interest, investors looking for a safe investment will start shifting their money back into the bond market and out of Gold and other precious metals which don't pay any interest (the only money you make is if you manage to sell after the price went up a little more since you bought it but before it collapses and you're left holding the bag). If the economy is looking healthier (which it will need to be before the fed will raise interest rates), then stocks may also present a more attractive investment so some of the money which is currently in precious metals will also shift there.
There are two big thorns in the side of this narrative I'm presenting, which I haven't addressed yet--those are the effects of inflation (which can be triggered by printing too much money, which is what a lot of conservatives have accused the Fed of doing recently), and the possibility that countries will begin doing what Michael Hudson suggests they do, namely shifting their reserves away form the US dollar. That shift would be dangerous both for the US and for the countries who choose to do it, but there is nevertheless a chance that they might choose to "suicide bomb" the economy in this way, and that's a prospect that needs to be kept in mind, even if it's only a slim chance. Unfortunately this post is long enough so to talk about either of those I'll need to continue it in part 2. Till tomorrow, or whenever the next chance is when I get to sit down and write!
Leaving for Madrid in 3 days. Then Barcelona, Paris, Rome. Lots of packing to do!
The Multiverse Interpretation of Quantum Mechanics
Authors: Raphael Bousso, Leonard Susskind
(Submitted on 19 May 2011)
http://arxiv.org/abs/1105.3796
"We argue that the many-worlds of quantum mechanics and the many worlds of the multiverse are the same thing, and that the multiverse is necessary to give exact operational meaning to probabilistic predictions from quantum mechanics. Decoherence - the modern version of wave-function collapse - is subjective in that it depends on the choice of a set of unmonitored degrees of freedom, the "environment". In fact decoherence is absent in the complete description of any region larger than the future light-cone of a measurement event. However, if one restricts to the causal diamond - the largest region that can be causally probed - then the boundary of the diamond acts as a one-way membrane and thus provides a preferred choice of environment. We argue that the global multiverse is a representation of the many-worlds (all possible decoherent causal diamond histories) in a single geometry. We propose that it must be possible in principle to verify quantum-mechanical predictions exactly. This requires not only the existence of exact observables but two additional postulates: a single observer within the universe can access infinitely many identical experiments; and the outcome of each experiment must be completely definite. In causal diamonds with finite surface area, holographic entropy bounds imply that no exact observables exist, and both postulates fail: experiments cannot be repeated infinitely many times; and decoherence is not completely irreversible, so outcomes are not definite. We argue that our postulates can be satisfied in "hats" (supersymmetric multiverse regions with vanishing cosmological constant). We propose a complementarity principle that relates the approximate observables associated with finite causal diamonds to exact observables in the hat."
The most ridiculous so far is birther Donald Trump. Jimmy Kimmel has a pretty funny bit on him where he describes America under a Trump Presidency as "looking a lot like it did in Back to the Future II when Biff was in charge":
And so far the candidate who seems the most likely to me, if I had to guess, would be Tim Pawlenty, although I'm mostly just basing this on this ad which seems like a pretty serious bid:
I'm not sure why, but I have a real hard time picturing Mike Huckabee, Mitt Romney, Rick Santorum, or even Sarah Palin being President. And yet I can picture Tim Pawlenty being President, and I can picture a lot of people voting for him. He's an evangelical Christian with a Juris Doctor degree, which is a pretty potent combination for getting Republicans on your side. I guess that's not a terribly good reason to think someone will win the nomination, but it's the only thing I have to go on right now. If I had to pick which candidate I'd personally be most likely to vote for (if I absolutely had to vote Republican), I think it would be Newt Gingrich. But I think that most Republicans are tired enough of Gingrich and the rest of the Washington beltway (and not too keen on his adultery either) that he's very unlikely to win the nomination if he runs. Of the rest, I'd take Romney easily over Huckabee, with Pawlenty somewhere in between. Then Sarah Palin or Rick Santorum, I'm not sure which is worse, but they're both really bad... and finally, last and least, Donald Trump would be my worst nightmare. I cannot stand conspiracy theorists (even though I doubt he really seriously believes the crap that he says about Obama's birth certificate) and the guy is just a total schmuck--I doubt there is an honest bone in his body.
http://www.hulu.com/watch/151134/transf
It filled in more about Erhard that I found interesting. His techniques and ideas were precursors to powerful memes that I've encountered here and there while I was living in California. Specifically the "human potential" movement, but to some extent the very idea of "self help" is due to him.
