Part of the problem with the Pikettian “Investment Event Horizon”, which I articulated in an earlier post, is the idea that we can blindly presume that a statistical trend will continue forever without carefully considering whether the extrapolation is at all plausible.
In that spirit, a friend of mine analyzed the growth of smartphone screens, which began a few years ago at around a diagonal measurement of 3 inches, then moved to 4 inches, and have recently been going past 5 inches. He has demonstrated, by extrapolation, that by the year 2034 smart phones will be 80 inches across!
Not convinced? See his graphs for yourself! Anyone can see that the trend is inexorable. Nothing could possibly interrupt it!
Now, as it happens, Piketty’s data appear to have been incorrect, but note, yet again, that even if the data had been correct, that does not make the underlying claim any less risible.
In the United States, we’re in the midst of a giant scandal about just how bad the Veterans Administration hospital system is.
For those unfamiliar with it, the US maintains a mini-NHS just for former soldiers, and it appears that it has both been undergoing a systematic meltdown and systematically falsifying records that would have allowed outsiders to learn of the situation.
As it happens, Paul Krugman, everyone’s favorite economist, effusively praised the VA hospital network as a model for future American health care in 2006, claiming it demonstrated that state operation of the health system was to be wished for rather than feared. Quoting his New York Times Column:
I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system–it runs the hospitals and clinics.
No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.
The discovery of a column or speech by Professor Krugman that seems embarrassing in the light of later discoveries has become quite routine. (see, for example, his effusive praise for the quality of Thomas Piketty’s data and the inability of opponents to refute it at a point where “Capital in the 21st Century” had been in public hands for mere days. There are numerous other examples to be had.)
What is not routine, sadly, is for Professor Krugman to ever acknowledge such a mistake. I am unaware of an instance of his admitting to an error.
If you are ever puzzled by the phrases “a priori” or “a priorism”, in connection in particular with the writings of Ludwig von Mises, and would appreciate becoming less puzzled, then let me now recommend to you a recent essay by Detlev Schlichter entitled The a priori method in economics – In defence of Ludwig von Mises.
Perry Metzger’s recent demolition job, here at Samizdata, of Thomas Piketty, made me think of Schlichter’s essay. What Perry Metzger was giving us was surely a perfect example of the a priori way of thinking about economic events and economic evidence.
Economic events, even if alluded to with pertinent statistics, can only be said to make sense once you have made sense of the human judgements that gave rise to these events. Future events cannot be predicted merely by looking at numbers and at graphs and then guessing at where these numbers seem to be heading. The economic future is made of human judgements, and to get a handle on what that future will most probably be like, you have to interpret that future in terms of rational human judgements and reactions.
Piketty points towards what Metzger names and shames as an “Investment Event Horizon”, a world in which investment is done far too much, with all other economic activities being curtailed in the service of this one obsession. Piketty says there must be political action to impose rationality on such otherwise irrational events. Metzger says that it is Piketty who is being irrational. Piketty’s interpretation of his supposedly supportive statistics is a perfect example of the kind of thing that Detlev Schlichter is criticising.
In general, says Schichter:
… We can neither verify nor falsify the a priori laws of economics … Even more important (and potentially disappointing to those who derive their expectations as to what science is all about from the natural sciences) we cannot derive the laws of economics from mere observation, and that includes even the most extensive collection of data and the most elaborate and sophisticated analysis of it. The economists who claim to do this are either confused or simply play to the gallery (Piketty?) and are frequently not really proper economists, although some of them may even win Nobel Prizes. This may sound harsh but I believe it is true. The reasons for why we must fail to achieve these two things (test/verify/falsify economic laws and discover economic laws through statistics) are fundamental and I will give them below. Of course, if economics were a natural science, if it were an empirical science, these two things would not only be possible, they would be essential to its modus operandi as a science. Crucially, economics is not an empirical science in the sense that the natural sciences are.
This is in fact the reason why no amount of data mining and statistical analysis will ever settle disputes in the field of economics. Keynesian economists will forever quote historical data from around the Great Depression as evidence of their crisis theories and policy recommendations, just as those who subscribe to monetary explanations of the business cycle (as we “Austrians” do) will forever cite the same or similar data in support of their theories. It is a common complaint that anything can be proven with statistics, and in the field of economic debate this seems to be true to a large degree. (I subscribe to the “Austrian” explanation of economic crises not because it fits the data better but because it fits the principles of economics, the laws of economics that allow us to analyse the cycle in the first place. A detailed analysis of Keynesian theories leads to conflicts and mismatches with some key economic principles. This makes this theory much less convincing.)
