Quote of the Day

"A poet who reads his verse in public may have other nasty habits." - Robert Heinlein

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Who’s Afraid of Friedrich Hayek? - Dissent Magazine

Summary:
Jesse Larner reviewing Hayek's Road to Serfdom. Good critique of central planning. Not as extreme a position as that of some of his followers. Hayek's main concern is human freedom. Not dissimilar to some versions of socialism (even libertarian collectivism). Hayek's limitation is that he only considers one type of socialism (Stalin's). Hayek admits that there are economic circumstances in which market forces cannot deliver the optimum result, and when the state may legitimately intervene. (Published: Winter 2008)


Notes:

• Hayek revered at
  
• American Enterprise Institute
• Cato Institute
• National Review
• Weekly Standard
• book: The Road to Serfdom (1944)
  
• 350,000 sold in US
• Hayek nowhere near as extreme as his ideological descendants
• admits that there are a few rare economic circumstances in which market forces cannot deliver the optimum result, and that when these occur, the state may legitimately intervene
• recognizes such a thing as the social interest and will even endorse some limited redistributionalism
• goes so far as to suggest that the state ensure a minimum standard of living
• idea surely to embarrasses people at Cato
• Hayek concerned with human freedom
• in contrast to many modern conservative intellectuals
• writes with passion against class privilege
• not as rational and irrefutable as the right would have it; often eccentric
  
• makes a powerful and far-ranging critique of state control of economic life in Road to Serfdom
• Keynes on Road:
  
• “it is a grand book. . . . Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”
  
• but followed up his seven famous lines of praise with eighty-four little-known lines in favor of expanded economic planning
• George Orwell on Road:
• “In the negative part of Professor Hayek’s thesis there is a great deal of truth . . . collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of.”
• core of Road is an exploration of why a planned, state-managed economy must tend toward totalitarianism
• Road: Economic planning assumes a social goal at which the plan aims.
  
• But whose goal?
  
• In a society of competing interests—a condition that would describe every human society—any goal, any plan, inevitably favors some interests against others.
  
• Who is to say whether the favored interests are “better” for society as a whole?
• There may be consensus in government, or on a delegated planning board, but this only reflects the consensus of immediately interested parties.
• A complex economy is something no person or institution can understand.
  
• But it can generate a sustainable order, with a rational allocation of resources, as individuals respond to their own circumstances and make choices as consumers and entrepreneurs, signaling the subjective value that they place on goods and capital stock through the price mechanism
• One of Hayek’s most original contributions to economic theory:
• insight that economic systems are based primarily on information rather than resources
• To plan an outcome and to direct economic inputs and outputs toward this outcome is to stifle the emergence of a spontaneous, democratic response to the needs of the individuals who make up the community
• a response that will necessarily have winners and losers
• but will not privilege the vision or depend on the limited information of a governing elite
• furthermore, will encourage further experimentation
• responsibility of a government that fosters individual freedom is
  
• to set up transparent and impartial rules so that the legal reaction to personal choices can be predicted for all, regardless of social station;
  
• to tolerate no privileged access to the law;
  
• to provide security; and
  
• to protect contracts and private property
• so long as doing so does not conflict with the very small set of social assumptions on which there truly is broad consensus
• ensure a minimum standard of living (?)
  
• Hayek disapproved of prebendal institutions that increase the wealth and power of an elite at the expense of other members of the class in whose interests the elite is supposedly working, and of society at large
• whether that elite be composed of
  
• union members,
• holders of exclusive concessions,
• hereditary lords
• recognized that institutions that interfere with the price mechanism encourage relations of patronage.
• Hayek understood at least one very big thing:
  
• that the vision of a perfectible society leads inevitably to the gulag
• human societies are jerry-built structures, rickety towers of ad hoc solutions to unforeseen problems.
  
• their development is evolutionary
• as in biological evolution, they do not have natural end-states
• Comprehensive models of how society should work reject the wisdom of solutions that work and deny the legitimacy of individuals who demonstrate anti-orthodox wisdom
• models from Lenin to Mussolini to Mao to Ho to Castro to Qutb deny the very right to exist of individuals who demonstrate anti-orthodox wisdom

