open Democracy News Analysis - Constant returns, Tony Curzon Price - Comments

trimmerb1234 on "Constant returns"

trimmerb1234 — Thu, 25 Sep 2008 14:04:48 +0100

Excellent informed article. But isnt a major problem that the rewards for poaching are much higher than those for gamekeeping? Couldnt there be a levy on city salaries and especially bonuses to pay for better brighter regulators? How about offering jail sentence reductions for those willing to assist these beefed up regulators. Those who knew the system and its weaknesses so well that they used this to their own advantage. There is another point: the consequences of financial meltdown are so serious - and now so expensive to public finances that they equate to major economic terrorism. So should it not be treated similarly seriously - indeed similarly? Along with data security?

spamlet on "Constant returns"

spamlet — Tue, 23 Sep 2008 19:55:21 +0100

Thanks Tony,

The main Smith quote is actually part of a much longer, closely worded warning that is over a page long and forms the final summing up of Book 1 of Wealth of Nations, with a very clear warning not to trust what we would now call businessmen. It is very tempting just to quote the lot, but here is another taster:

“The plans and projects of the employers of stock regulate and direct all the most important operations of labour, and profit is the end proposed by all those plans and projects. But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”

As to the ‘utopia of no parties’: I do not see why so many otherwise radical thinkers persist in taking the current antidemocratic party system as a given that is unassailable. Party membership is a decidedly minority interest and is declining all the time, while membership across the numerous environmental and conservation groups continues to outnumber them.

And neither do the Charities rules consider political parties to be worthy causes for charitable status. If the activities of parties are not, thus, considered charitable and, hence, for the public good: then it is surely not in the public interest to let them run the country!

I don’t agree that it is the nature of delegation to create the rigid set of parties that have established a leach like hold on the democratic process as they have in the UK; each of which must be totally unified on all topics decreed by the leader; and each of which must be maintained wholly in disagreement with the other! These are parasites: not delegates from the demos.

Yes it is in the nature of delegation for groups of interest to get together to debate particular issues – just as members from different parties may sign up to early day motions even now – but, it should be the natural case that the make up of each group of interest will wax and wane with the debate, before a vote and conclusion; and then new groups of interest will form for the next topic. In fact, a good start down the road to democracy would be to give the EDMs priority over the ‘government’ agenda. (The Government should be all of the elected members: not the PM and his sycophantic chums: ‘supported’ by enforced and antidemocratic whipping and ‘loyalty’.)

With no parties there would always be a clear majority, because members would always be voting from the experience, and perspicacity, that led them to be chosen by their communities in the first place: instead of merely being instructed how to vote as now; and indeed, not even being able to get elected without being a proven loyal party member in the first place! With no parties, if there was no clear majority on any particular point, this would indicate that more investigation was needed before the best course of action could be arrived at. With parties the vote is forced even if it is clear to all bar the leader that it is wrong.

The rigid party system which we have at present is a deliberate imposition to prevent this free trade of ideas and arguments that would otherwise naturally take place. It leaves the majority of the public effectively disenfranchised, and stifles the debate that might otherwise lead to real solutions to the almost unthinkable problems, with which the world is now confronted. This stifling of the free trade of ideas by self serving political parties, is every bit as bad as any stifling of free trade in the world of the economists that would horrify those very same parties!

[High time there was a free trade of ideas in the ‘news’ media too! Interesting to note here, that for the BBC, economics is ‘News’, but science isn’t!]

Like the economic system, the current parties are held in place by their own rigid rules and by a media geared to keep them that way and quick to snap at any ‘dissenting’ members as ‘signs of weakness’. When they are in power, they don’t know what to do with it, yet still fret about holding on to it; and when they are out of power all they can think about is how to get back in. Do they ever really think of the good of the public at all?

Why then do we allow the parties to carry on to infinity, as they continue to promote ‘growth’ to infinity in a finite world?