I consider that last bit there in particular, the final three sentences in the brackets, to be SQotD-worthy.
In the first of the two paragraphs quoted above, Schlichter actually mentions Piketty, albeit with his name between brackets and with a tentative question mark attached, merely as a possible example of the kind of thinker he is criticising. But if Metzger is right about Piketty (and I would be amazed if anyone is able persuasively to show him not to be) then that question mark can be dispensed with.
The intellectually corrupt Karl Marx, having promised his publisher a proof of impending proletarian revolution caused in the meantime by proletarian immiseration, then felt obliged to fiddle his numbers to prove that things were going from bad to worse for the nineteenth century proletariat rather than from bad to better. (Metzger might describe Marx’s yearned-for revolution as something like a “Discontent Event Horizon”.) The Piketty story has the look to me of a farcical rerun of that intellectually sordid Marx episode. (On the subject of the bad faith of Karl Marx, I recommend the late and much missed Antony Flew’s 1991 Free Inquiry/Libertarian Alliance article entitled (by the LA) KARL MARX WAS NOT A SOCIAL SCIENTIST (the LA likewise subtracted a question mark). Scroll down to where it says “FALSEHOODS OF IMMISERATION”, on page 5.)
But it isn’t just that Piketty’s numbers are wrong, although it would seem certain that they are. It is, as Metzger points out, that even if Piketty’s numbers were correct, Piketty’s understanding of what he believes they must be pointing to is defective.
Which just goes to show that if you come to a big pile of economic statistics with some a priori principles that are wrong, because they don’t make sense, then you cannot hope to make any sense of the statistics.
Piketty would presumably say that he is not doing this, merely letting the statistics speak for themselves. But neither can you make any sense of a pile of economic statistics if you expect those statistics to tell you everything you want to learn.
I met Detlev Schlichter earlier this week, and he told me that he had not then read Perry Metzger’s posting. I recommended to him that he might particularly enjoy it.
An addendum to the earlier post on Thomas Piketty’s “Capital in the 21st Century”:
As was originally pointed out yesterday by Alisa, the Financial Times attempted to verify the data presented by Piketty in his book, and failed to be able to reproduce it.
They found that the data, as presented, contained (to say the least) substantial inaccuracies. More bluntly, if the correct figures from the sources he cites are used, and the calculations are performed correctly, the effects he claims to describe vanish entirely.
The Financial Times has now published two articles on the subject, but I would prefer to draw people’s attention to the blog post by Chris Giles that discusses the matter in full detail. It is absolutely worth reading, especially as Piketty’s reply to the FT on the matter is breezy and entirely non-substantive, addressing none of the points brought up by Giles.
There were hints of data problems even before my own earlier blog post on this matter. I will continue to assert that even were the data correct, it would make no real difference, as Piketty’s conclusions are absurd. However, it is of significant interest to know that his objective claims about the data are untrue as well.
One wonders why Professor Piketty chose to first publish his ideas in a popular account rather than in academic journals, where peer review might have caught these problems earlier. Perhaps then, however, we would not have experienced the treat of Paul Krugman explaining to us that no real counterargument exists to Piketty’s claims. Quoting Professor Krugman only a month ago:
The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis
Note that Professor Krugman wrote this mere days after the book even became available to most readers, long before it could be expected that anyone could have double-checked the data or formulated a coherent response, and long before any but the swiftest of readers could have been expected to digest the contents.
I recommend that connoisseurs of schadenfreude read all of Professor Krugman’s writings in The New York Times on the subject of Piketty. They are, especially in the light of the emerging news, a rare treat.
About a month ago, I was at the Institute of Economic Affairs to hear a talk given by Antoine Clarke to the End of the World Club. The audience was larger than usual, and of a very high quality. It listened, fascinated and engrossed, and with some rueful laughter at the intense relevance of a seemingly rather obscure slice of history to our own times.