• Hayek makes little distinction between socialism, communism, and collectivism
• the only kind of socialism he considers in Road is state-managed, perfect-society utopianism, in which the direction of the economy and all of its inputs and outputs are planned, with the accompanying political and moral degradation that Hayek demonstrates quite convincingly
• this focus on state-led socialism should not be particularly surprising in 1944
• but: other visions of socialism, and other socialistic traditions, were certainly available to Hayek when he wrote
• libertarian, less top-down approaches
• socialisms of Luxembourg, Kropotkin, Proudhon, many others
• the possibility of nontotalitarian models of social democracy, like those that emerged in Europe after the war
• therein lies limitation of Hayek
• Hayek’s ideological descendants often assume, either sincerely or disingenuously, that in a world very different from that of 1944, socialism by definition still means state control of the economy in the interest of perfecting social relations

• Because they understand very little of the thoughtful left, it is hard for many on the right to acknowledge that as a critique of socialism, Hayek’s ideas are limited rather than devastating
• Hayek doesn’t seem to grasp that human beings can exist both as individuals and as members of a society, without necessarily subordinating them to the needs of an imposed social plan
• although he acknowledges that the state can legitimately serve social needs, he contradictorily views collective benefits as incompatible with individual freedom
• Hayek rejects the very concept of social justice
• for much the same reasons that he rejects the arbitrary valuation of labor
• in Hayek’s view there is no way to put an objective value on a grievance or to weigh it against other claims
• because he locates all responsibility and agency only at the level of the individual, he sees no way in which any claim can be generalized to society
• Hayek’s political philosophy recognizes only negative rights.
  
• Positive fulfillment beyond the most basic needs is a matter of individual striving.

• brief survey will show that there are all kinds of imaginative ways in which libertarian collectivism can coexist with capitalism and markets
• e.g. fishing co-operatives
• investors and crew are paid in shares of the catch
• form of economic organization that is found wherever fishing is pursued as a way of life
• has ancient origins.
• corporate stock ownership plans or the limited employee ownership of companies like Avis or United Airlines
• This is a socialism that is not incompatible with democracy, markets, or liberty.
  
• It is not subject to the perfectionist fallacy
• public disbursements in the social interest don't necessarily start us down a slippery slope to the totalitarian state
• Hayek, in suggestively conflating government spending with government planning, pulls a bit of a sleight of hand in Road.
• Democracy turned out to be a lot stronger than Hayek expected.

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Nassim Nicholas Taleb: the prophet of boom and doom - The Times

Summary:
Interview with Nassim Nicholas Taleb, author of "The Black Swan: The Impact of the Highly Improbable." Problem with probability theory: Fat Tony vs. Dr. John. On buying "out-of-the-money" options: when markets rise, they rise by small amounts, when they fall, they fall dramatically. Mediocristan vs. Extremistan. On banks and failing of Long Term Capital Management. Importance of religion and being ecologically conservative. Investment strategy: 90% in safest government securities, 10% high risk. (Published: 01/06/08)

Notes:

• most economists, and almost all bankers, are subhuman and very, very dangerous
• live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems
• in December lectured bankers at Société Générale
• told them they were sitting on a mountain of risks – a menagerie of black swans
• didn’t believe him
• six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.
• "Clothes matter; they send signals"
• risk management
• facing up to those aspects of randomness about which something can be done
• “Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”
• "Take away religion, and people start believing in nationalism, which has killed far more people."
  
• Religion as way of handling uncertainty
• lowers blood pressure
• thinks religious people take fewer financial risks
• obsessed with probability
• Brooklyn-born Fat Tony and academically inclined Dr John: two of Taleb’s creations
• You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time?
  
• Dr John gives the answer drummed into the heads of every statistic student: 50/50.
  
• Fat Tony says the chances are no more than 1%.
  
• “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”
• chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe.
  
• It is far, far more likely that somebody is cheating.
  
• Fat Tony wins. Dr John is the sucker
• 1985: France, Germany, Japan, Britain and America signed an agreement to push down the value of the dollar
• held options that had cost him almost nothing and that bet on the dollar’s decline
• 1987 – Black Monday
• options were suddently worth a fortune
• became obsessed with buying “out of the money” options
• was sitting on a pile of out-of-the-money eurodollar options
• realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.
• on fall of Long-Term Capital Management
• hedge fund set up in 1994 by, among others, Myron Scholes and Robert C Merton
• joint winners of the 1997 Nobel prize in economics
• had grandest of all possible credentials and used the most sophisticated academic theories of portfolio management
• went bust in 1998 and, because it had positions worth $1.25 trillion outstanding, it almost took the financial system down with it
• modern portfolio theory had not accounted for the black swan, the Russian financial crisis of that year
• Mediocristan vs. Extremistan
• Mediocristan: where early humans lived
• Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students.
• we don’t live there any more.
• Extremistan: world we live in
• created world we don't understand
  
• black swans proliferate, winners tend to take all and the rest get nothing
• our systems are complex but over-efficient
• no redundancy, so a black swan strikes everybody at once
• banking system is the worst of all
• banks make money from two sources
• they take interest on current accounts and charges for services
• this is easy, safe money
• but they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up.
  