That video led me to another video on Hulu, that was marked as related--a documentary on the communist terrorist organization "Weather Underground" that grew out of the Vietnam War protests in the 1960's at Berkeley and other universities. It's not actually that related, other than being another documentary about things that took place during the same era in northern California. But there is a lot of interesting stuff in there, including interviews with many of the former leaders of the Weather Underground and how they look at it in retrospect. (One of them being Bill Ayers, whom McCain and Palin accused Obama of being pals with during the 2008 election in some of their mudslinging ads). There was one thing though that does sort of connect it with my "Hippies Saved Physics" post--in a segment of it they talk about Timothy Leary's imprisonment, and mention that the Weather Underground was the group that actually broke him out of jail (with funding from the Brotherhood of Eternal Love):
http://www.hulu.com/watch/118170/the-we
The two above videos are both very long, but here's a quick clip that I ran across recently so while I'm linking to videos I may as well link to this one. Ron Reagan (Jr.) expresses his views on his father, Ronald Reagan:
http://news.bbc.co.uk/2/hi/programmes/w
(The only connection Ronald Reagan has to the rest is that he ran for governor of California against Timothy Leary. Leary's campaign slogan was "Come Together, Join the Party!" which inspired John Lennon to back his campaign by writing the song "Come Together", but he was thrown in jail (for marijuana possession) before the election, rendering him ineligible. The Weathermen then broke him out of jail and smuggled him and his wife safely into Algeria.)
Oh, right--and another response I got regarding my "Hippies Save Physics" post was from Nick Herbert, whom I mentioned having met briefly a while back, although he didn't remember me. He writes a blog (that I was previously unaware of) called Quantum Tantra. As I indicated in my previous post, we have pretty different views on quantum mechanics, but nevertheless have some similar interests and passions and managed to do our best at bonding over email last week. Was a fun and playful conversation and reminds me of how much I'd like to move back to California at some point. He also reminded me that the weekly meetings at Robert Anton Wilson's pad where I initially ran into him were on Wednesdays--not Fridays, as I mistakenly said in one of the comment threads. (Incidentally, Robert Anton Wilson was also a friend of Timothy Leary's.) Don't ask me what exactly he means by quantum tantra, but it seems to involve among other things--writing poetry filled with obscure references to physics, which I of course approve of! It also apparently involves fucking atoms, which I'm not so sure about. You never know where those electrons have been.
Where to start? Well, earlier this year, I went to a wedding in Atlanta, where a friend I hadn't seen in many years started asking me some things about physics. He mentioned that he was reading "The Quantum Enigma" and I immediately let out a groan, and mentally did a "palm-face" kind of thing. I then explained that this was written by two guys, Bruce and Fred, whom I knew well, but they were both idiots and I'd told them to their face that I didn't agree with the basic premise of their book, and my advisor had given a whole lecture retaliating against their accusations that the physics community is hiding "skeletons in the closet" regarding the role of consciousness in physics (which they launched at the weekly seminar preceding his lecture the following week). The two other professors at UC Santa Cruz who spoke out against Bruce and Fred before and after my advisor on that same day, were Anthony Aguirre (one of the founders of the FQXi institute mentioned in the How the Hippies Saved Physics video below) and Michael Nauenberg (who is mentioned by name several times in the video below, and was apparently the person who suggested to Fritjoff Capra while he was a postdoc at my school that he write a book mixing quantum mechanics with Eastern mysticism--one of the many things I had no idea about until seeing this video). I know Nauenberg mostly as a crotchety old man who we call "The Santa Cruz Heckler" because he heckles any string theorists or cosmologists who ever give talks, telling them they aren't real scientists and repeatedly asking "what's the physical meaning of this?". I think the one and only occasion where I've ever agreed with anything that's come out of Nauenberg's mouth was when he shot down Bruce and Fred--although I think everyone present would agree that my advisor did a much better job of that. Wikipedia's entry on "quantum mysticism" says that it was primarily Fritjoff Capra's "The Tao of Physics" that started the whole quantum mysticism movement, and got the new age community interested in quantum mechanics--that I was vaguely aware of.