So, yes, maybe some form of ‘financial activism’ among those that have the resources, would be a positive thing, but it won’t get at the root of the problem. If it spreads the ‘practice of politics’ it will be a disaster as bad as the spread of any other mere religious belief system. Decision making needs to be based on the proper consideration of the science and the truth: not on any political or economic doctrine of the day.

In this the Parties, are clearly unfit for purpose; and, for all our sakes, must go.

(I've made more observations on present day 'economics' and Smith's day here: http://www.opendemocracy.net/article/the-week-that-changed-everything )

Not logged in Lawrence Efana on "Constant returns"

Not logged in Lawrence Efana — Mon, 22 Sep 2008 14:01:46 +0100

No need for apologies please. For UK and elsewhere you could be right, it is about change with human face and we appear to agree on the need for that now that things unfold in extraordinary ways. For the same reason I idealize many a time even about the chances for world government!

opendemocracy on "Constant returns"

opendemocracy — Mon, 22 Sep 2008 13:38:10 +0100

Spamlet -- great Smith quotes! thank you. There is utopia in your "no parties, no special interests" vision --- the nature of delegation is to create these. I think delegation has -- often -- gone too far. That was my call for our collective empowerment through (financial) activism. It won't stop groups or interests in politics --- that cannot be, because there is no perspective from which we are "anyone". But it will spread the practice of politics. This is where Constant really is worth reading seriously. We need politics to enter ordinary decisions as a matter of course to save our liberties.

Lawrence - I agree that there is a new moral discourse here. It is a rediscovery of what we all together do through an understanding of the responsibility of each.

Tony

spamlet on "Constant returns"

spamlet — Mon, 22 Sep 2008 11:23:49 +0100

Apologies Lawrence, as I am finding your comments a bit difficult to interpret, but on the 'way to retracing our steps to democracy' we (In the UK) will need to reform both the media and the parliament.

One measure which might get the ball rolling as it were, might be the setting up of a register of 'conscientious objectors' to voting under the present system. Demands would include outlawing the practice of whipping as a minimum; banning 'party unity' for its stifling of public access to the democratic process, and; PR. If these were not forthcoming, then the public should hold out for a complete removal of the parties from parliament, and their replacement with properly elected and independent public representatives.

Make that register big enough and parties would have a hard time ignoring the 'writing on the wall'.

Not logged in Lawrence Efana on "Constant returns"

Not logged in Lawrence Efana — Mon, 22 Sep 2008 09:27:20 +0100

Heavenly indeed: "free of parties and other interest groups"? 'Human nature' and a mission for anarchy on earth? It must be managed but that probably is if we do not ignore co-existence or call it: fancifulness of tolerance - its limit?] translatable into some form of acceptable system with flexible regulation and control not necessarily hurtful for democracy, but highly supportive of prudence! Couldn't this be framed into a new moral discourse code we might be searching for and processing through education, aimed among others, at restructuring our institutions, values and life-styles?

The reaction is because the world is basically imperfect, derived causally from the historical narrative that the "perfect world" was rejected, left with "toiling" as our lot! Our sorrow is partly because we overestimate ourselves and colour that with increasing sense of individualism, to the detriment of learning quickly while struggling to transcend simultaneously the limits imposed on man. Sounding somewhat philosophical but realistic also, the 'finance-house' drama before us all [not only the US], reminds of how we should retrace our steps and for that, because of respect for democracy we are yet to see and learn.

Lawrence Efana [Finland]

spamlet on "Constant returns"

spamlet — Sat, 20 Sep 2008 18:59:44 +0100

Here is another interesting warning from Adam Smith - what would he have made of our virtual economy I wonder?

"A prince, anxious to maintain his dominions...ought upon this account, to guard, not only against the excessive multiplication of paper money which ruins the very banks which issue it; but even against that multiplication of it which enables them to fill the greater part of the circulation of the country with it." [In 'Money, a branch of the general stock.']

Now what circulates, in all its multitudinous 'billions' and 'trillions,' is infinitely less substantial than thin air! Isn't it strange than when a man fashions his own coins, he is a criminal, but when he conjures money out of the less than thin air garnered by a bank, he's a 'trader'; and so very important that governments must fall fawning at his feet, and sacrifice the public, their real money, and the very fabric of countries to him?!