• “Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”
• increased economic concentration has raised our vulnerability to natural disasters
• Kobe earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923
• countless other ways in which we have built a world ruled by black swans – some good but mostly bad
• believes in tinkering
• Trial and error will save us from ourselves because they capture benign black swans
• three big inventions of our time: lasers, computers and the internet
• all produced by tinkering and none of them ended up doing what their inventors intended them to do
  all were black swans
• big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes
• good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures
• insulates you from bad black swans and exposes you to the possibility of good ones
• Your smallest investment could go “convex” – explode – and make you rich
• High-tech companies are the best
• The downside risk is low if you get in at the start and the upside very high
• Banks are the worst – all the risk is downside
• Don’t be tempted to play the stock market
• “If people knew the risks they’d never invest.”
• We should be mistrustful of knowledge. It is bad for us.
  
• Give a bookie 10 pieces of information about a race and he’ll pick his horses.
  
• Give him 50 and his picks will be no better, but he will, fatally, be more confident.
• We should be ecologically conservative:
• global warming may or may not be happening but why pollute the planet?
  
• "Taleb's top life tips"
1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
2. Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3. It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
5. Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
6. Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
   
7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
   
8. Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
   
9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
   
10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
    

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Quote of the Day

"Some things have to be believed to be seen." - Ralph Hodgson

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Darwin on my mind - Literary Review of Canada

Summary:

Michael Ruse reviewing "Why Think? Evolution and the Rational Mind" by Ronald de Sousa; thinking is expensive; why think? making choices and the social aspect; Wason test: can't solve simple problems; Plantinga and Darwin's doubt; confidence in our mathematical abilities (March 2008)

Notes:

• most organisms do not think; most organisms certainly not rational; yet they do alright
• rationality not necessarily key to success
• thinking is expensive
• requires big brains; in turns requires lots of protein, "which, outside modern yuppie societies generally means meat"
• Jack Sepkoski: "I see intelligence as just one of a variety of adapations among tetrapods for survival. Running fast in a herd while being as dumb as shit, I think, is a very good adaptation for survival."
• Why do we think?
• Ruse: need to make more choices
• more choices need to be made because humans have moved into realms where things change constantly (food availability, temperature ranges, predator threats,...); also can't go it alone: choices involving working with others
• few offsprings due to cost of producing thinkers; ensuring survival of offspring requires more thinking
• "As we - and, for much of the journey, other higher mammals - went down the path of big brains, we became better able to be thinkers but more dependent on being thinkers"
• selection produced slightly better brains that led to success and so forth
• de Sousa: human thought not like the calculation of a perfect, all-purpose computer
• we think well in situations where thinking well might be of benefit, and not so well when thinking is irrelevant
• e.g. Wason test
• Alvin Plantinga: what counts in evolution is success and not the truth
• so how can we ever be sure of the truth? perhaps none of our thoughts can tell us about reality; perhaps all like beings in a dream world
• "Darwin's doubt": Darwin: "With me the horrid doubt always arises whether the convictions of man's mind, which has been developed from the mind of the lower animals, are of any value or at all trustworthy. Would anyone trust in the convictions of a monkey's mind, if there are any convictions in such a mind?"
• de Sousa
• our mathematical abilities cannot be result of natural selection; mathematics part of our present rather than our evolutionary past;
• "mathematics can uncover aspects of the universe of which neither the usefulness nor even the existence could possibly have been manifested in the Environment of our Evolutionary Adaptations in which the basic function of the brain were being shaped by natural selection"
• hard to see how it works so well (solution of all sorts of technological and scientific problems) if it isn't true
• de Sousa on irrationality
• we sometimes flub even quite simple calculation;
• e.g. probability of having cancer that affects 0.01% of population having been diagnosed using a test with 98% reliability:
• we panic, but probability is less than 0.5%
• "We can work work out the right answers, but it is not easy - and there is a good reason why it is not easy. Human reason is a faculty evolved to help us survive in certain contexts, rather than reach the truth on every occasion, and historically we have rarely been challenged to work things out at such abstract levels."
• Note to self: this sounds much like Sunnstein's talk on worst-case scenarios

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