The talk was about French investment, private but egged on by French politicians for their own foreign policy reasons, in pre-revolutionary Russia. This investment was huge, and for a while it provided a healthy income to French savers, by French standards. But then, because of events which the French media of the time somehow neglected to inform their readers about, it all started to go wrong, and wronger and wronger, and then of course very wrong indeed. Collusion and corruption on a huge scale among and between politicians, bankers and journalists is not, said Antoine, anything new.
Antoine has now gathered his spoken thoughts from that night into a blog posting at the Cobden Centre.
The first Russian bonds sold in France were in 1867 to finance a railroad. Others followed, notably in 1888. At this point the French government decided on a policy of alliance with Russia and the encouragement of French savers to invest in Russian infrastructure. From 1887 to 1913, 3.5% of the French Gross National Product is invested in Russia alone. This amounted to a quarter of all foreign investment by French private citizens. That’s a savings ratio (14% in external investment alone) we wouldn’t mind seeing in the UK today!
A massive media campaign promoting Russia as a future economic giant (a bit like China in recent years) was pushed by politicians. Meanwhile French banks found they could make enormous amounts of commission from Russian bonds: in this period, the Credit Lyonnais makes 30% of its profits from its commission for selling the bonds.
In 1897, the ruble is linked to gold. The French government guarantees its citizens against any default. The Paris Stock Exchange takes listings for, among others: Banque russo-asiatique, la Banque de commerce de Sibérie, les usines Stoll, les Wagons de Petrograd.
The first signs of trouble come in 1905, with the post-Russo-Japanese War revolution. A provisional government announced a default of foreign bonds, but this isn’t reported in the French mainstream media or the French banks that continue to sell (mis-sell?).
During the First World War, the French government issued zero interest bonds to cover the Russian government’s loan repayment, with an agreement to sort out the problem after the war. However, in December 1917, Lenin announced the repudiation of Tsarist debts.
Boom, bust. And surprise surprise, French governments of the twentieth century were neither willing nor able to provide anything like the kind of compensation for disappointed French savers that had earlier been promised.
Antoine Clarke is fluently English thanks to his English father and fluently French thanks to his French mother, and he has lived and worked in both countries. As long as I have known him I have urged him to make maximum use of this bilingualism, in connecting us Anglo libertarians to French stories and writings, and vice versa. This talk and his subsequent written version of it is a perfect example of the sort of thing I had in mind, and I thank and congratulate him for it. How many non-French libertarians already knew this story? Some, certainly, a bit, but certainly not me.
In Douglas Adams famous non-fiction series on galactic economic history, “The Hitchhiker’s Guide to the Galaxy”, we are presented with a description of the tragedy of the planet Frogstar B.
On Frogstar B, for a time shoe production increased faster than the rate of overall economic growth. As a result, with time, shoe production became a larger and larger fraction of the economy, until finally the Shoe Event Horizon was hit, at which point nothing but shoes could be manufactured, and lacking any other goods or services, their civilization collapsed.
Thomas Piketty’s “Capital in the Twenty-First Century” describes a similar tragedy that lies inevitably in our future, the point at which the only economic activity left is investment, all money is held by a tiny minority of wealthy people, and our civilization permanently ends.
Will we be wise enough to learn from the people of Frogstar B, and place a heavy tax on capital before our doom is reached?
I hope not, because of course Douglas Adams was writing comedy, not an economic history. Sadly, Piketty appears not to be a parodist, and presents the claim, in all seriousness, that something like a Shoe Event Horizon, in this case the Investment Event Horizon, could actually happen.
Normally, I would ignore such a book, but numerous commentators (all of whom, by strange coincidence, were already enthralled by the idea of expansions state power) have responded to Piketty’s call for heavy wealth and income taxation with rapturous reviews, driving Piketty’s work to the center of much of our current political discussion.
It is therefore, sadly, our duty to seriously to consider his arguments and the effects of his proposed remedies…
→ Continue reading: Piketty and the Shoe Event Horizon
Swiss voters reject plan to establish world’s highest minimum wage
Swiss voters have rejected a proposal to create what would have been the world’s highest minimum wage after siding with the government and business leaders in a referendum.
That should read “…after siding with the government, business leaders, and those Swiss people who could least afford to be unemployed.”
