Nine bad ways of thinking

Logic is the screwdriver of thought. It’s good for solving precise problems, of which there’s more lately, but human thinking through the centuries has developed a much wider set of tools.

Accordingly, here’s some common ways to think poorly. These are not logical fallacies, but broader ways of getting things wrong.

False shortcuts
A shortcut is when you have a large problem to solve, like evaluate many possibilities or consider many factors, and as you try to abstract it in your head you think “X has to have that relationship to Y so the answer can’t be over there”. For example you think two ways are equivalent, or one choice is no better than the other, so there’s no point exploring some part of the space. Well, when you get that abstraction wrong it’s a false shortcut and you make mistakes. Happens to me all the time.

Category arguments
Arguing that X is a Y, or questioning whether X is a real Y, is almost never a helpful philosophical method. There are well meaning situations when we’re trying to be inclusive, but more often than not it’s an attempt to exclude someone for not being a “real” member of a group. It also carries the suspicion of frame shifting. What is it about Y (the frame) that you want to pin on X (the individual) and is that helpful? Could you deal with the question at hand universally, or individually?

Baseline calibration
Making choices is hard. We’re used to ranking alternatives among each other, but do we consider how much difference the choice makes overall? When we scale the options with baseline importance, the difference may be tiny. Like this thing is better than that thing, but how much difference is a thing going to make to my life or my happiness? People make this mistake with money and buy things that are too cheap or too expensive. It’s also in business, politics, and everywhere.

Learnt constraints
A corollary to the false shortcut is when you have a real constraint, such as X isn’t practical, or person Y would never have it, and that used to be true but the constraint isn’t there any more; because you changed, the times changed, or something else. A learnt constraint is the miserable condition when you’ve excluded some possibilities without noticing the constraint isn’t actually there. It holds back people, and it’s also why innovation is difficult.

Taking people at face value
To take people at face value is to process what they say and not why they say it. For example “how is Claire?” means I want information about Claire but also signals that I care about her, or I may be trying to show that I’m a caring person, or feeling unease about something that happened with Claire in the past. Here it’s obvious that there’s a social subtext, but all speech carries subtext all the time. The proper way to parse statement S is to think “Person X is telling me S, and what may be going on in X’s brain to say that?”. Men are especially clumsy with subtext and women better at detecting it. I hope AI is female.

Apparently you’re supposed to take people at face value to avoid the ad hominem attack. That’s nonsense. Ad hominem is to say the witness is a slut. Face value is to ignore that the witness has material interests. An example where the question is irrelevant is to say the lawyer is defending the accused because they’re the lawyer. Of course in trusted situations we can take people at face value, but not all the time.

Toxic topics
One of the worst way to have moral arguments is to bring up examples that make people altogether uncomfortable or unwilling to defend a side. Think of the children, the Nazis, the latest atrocity. That’s obviously prone to manipulation. It also produces a toxic debate between thick-skinned people as those with higher levels of empathy, and often the victims, are driven out. To deal with these issues create a safe space, take good time, focus on patterns rather than specifics, and frequently affirm shared principles.

Wanting to be right
A great way to be wrong is to care about being right, in other words to be emotionally invested in the ideas you already have. You’re likely to think deeply to yourself, avoid sharing or exposing your true beliefs, and seek confirming evidence and like-minded people. In fact being wrong has almost the same symptoms as being intelligent, and there’s no shortage of smart but misguided people. The mistake is valuing thought over experiment.

The right way to be right is to test your ideas by convincing others, applying in practice, or comparing expectations with facts. Drop the ideas that don’t work, that’s the hard part. Then take in some new ideas, combine, and repeat. Intelligence is an evolutionary process, not a mathematical one. The price of being right is you have to face being wrong often, and you have no choice over what you’re right about.

Classical thinking
A less common error is to try to grasp the objective truth about some matter that’s inaccessible. Is this person guilty or good? What transpired behind closed doors? What’s in X’s mind? Well, you don’t know. It’s like quantum mechanics. You can’t probe the truth and all you can do is maintain your knowledge in a superposition of states consistent with the evidence. Person X could be trustworthy or not. The error is not to get a wrong outcome, it’s to think classically that they are one way. Western fiction is classical and Asian cultures understand superposition, it seems.

The unitary intelligence
People don’t interact with the world and with others rationally. We interact, first, emotionally: Do I like this person, these ideas, this situation? When we perceive a new thing we ask all the ideas in our head what they think of it. If our ideas mostly approve, we admit the new information or new argument. Otherwise we exclude it. If our existing ideas rebel, we exclude it violently. Wanting to value facts, question assumptions, or entertain something new are also ideas we might have. They play a big part in what we admit.