But the problem of putting this right does not begin with the grass roots. Unfortunately the problem is the virtual government: the capital of capital as it were; the 'root' of these escalating problems, is at the head, not under the ground! The unholy alliance between governments and Smith's 'deceivers and oppressors'.

Governments almost everywhere see their number one task as the pursuit of 'economic growth' (Which in turn demands population growth.). These governments are only virtual, because the only people that are listened to, are those very 'employers of stock' and their magical servants, the economages. They do not govern: they promote - and believe to a man that their overriding duty is to promote - the very thing which is already causing chaos. As Tony pointed out, these virtual world jugglers only know how to keep the illusion going, by throwing ever more virtual balls in the air, in ever more complex and unstable patterns, in order to keep enriching themselves; and they have, as Smith says, on many occasions both deceived and oppressed us lesser, fleshy, beings, to that end. Never the less governments will do anything at all to keep the plutomaniacs happy: and very little if anything, for anyone, or anything else.

Governments and plutomaniacs live in their own infinitely expanding virtual balloon: We must, at long last, turn off the gas and cut the string, before it drags us to our deaths. We need new government, free of parties and other self interest groups, before any grass roots democracy will ever be allowed any part in the regulation of those who play fast and loose with the things on which we all depend.

Not logged in Lawrence Efana on "Constant returns"

Not logged in Lawrence Efana — Fri, 19 Sep 2008 18:20:04 +0100

Obviously in agreement: "economists would need to look at both sides of the equation" - even though in the abstract it could well boil down to the discourse stretching wings across issues of financial prudence, political consciousness and 'blurred' notions of grass-root democracy - else how are we [all] at the same time: "to become our own regular regulators"? Isn't there a 'ghost' behind the latter expression that implicitly negates or reduces its rationality? Excuse me for sensing ambivalence! 'Malthus' like Adam Smith both made a case each, but If grass-root democracy is adapted to interpret the discourse, I am compelled to point at two other useful "after-thoughts" in the present global financial crisis atmosphere, which are respectively: (i) waking-up to define or redefine "grass-root"; (ii) tackling the burden of having to re-educate [it] to appreciate the changing characteristics of what the problem disturbing the sense of prudence are.

Contextually, sadly with the US at center stage, Godfrey Hodgson's article "Metapolitics: American Elections faultline" (Open democracy 18-09-2008, especially page 4 of 4), we might relegate some dimensions of arguments implicit but not that which has to do with the consciousness of the grass-root, to enable detecting the 'real' problem! In all its practicality, 'to become our own regular regulators' has to be a function of continuing to educate peoples about democracy and its processes not the least dangers also.

Lawrence Efana [Finland]

spamlet on "Constant returns"

spamlet — Fri, 19 Sep 2008 16:06:33 +0100

And also:

You had an earlier piece on the global food crisis that provides an interesting comparison:

On this occasion you ask: "how do we de-leverage in such a way that the virtual economy is hit, not the real? "

Now, here you are refering to the money economy, but the same holds for the food economy. Population growth advocates - cornucopians - assume a virtual food economy with an infinitely growing supply, just as your plutomaniacs assume an infinitely growing money supply in their virtual money economy.

Previously you were advocating bailing out the 'speculators in the food economy' - i.e people who have assumed 'funds' (food) will always materialise to 'finance' (feed) a process of infinite growth. But now, you are advocating proper controls on "the unconstrained creation of money by the financial sector--" whereas you shied away from advocating controls on the unconstrained creation of people, that is leading to a much more profound crisis than the one current in the financial sector.

So, to aid the crisis that is the result of 'every man being a knave', and multiplying beyond the limits set by the real local food economy, you advocate leveraging from external sources to set up a virtual one, dependant on infinitely escalating 'leverage'. As the food economy becomes 'over-leveraged', you advocate more leverage (food) to bail out the "knaves" and encourage them to greater excess.