Anyway, I explained to my friend that Fred is just this obnoxious lab manager who wishes he were a real physicist, and Bruce is this kind but really senile old guy who at some point earlier in his career was an atomic physicist, but doesn't understand quantum mechanics (let alone consciousness) any better than Fred. I once watched Bruce debate an undergrad philosophy major about the nature of consciousness in front of an audience of myself and a bunch of undergrad SPS club members, and it was really sad to watch because the undergrad utterly destroyed him, as Bruce didn't know the first thing about consciousness and had all of these silly naive ideas about free will.
After explaining this, he naturally asked me "ok, well yeah... I kind of thought some of the book sounded a little kooky, but I wasn't sure. So who *should* I read if I want to read a really deep book about physics? Who would you recommend?" I thought for only a moment and then said "this is going to sound strange, because I haven't read it, but I think the book I would recommend the most is Leonard Susskind's book The Black Hole War : My Battle With Stephen Hawking to Make the World Safe for Quantum Mechanics. It's funny, I somehow *knew* this was the best popular book on physics out there, even though I hadn't read it. My intuition was that it would be from a combination of things--one, Leonard Susskind is one of the deepest and most intelligent thinkers in physics, and always explains things in a very interesting way that exposes the philosophical importance of the ideas, not just the math behind it. He has razor sharp intellect as well as wit. He also explains things in a very down to earth way, that makes complicated things just make simple sense--he cuts right to the important stuff. Also, when he published that book, he wrote another book called An Introduction to Black Holes, Information, and the String Theory Revolution : The Holographic Universe on the same topic, but including all the math and intended for physicists, and that one I did read and found it outstanding. My impression was that the content was similar, but the Black Hole War was written at a level that anyone should be able to understand, whereas the one I read has a lot of stuff that only a physicist would be able to make sense of.
So, I started listening to The Black Hole War on books on tape yesterday. I've only listened to the prologue and Chapter 1, but to my great delight it appears to be everything I'd hoped it would be and more--the ultimate popular book on physics, that both gets things right and exposes what's interesting and deep about physics without watering it down too much. But the best thing about the book that I hadn't realized is that it tells a lot more of the human story behind it than his other book. So it's not just redundant with what I've already read (so far at least).
The First Chapter of the book is about a series of secret meetings that he attended with Hawking (where the famous battle over black holes known as "The Information Paradox" all began) in the upstairs of the house of a guy named Werner Erhard, who ran an organization known as EST (Erhard Seminar Training) and was filthy rich and loved to invite high profile physicists over to his house to have deep conversations. He mentions 3 or 4 regular attenders including Hawking and himself, Savas Dimopolous (whom I've met a few times, my advisor having introduced us) and--to my surprise--David Finkelstein, whom he mentions twice. I knew that Lenny was friends with my advisor (Tom Banks) and figured he would surely mention him in the book, and I wasn't surprised at all that Dimopolous was in there too, since he works at Stanford with Susskind. But I was not at ALL expecting him to start the book off by mentioning (twice in Chapter 1) David Finkelstein, someone who had an enormous personal impact on my life. It may or may not be an exaggeration to say that taking David Finkelstein's Quantum Relativity class with