We’re not a unitary intelligence, we’re a forum of ideas. The reason your arguments with religious people don’t work is you present ideas that they (their other ideas) don’t like and they don’t carry the ideas of openness or objectivity as strongly as you do. Or they carry only openness and get seduced by quack theories. Once you see people as a forum of ideas it affects discourse and also ethics. Do you write off people or try to get their better ideas to prevail?

 

European conceptions

“The EU has brought peace to Europe”

The theory here is that rival Capitalism causes war, and that’s true but no longer relevant. Moral revulsion and nuclear weapons made a repeat of WW2 unpalatable, while rapidly advancing technology and the politics of the Cold War aligned all of Capitalism into one block. It’s more accurate to say that the EU was an adaptation to peace and technology than that it was a political nudge to stop the French and Germans from fighting. Yes the EU is an architecture for peace, but it’s more a consequence than a cause.

Also as an aside, the EUs anti-war credentials are disappointing. We’ve had war in Europe, in Yugoslavia and Ukraine, and the EUs misguided diplomacy did more to hasten these than to stop them. The EU did nothing to discourage American interventions that destroyed Iraq, Libya, and Syria and only dealt with the migration “problem” as if it was a natural disaster. Now that Capitalism is splitting into rival camps, a result of failing to accept Russia and China as equals, the EU is once again introspective and silent.

“The EU creates shared prosperity”

In many ways an open, peaceful, high technology environment can’t fail to do that, so we have to judge how the EU’s achieves better or worse outcomes than plain economics. Up until the 90s, Europe’s strong welfare states and “four freedoms” scored pretty well. It looked like the EU was set to emulate the Nordic ideal at a larger scale.

But since Maastricht the EU went neoliberal and focused on competition, inside societies and between regions. The Eurozone was set up as a structure that generates winners and losers. It’s a zone with free trade, a fixed gold-like currency, and no shared taxation or welfare systems. This benefits export economies that accumulate all the money, and punishes weker deficit regions that end up gradually stripped of their assets.

There are secondary effects too. A shared currency allows the winners to accumulate bigger surpluses and the losers bigger deficits than they could otherwise. The Euro is sort of guaranteed, but not entirely, leaving just enough risk to cause capital flight from poor to rich areas, and there’s a brain drain in the same direction. Although the rules don’t say “money shall flow from the periphery to the industrial core” the rules ensure that this happens.

“The EU safeguards democracy”

In the early days the EU was a strong modernizing force, especially for peripheral states like Ireland, Spain, or Greece that were struggling to reform their democratic institutions, civil, and family law. There’s a strong sense among their populations of never going back.

However look at the EU now: France has a severe exclusion problem and every few years all the other parties have to ally to prevent a fascist becoming president. Hungary and Poland have nationalist authoritarian leaders. Austria has a far right leader every other term. Italy has far right populist splinter groups. Greece had to choose between the neo-nazis and the idealistic far left, and thankfully we chose well. In Germany and Sweden the elites claim to be in control but hatred simmers underneath. The Brexit faction in the UK is a mere nuisance by comparison.

Nationalism and fascism aren’t like an infectious disease of bad ideology that you cure with an antibiotic of truth. They’re more like an unhealthy diet of inequality, austerity, and lack of prospects subdued by the liquor of a tabloid press. As long as the EU follows a neoliberal path of increasing inequality and “managing” dissent the forces of hatred will persist.

I’m fed up of hearing the liberal middle class, people like me, cry that politics is turning to the right, that the working class is seduced by hateful demagogues, or that people dared to vote Brexit, while that same middle class can’t stomach the left of Corbyn, Podemos, or Varoufakis (or Sanders, Warren, Ocasio-Cortez) claiming that they’re unelectable or too dangerous or indeed “populists” themselves. Well the writing’s on the wall. The longer the middle class clings to a vision of privileged centrism that collapsed in 2008, the more we’ll be handing victories to the merchants of chaos.

GDPR

The GDPR is now the law across Europe. I don’t like it. I think it’s seriously misguided.

It gives me rights and freedoms that I don’t want or care about. Viscerally as a human I’m not concerned what data others have about me. I don’t presume to know or change it, any more than I could reach into their minds and change their thoughts. If some evil magician gave me that power, I would recoil in horror.

I’m now uselessly informed of every way businesses use data. I can’t read a privacy statement any more. Can you? I can withdraw consent, but the other side can withdraw the service or whatever is their side of the deal. The law doesn’t give me anonymity, or discretion, consumer rights, or anything that I care about.