Yet when the 'knave' is playing with virtual money rather than real people, he needs regulating and a good dose of de-leverage.

Crisis? You ain't seen nothing yet!

One day, I do wish, economists would look at both sides of the equation.

Cheers,

spamlet on "Constant returns"

spamlet — Fri, 19 Sep 2008 14:53:45 +0100

Re: 'plutomaniacs':

"The proposal of any new law or regulation of commerce which comes from this order [the employers of stock] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it."

Adam Smith: Wealth of Nations. Warning to us all at the end of book 1.

Rolling in his grave?

Constant returns, Tony Curzon Price

admin — Wed, 17 Sep 2008 19:03:15 +0100

The de-leveraging crisis--or the sub-prime crisis or the debtonation crisis--came about through the interaction of wicked plutophiles, genuinely useful financial innovations and lax, cowardly and confused regulators. It is important to untangle these in order to destroy what was genuinely bad in our financial arrangements. The spread of cheap computing, the theoretical understanding of how to price flexibility--option pricing--and the globalisation of supply and demand for capital set the stage for the growth of the financial sector from the 1980s for the next 25 years. In a world of benevolent, professional bankers, these changes would have been welcomed. However, the world of finance became the global magnet for hordes of semi-quantitative plutomaniacs against whom the partially sighted, ideology-bound regulators had no chance of success.

Globalisation, financial innovation and computing have brought benefits that now, when blame is spread generously, should be remembered. The heart of every financial transaction is an exchange of financial risks. When you sell a house, you want an amount of cash in exchange with a known, certain value. When a bank offers a mortgage, it swaps a known value for the likelihood of a stream of payments. The seller of the house has become financially more secure; the seller of the mortgage has taken on the corresponding risk. Moving risk around has real social value. A manufacturing company in Senzhen with good commercial contacts to corporate America can borrow to expand; it wants to take on risk. A fifty year-old office worker in California, at the height of her earning powers and saving for retirement, may find that an investment in a Senzhen factory is attractive. Globalisation of capital markets--whatever abuse it also permitted--expanded the opportunities for these sorts of re-allocations of risk. There is real social value in doing this--as long as you do it right.

Financial intermediaries can often provide more attractive risk re-allocations than would be possible with direct contracting between lenders and borrowers because they can enjoy the statistical effects of pooling risks. This is the basis of insurance: because things tend not to all go wrong at the same time--because ``sod's law'' is not a law--two mortgages are less risky than one mortgage. Information technology expanded the scope for the discovery of offsetting risk of this sort, and so found ways to ``cancel-out'' uncertainty. There is real social value in doing this, as long as you really do it. Only inveterate gamblers prefer material uncertainty to stability, and they can always be served at the casino. The more material uncertainty can be destroyed through social aggregation of risk, the easier we ought to be able to sleep at night ...as long as we are really doing this. Computers trawling great databases of prices could identify opportunities for cancelling risk on an unprecedented scale.

The development of portfolio theory and option pricing theory by financial economists has opened the way for a greatly increased scope for pooling risks. Even once you have identified uncertainty that can be ``cancelled out'', you need to turn that aggregate into a product that those affected by the uncertainty can buy; and as long as you can assess the price of risk, these become products that those with a collective appetite for risk can supply. So, a retiree might want to swap her accumulated pension fund in exchange for a promise to have her medical care covered, her subsistence needs covered, and a small amount left over for her children. Financial theory now allows such products to be priced and supplied.

In the midst of all this potential to do good came the plutomaniacs and bad regulators. The three forces of good change in finance of the last 25 years--increased opportunities to trade, increased data-processing and increased understanding--could all in themselves justify some degree of increase in the level of leverage. For every pound, euro or dollar of certain value that a financial firm could count on, it could now transform those into more uncertain pounds, euros or dollars of value than in the past. The banking multiplier could increase. Its increase from a traditional value of about 6 to the current value of about 25 is the story of ``debtonation'' that Ann Pettifor has told so well. Even if the forces of good change could justify--an extreme suggestion--a doubling of the rate of leverage, the five-fold increase we have lived through in 20 years can only be explained by the monumental failure to properly guide an invisible hand made weak by the mendacity of many in the financial industries.