The plan, which would have pushed up the basic annual salary for a 35-hour week to £27,000, was rejected by 75% of voters. It would have required employers to pay workers a minimum of 22 Swiss francs (£14.66) an hour.
Government ministers opposed the proposal, made by the Swiss Federation of Trade Unions and supported by the Socialist and Green parties, arguing that it would put smaller companies out of business.
Fortunately for some of the poorest Swiss people, their so-called protectors overreached themselves.
If I emerge from the front door of my block of flats, but then realise that I have forgotten to bring my camera with me, then, unless I am in an extreme hurry, I turn around, go back up the five flights of stairs to my home, and get my camera. I cannot bear to be out and about in London without it, being a ever-more voracious photographer of whatever I see on my perambulations that interests me, and that’s more and more, the more I think of different interesting things to keep track of.
Plus, I just know that if I am not careful in this way, then the one day when I do not have my camera with me will be the exact day that an Airbus 380 on its way into Heathrow gets into trouble so serious that it is visible even to me, and plummets down into central London.
One of the things I like to photograph is the front pages of newspapers, because of their often amusing or arresting headlines. I mostly do this in the shop where I often buy my monthly copies of the Gramophone and the BBC Music Magazine (by “music” this magazine means classical music) and my weekly copies of the Radio Times, so the proprietor doesn’t mind me photographing other things. He knows that I am not going to buy any of these newspapers, but that I might be about to buy something else, and that I regularly do, even if maybe not on that particular day.
And, I take a lot of other photographs, of such things as cranes, bridges, Big Things, roof clutter, signs and notices, and other digital photographers, especially when they are engaged in photographing such things themselves, or in photographing themselves.
All of which is my explanation of why I took the photo below (on March 14th 2014) but then forgot about it, until I went trawling through my photo-archives seeking something else entirely:
I couldn’t find that exact story on the www, but here is the Evening Standard version of the same thing.
For me, this is always an interesting moment in the see-saw that is now British politics, between regimes which contrive as much government as the voters feel they can afford and regimes which unleash more government than the voters feel they can afford. (The option of having less government than the voters feel they can afford, is not, alas, considered worth offering.)
I cannot remember to the nearest year when the Blair/Brown regime was reported as having pushed public sector pay above this same mark, contriving a country in which public sector workers were, on average, reported to be getting more than private sector workers, but I do remember noticing that moment, and thinking it of some significance.
And this latest little tilt in the balance between production and predation strikes me as significant also, and worth noting here even if the announcement happened a couple of months ago. Just for now, for the time being (or so it says in the newspapers): production gets you better wages than predation. Good.
I know, I know. As good news comes, this is pretty small stuff. After all, even this feeble milestone took them four years to get past. As “austerity” goes, it is very mild indeed. But it is good news, I think. And I particularly enjoy being told it by a newspaper which so obviously disapproves of the story that it is telling.
Japan is currently in the process of monetising its vast debt (in plain English, printing money). To get some scale of the issue, check out this following news report from the Japan Times.
Japan’s national debt hit a record-high ¥1.025 quadrillion at the end of March, up ¥33 trillion from a year earlier, the Finance Ministry said on Friday. The central government debt, which increased ¥7 trillion from the end of December last year, kept rising mainly due to ballooning social security costs in line with the aging population. The balance of government bonds, financing bills and other borrowings crossed the ¥1 quadrillion mark for the first time ever at the end of June 2013.
Here is a definition of what is a Quadrillion. Even at the dollar-yen exchange rate of one dollar buying 101 yen, this is a scary, but also barely comprehensible, sum of money. That leads me to the view that the public no longer can really get to grips with how massive debt, both in funded and unfunded, forms is, and indeed with the very notion that a lot of this debt is not even “on the balance sheet”.
Speaking in this video, Steve Baker makes a point that cannot be made too often:
It’s a crazy thing. In most price systems or most parts of the economy, people understand that it’s wrong to plan prices. So here we are, we’ve had chaos in the credit markets, and the credit markets are centrally planned by a cooperating international network of central banks, committees of planners, who deliberately alter the height of interest rates. And we don’t make the connection that central planning causes chaos. And it’s just a really simple thing, and it’s true in money and banking and it’s true in everything else.