ikioi at Georgia Tech in 1998 was what convinced me to major in physics. But it's not at all an exaggeration to say that he's the man who convinced me that Ayn Rand was wrong and to officially renounce my faith in Objectivism, after ikioi and I invited him to give a talk called "Quantum Objectivism" for our Students of Objectivism club and had dinner with him afterwards. Also, the reason I bought the domain name "spoonless.net" in 1999 (which I've owned for the past 12 years) and adopted "spoonless" as my username is about half related to Finkelstein (in particular his antirealist views on quantum mechanics, which I was fascinated by at the time, later departed from, and now have drifted somewhat back towards) and half related to other things.So after getting home and googling for this self help guru's name, Werner Erhard, I found more and more additional connections between people that I had never realized were there. Also, before I get to that, let me mention that Landmark Education (which I've met a lot of people who have been involved with, and were in part the inspiration for a circle of friends I spend a lot of time with, called FreedomCommunity) apparently was a direct spinoff of Erhard Seminar Training. And furthermore, the Church of Scientology launched a campaign against him after he allegedly stole a lot of their methods and incorporated them into his own (http://en.wikipedia.org/wiki/Scientolo
After reeling from that a bit, then the real fun started once I found Jack Sarfatti's final blog entry at his blog "Destiny Matrix":
http://destinymatrix.blogspot.com/
I had never heard of Jack Sarfatti either, but in his blog post he ties a ton of people I've known or heard about all together, which totally blows my mind. Here are some experps from it:
"Both Fred [Alan Wolf] and I got divorced about same time ~ 1971 and we were room mates. I was too young for that job and was bored and wanted adventure which came soon enough from the CIA with the strange events in 1973 at SRI Remote Viewing Project described in my book" [Fred Alan Wolf is one of the main crazy guys interviewed in What the Bleep Do We Know, along with John Hagelin (also crazy) and David Albert (not crazy at all, but sued them for distorting his words). (On a side note, I found a picture of my advisor somewhere online arm in arm with David Albert at a conference they were at together on the Arrow of Time.)]
"My encounter with Dennis Bardens of British Intelligence in 1974: 'Dr Sarfatti, it is my duty to inform you of a psychic war raging across the continents between the Soviet Union and your country and you are to be in the thick of it.'
"The main thing we did was the Esalen Month in Jan 1976 I think that Gary Zukav writes about in Dancing Wu Li Masters. I brought David Finkelstein there and that's how he met Werner Erhard leading to the big est physics conferences described by Lenny Susskind with Feynman, Gell-Mann, Wheeler, Hawking, Coleman, I think Kip Thorne et-al. I had met David at Yeshiva visiting Lenny Susskind. Finkelstein also worked with Ken Shoulders and Hal Puthoff at a company set up by the Fried Chicken guy William Church as a result of the Esalen month.
We had seminars at the facility on Nob Hill with the Rockefeller-Lanier money."
"I asked Werner in the lobby of the Ritz, he in a silly inappropriate casual outfit, with a woman adorer, what he did. He said "I make people happy." I wanted to run and I said in a strong Brooklyn accent, "I think you're an asshole." Werner got up from his chair a big smile, embraced me warmly and said "I am going to give you money." I had no idea about the message of the est-Training being "You're an asshole." Werner thought I was some kind of Guru I guess."
"Yes. I gave Fritjof $1500 that he needed to pay his lawyer for a Green Card. I also brought my then room-mate Gary Zukav to Esalen and wrote all of the rough draft of the physics parts of Wu Li Masters for him and helped him with the editing in later drafts."
"George was a "spook" who managed Tim Leary when Nixon let him out of prison."
"Indeed Nick Herbert's FLASH paper led to the no-cloning theorem so important in quantum computing today."
"Fred Wolf and I were edged out probably because they thought we were too crazy? Finkelstein sort of took over and I was the guy who brought him there in the first place. It was the usual academic shark cut-throat back-stabbing both Fred & I left SDSU for."
"I am cc'ing this to some of the participants who I am still in touch with. Fred Wolf recently spoke to Werner who now lives in London. I also ran into Stan Klein only a few days ago who is doing very interesting brain research with Stapp. I think Fritjof Capra is still in Berkeley and Stan Klein is in touch with him. Unfortunately Tim Leary, George Koopman and Robert Anton Wilson have died. I think Gary Zukav lives on Mount Shasta. You should also talk to David Finkelstein."