As globalisation allowed banks to run rings around national regulators, the Bank for International Settlements transformed itself in the 1980s into a world-wide regulator. All banking institutions need to show consolidated accounts and prove that taking all their operations together, they have sufficient capital to cover ordinary and even extraordinary risks. Banks are required to limit their lending to 8 times their capital, where the value of the capital base is cleverly adjusted for its riskiness. In a world of benevolent bankers, all of them following the rules, these constraints should have worked. The banking money multiplier would have stayed at 8X, a number apparently entirely justified by the good forces for change in finance.

But we know the reality ...Banking ``innovation'' became more concerned with hiding the lending that banks were extending in order to continue to lend a long way beyond the 8 times capital limit. The ``special investment vehicles'' like Granite--the Jersey-based company that Northern Rock set up--existed only to be the repositories of lending that would not be counted against capital by the Bank for International Settlements regulation. Bankers, bonuses based on the volumes of the transactions they performed, had found a way around the spirit of regulation to unconstrained personal gain. Asset price bubbles followed, as the money created by banks chased limited investments. Emerging markets, technology stocks, housing, stock markets, gold, commodities, contemporary art ...anything in vaguely fixed supply--or at least supply slightly more fixed than the unconstrained creation of money by the financial sector--rose in price to absorb the money being created in the cracks of international regulation by the plutomaniacs. We can tell that the crisis still has a way to run from the stellar results of Hirst's last auction.

The crisis we are now going through comes from the fact that the money-creation went into a largely virtual economy. This was not about factories in Senzhen or retirement packages ...most of the growth in money was going to casino chips on which rich-world middle classes became hooked; their appreciating housing assets gave them a sense of righteous enrichment, a reward for who knows what hidden moral virtue they could conjure. The retrenchment today will require de-leveraging from today's absurd 25X to a normal 8X. Two thirds of the debt in the system needs to be eased out.

The dilemma now is this: how do we de-leverage in such a way that the virtual economy is hit, not the real? and how do we protect the real forces for good while cutting off the most destructive tendencies of the plutomaniacs? Regulatory pragmatism is aimed at the first problem now. AIG is too close--or thought to be too close--to the real economy to be allowed to default, while Lehman is sufficiently virtual to need to go. HBOS has strong links to reality--its mortgage business in the UK is tightly related to household savings, and so to the UK economy as a whole--to get nod-through approval to join the stronger balance sheet of Lloyds-TSB. As banker to the real economy and bankrupter of the virtual economy, this regulatory pragmatism is the right approach to the immediate mess.

But what of the longer term problem of good regulation? Can we have our good financial cake without it being forced down our throats like geese prepared for their liver? A solution to a problem usually comes from choosing the right constraints: what is fixed? what can be assumed to be in our choice? It is important to assume that the plutomaniacs will always be with us: financial regulation must assume that the great magnet of money will always disproportionately attract the iron-like sharks. What was true of politics when David Hume recommended that we design constitutions on the assumption that every man be a knave should now, in a world where the market has become mightier than the sword, be applied to financial regulation. 75 years after Hume's advice, Benjamin Constant, in his essay on the Freedom of the Moderns as Compared to that of the Ancients, reminded us that we ought to continue, all of us, to stay involved in politics in order to prevent the return of tyranny:

we should [...never...] surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying!

Today, this advice holds for control over finance. This is where the holders of authority lie in wait for us. Politics today needs to be in the shareholder assembly, as activist investors, as savers and borrowers. We must take control of regulation from the demoralised public servant and help ourselves. Where is your pension invested? Who manages the money? How culpable am I for the use that my savings have been put to? In our pre-occupation for the freedom of the moderns, for our cherished ability to get along with our private concerns, we have left a gaping opportunity for plutomania to operate and create havoc. Regulation is too important to be left to the conflicted civill servants.

We need all to become our own regular regulators.

tony curzon price 2008-09-19