Making our case on financial matters can get difficult, because it can quickly get bogged down in arcane detail. Talking about the interest rate as a politically imposed price works well, because the idea is so clear and so straightforward.
Baker has just been voted onto the Treasury Select Committee. I know very little of the inner workings of Britain’s Parliament, but those who know better about such things I tell me that this is a very big deal. The Guido Fawkes blog certainly thought this circumstance worth a passing mention. This man is making headway.
When I first heard the newly elected Baker talking about what he hoped to accomplish, he sometimes sounded like he thought that the Keynesian/Quantitative Easing door was so rotten that it might only need a few good kicks to be destroyed. Well, hope springs eternal and this door was and is very rotten indeed, but it is also very powerfully defended. Baker now talks like a man who is definitely in for the long fight. Good.
Some of these claims are false. Some reveal more truth than the writers intended:
Lowest labour cost in Asia.
Highly qualified, loyal and motivated personnel. Education, housing and health service is provided free to all citizens. As opposed to other Asian countries, worker’s will not abandon their positions for higher salaries once they are trained.
Lowest taxes scheme in Asia. Especially for high-tech factories. Typical tax exemption for the first two years.
No middle agents. All business made directly with the government, state-owned companies.
Stable. A government with solid security and very stable political system, without corruption.
Full diplomatic relations with most EU members and rest of countries.
New market. Many areas of business and exclusive distribution of products (sole-distribution).
Transparant legal work. Legal procedures, intellectual rights, patents and warranties for investors settled.
“Saving is mostly just delayed consumption, as generations of economists have taught, and the only way for capital to grow exactly at the interest rate is for nobody to consume it. Every bit of consumption pushes down the growth rate of capital.”
Garrett Jones, who has written a gently devastating review of a much-heralded book, Capital in the 21st Century, by someone called Thomas Piketty. The reason it is worth drawing attention to it is that this is the sort of book that you just know is going to get bandied about in the usual quarters as a source of supposed wisdom, when in fact its central contention is based on sand. In some ways, the claim that the rich get so proportionately rich that they gobble up the rest of us, so to speak, is hardly a new assertion. Piketty has repackaged it and added in new supposed facts to make the case.
Over to Jones:
There’s an extra reason to think that capital isn’t going to permanently grow at a faster rate than the overall economy: Piketty says it won’t. He places great weight on the mainstream economic idea that in the long run the natural tendency of market economies is for capital and the economy to both grow at the same rate, whatever that rate turns out to be. That “twin growth rate” might be high if population and technology are advancing quickly, or it might be low if both are in the doldrums, but there’s no inherent tendency for capital to outpace the economy forever, even when Piketty’s “central contradiction” of high interest rates holds.
The reason is simple. If the first machine is more productive than the second (i.e., diminishing returns), and if machines wear out and fall apart at a fairly predictable rate—a depreciation rate, in accounting-speak—then it’s a safe bet that in the long run capital and the economy will grow at about the same rate. Double the machines mean double the machines wearing out, so at some point you have so many machines (and houses and outdated software and office buildings) wearing out each year that a nation spends an enormous economic effort just replacing them. And of course if interest rates are high, business owners look for alternatives to capital (such as workers); private demand for capital thus shrinks. So growing replacement costs and the quest for cheaper alternatives both make it hard to imagine capital growing as far as the eye can see. I’ll spare you the math, but it’s getting harder all the time to see a central contradiction.
And then there is this paragraph, containing a nice little nugget:
But while Piketty’s contradiction is less an iron law and more a chalkboard speculation, there’s still plenty of room for class warfare in our future. A final way to see if capitalists are going to exercise unprecedented influence in the economy is to see whether their share of the economy is at unprecedented levels. Here, Piketty’s arduous historical research pays off. For the two countries for which he has data going back more than a century—Britain and France—the answer is clear: Capitalists are claiming a substantially smaller share of the economic pie today than they did in the mid-19th century. Back then capital income was a bit more than 40 percent of total national income. Now it’s a bit under 30 percent. So if capitalists—savers, landowners, entrepreneurs, and all the rest—are going to become a bigger deal in the future, they’ve got a long way to go before they’re at 19th-century levels. (Emphasis added to original.)
The author is fair in pointing out that there are useful insights in the book, although given that its central contention appears to be a crock, that is not a lot of praise.