It turns out, this whole post is an interview he did a couple years ago with a science historian at MIT named David Kaiser, who was writing a book called "How the Hippies Saved Physics". Here is a lecture he gave at MIT on the book, it sounds really good! And he mentions even more people I know...
http://forum-network.org/lecture/how-hi
After watching this video, lots more became clear to me. He talks about FQXI, which Anthony Agueirre helped found and Garrett Lisi, a personal friend of mine, who used to have an active lj here, was one of the main initial recipients of their funding. Both Jack Sarfatti in his blog and this guy in the video also mention Garrett.
Nick Herbert, whom they both talk about a lot, happens to be another guy whom I have met personally. Actually that's a funny story, I met him in Robert Anton Wilson's apartment, actually I think when we shook hands we were just walking in together.
Sarfatti it seems is clearly one of the crazy guys, similar to the What the Bleep people, but Nick Herbert is sort of borderline. Like Capra, he's kind of halfway crazy, and exaggerates a lot of things, but at least seems like he understands some physics, like Bruce and Fred. But I don't think he has that great of a grasp on it, personally. One thing that annoys me in the video, that I disagree with, is the premise. The main premise seems to be that, since Nick Herbert (one of the "Hippies") was able to get a paper published saying that he thought he could send communications faster than light... and that since that prompted a real physicist to respond by proving that you couldn't, that they contributed greatly to physics. While that may be true in a sense, the way I interpret it is more that everyone knew you couldn't do that, but the fact that a bunch of annoying new agers went to the trouble of trying to claim that you could, this made it worth proving that you couldn't. But it did attract more attention to Quantum Information, which overall is a good thing. He sort of glosses over the fact that what the hippies contributed was just that they were totally wrong.
I found this paper online, which was written a couple years ago by the referee who approved Nick Herbert's paper for publication... defending his decision to do it, since many physicists think it was never worthy of publication...
http://arxiv.org/abs/quant-ph/02050
"Abstract: I was the referee who approved the publication of Nick Herbert's FLASH paper, knowing perfectly well that it was wrong. I explain why my decision was the correct one, and I briefly review the progress to which it led."
"Early in 1981, the editor of Foundations of Physics asked me to be
a referee for a manuscript by Nick Herbert, with title “FLASH —A superluminal communicator based
upon a new kind of measurement.” It was obvious to me that the paper could not be correct, because it
violated the special theory of relativity. However I was sure this was also obvious to the author. Anyway,
nothing in the argument had any relation to relativity, so that the error had to be elsewhere."
(Incidentally, I do think Nick is a very entertaining guy, he's a real fun person to hang out with. I just wouldn't expect him to come up with any interesting ideas in physics. Nor would I ever expect Jack Sarfatti or Fred Alan Wolf to)
Oh, and the How the Hippies Saved Physics guy also talks a lot about Esalen, which is a place various friends of mine have visited, and where some have worked. Apparently lots of these people used to hang out there, and they eventually got Richard Feynman to come. I also think I remember Susskind mentioning that Feynman came to some of those secret meetings at Werner Erhard's house, because there was some story about ordering a Feynman sandwich he tells... where he asks Feynman what a Feynman sandwich would be like and Feynman says "it's like a Susskind sandwich but with less ham." And then Susskind replies "but at least a Susskind sandwich has less baloney." He mentions that that was the only time he remembers one-upping Feynman in terms of wit. I can't remember for sure if this was at Erhard's house but I think so.
At the end of Susskind's first chapter in The Black Hole War, he goes home from the meeting with Hawking where Hawking first told him that he thought information would be completely erased in black holes, and even that information was being erased all of the time in empty space due to microscopic virtual black holes. And he says "as soon as I got back, I went to my friend Tom Banks and we talked about it, and eventually figured out why it bothered us so much... erasing information means increasing entropy, which means you end up producing a lot of heat!" Soon after that, they published a paper arguing that Hawking's proposal violated the laws of thermodynamics, which was the first shot fired in the great war (which Hawking eventually conceded, although not until several decades later--in fact, he conceded it while I was in graduate school, just before I started working with Tom Banks, a couple years before Lenny wrote the book).