CCTV is everywhere. The phone company tracks me and my calls are logged. My provider knows where I go on the internet. The law does nothing whatsoever to stop state surveillance. It’s privacy theater.

Abusing the law will be fun. Every time I buy something firms ask for my details. I can immediately serve them a notice to erase the data or face millions in fines. I’m sure it’ll be great for European businesses if everyone does that.

Global firms may decide it’s not worth the risk and cut their services from us. Suddenly I face discrimination because of my citizenship, and there’s nothing I can do about it. Good job!

It’s massive jurisdictional overreach and hugely intrusive to enforce. So is copyright and other “worthy” censorship laws, but we need fewer of these not more.

Terrible legislation. Misguided, and I think miss-sold. The GDPR is last century politics, fighting the STASI, or big bad Google whom citizens don’t want fought on their behalf.

The two sensible choices

There are two sensible and realistic choices for solving the Euro crisis. The sensible and realistic choices are:

  • Surplus areas like Germany give deficit areas like Greece free money, indefinitely, or,
  • Weak economies like Greece and Spain leave the Eurozone.

These really are the sensible and realistic choices. You need one of these if you want roughly equal purchasing power across the Eurozone. Otherwise, money will flow from unproductive deficit areas to productive surplus areas, people in surplus countries will get steadily richer, people in deficit countries will get continually poorer, and eventually this will come to a head by revolt or other radical means.

Free money recycles this flow, exchange rates stop it. Economically the first is better because more flow of goods and services and money turns the economy forward and makes everyone consume more in aggregate. The latter choice aims for fairness, sacrificing total volume of trade and industry in the process.

Right now we’re still discussing the free money idea. Free money could be given as tax-and-transfer grants like most states do internally, as endless monetary expansion like the US, or by recurrent debt default and restructuring. The only advantage of the third option is it makes a policy look like an accident.

If free money won’t fly, leaving the Eurozone is the choice. Greece should have left the Eurozone… any time from 2001 till tonight would be good. Cynics would say stay until 2011 while the free money vision of Europe looked ascendant, but certainly Greece should have dropped after that. Greece should leave now.

Dropping out of the currency union has only advantages for the weaker economy. The disadvantages for the stronger economy are that it stops the flow of funds from the poor to the rich and removes demand for their exports. Germany selfishly wants the Euro. Greeks are stupidly attached to it because they equate the Euro with the EU and three decades of progress.

There are also a couple of totally fantastical choices that people might believe would fix the Eurozone, but they won’t work.

  • Economies like Germany and Greece become similarly productive any time soon.
  • Regions fix trade imbalances through fiscal discipline and austerity.

These are myths. It would be great if Greece was a bit more prosperous like Germany and that would take a venture investment ethos, congenial labour relations, an orientation to global markets, nourishing a boutique economy, branding, IP rights, stability and democracy. Well, at least Greece has democracy.

Different economies may become more alike, but they won’t become the same. The Mississippi delta is less productive than Silicon Valley and that’s why the meagre social policies of the US transfer funds indefinitely from rich Californians to poor Louisianan’s. Convergence doesn’t remove the need for transfers, it makes them smaller.

As for austerity, austerity is the null policy. Austerity means to just accept the dynamic of unproductive regions being steadily poorer and productive regions being steadily richer without asking for free money to mitigate it. And fiscal discipline means don’t try the free money by monetary expansion or default routes.

Until 2011 it looked like Europe was going to work like a superstate using free money transfers. This would have been better for all, including Germans. This idea now looks dead. Weak economies should ditch the Eurozone, now.

What Grexit looks like

Now that Greece voted No in the referendum it’s likely the institutions will seek a quick compromise to avoid serious damage to themselves and the Euro. In that case we’re looking at a more reasonable bankruptcy negotiation between Greece and the creditors, within the Euro. There will be capital controls for a while, like Cyprus, but eventually they’d be lifted.

The alternative is the Grexit scenario. However Grexit doesn’t mean that Euro deposits get redenominated to drachmas overnight. There’s no legal basis to do that. Euro deposits are obligations of Greek banks to individual depositors. They’re supposed to be guaranteed by the ECB, except last week the ECB decided to stop honoring that obligation. That decision will bite them, but it’s another matter.

Anyway Euro deposits are not the business of the Greek state or the bank of Greece. They could not redenominate Euros to drachmas, except by seizure. Also, there’s no incentive to do so. When the ECB withdraws its guarantee, Euros in Greece are precious hard currency like gold coins. Whatever Euros Greeks have, they’ll want to keep. Why would you convert perfectly good Euros to less valuable drachmas?

So on Monday, after a no vote, we have a scenario where Greek banks have Euro liabilities (deposits) and outstanding Euro loans, and they’re not guaranteed. There’s no lender of last resort for Euros in Greece. Banks would have to be super-prudential about handling Euros in this scenario, with deposits equal to reserves or close. Any MFI creation of Euros through loans would be extremely risky.

Of course banks are much more exposed than this. Soon, because of bad loans or the ongoing bank run, Greek banks go insolvent in Euros. At that point, the Bank of Greece steps in and guarantees deposits, but in Drachmas. And that’s how the conversion happens.

There’s a haircut on deposits until the Euro accounts of banks drop to the super-prudential level they’d need to be to operate safely. That means deposits equal reserves plus really safe loans. Greek banks continue to operate Euro accounts in this way thereafter, to facilitate transactions in tourism, import/export, etc. Euro loans will be hard to make and they’d only be made to businesses with good short-term collateral such as outstanding invoices. Not mortgages. Euro will effectively stay in Greece as a business currency.

The remainder (the amount that was haircut) gets converted to drachmas. So if you had €1000 in the bank and after haircut you’re left with €600, you also get the equivalent of €400 in drachmas, courtesy of the Bank of Greece. People can’t really complain about this change, because it’s the big bad ECB that haircut your Euros and the Greek state (Bank of Greece) saved you by giving you drachmas in compensation.

Thereafter the two currencies exist in parallel. Banks operate both types of accounts. Euros are not guaranteed, hence super-prudential: hard to get Euro loans, no Euro credit cards. The Banks of Greece acts as lender of last resort for drachmas, like a normal central bank. Drachmas operate with all banking services immediately and eventually notes and coins are introduced. Businesses that deal with tourism or import/export will surely maintain both Euro and drachma accounts. Everyone will have to declare their Euro and their drachma income separately and pay taxes in each.

Ordinary people like pensioners and dentists will either run out of Euros eventually, or they’ll use them for savings (bad idea, not guaranteed), or they’ll accept some offer to close their Euro account and convert to drachma. Pensions, salaries, house purchases, utility bills, and other big domestic prices will be negotiated in drachmas. Shops will post two prices, at least for a few months.

Eventually anything that’s related to tourism or imports, like electronics, will post both prices. Everyday domestic trade like street markets for food, plumbers, English lessons, hairdressers etc. will transact pretty much only in Drachmas. The Drachma has to be the official currency and there’s enough need for money for it to be accepted. The Euro just has to be legal to circulate, it doesn’t need any encouragement.

And then life will be good!

Having your own currency does three things: It makes imports expensive relative to domestic goods; it lets you pursue monetary policy; and it lets you devalue to make your exports price-competitive. The first two are crucial for Greece. The third is moot.

Greece is in a mess with external Euro debt because individuals prefer to buy imports than to pay taxes and so Euros leave the country. After the switch, businesses that earn Euros will have Euros to spend and they’ll have to be responsible because Euro loans will be super hard to get. Everyone else will face a Euro/Drachma exchange rate when buying imported goods. It’ll make iPhones expensive if you’re not directly earning Euros, and that’s really the worst part of the whole transition to drachmas thing.

The macro effect is Greeks will be buying more basics such as food, housing, and services which are predominantly domestic. They’ll be buying fewer discretionaries such as cars or electronics which are imports. Some essentials such as oil, clothing, and medicines require imports but currently those imports are cheap and there’s some production capacity in Greece for these sectors. That’s a very fortunate configuration for Greece’s balance of trade.

More importantly, the Bank of Greece will finally be able to run monetary policy in a way that fits Greece and not the gold standard delusions of Germany. Obviously it’ll be an expansionary Keynesian policy and the drachma will drop, but not alarmingly. Greece’s economy isn’t a basket case because of inflationary tendencies, By now it’s in a hard currency straitjacket.

Greece has massive unemployment, it’s demand-side limited, and there’s a huge amount of informal debt because of lack of liquidity. The plumber owes the teacher, the teacher owes the dentist, etc. and no-one has any money. As soon as money of any kind flows into the economy people will start paying their bills and the economy will pick up be amenable to taxation. Even if the Greek state makes up a few percent of fiscal spending with monetary easing that’s unlikely to yield so much drachma inflation to be a problem.

The third aspect of having a weak floating currency is that Greece could devalue it, deliberately or by letting it slide, to make its exports more attractive. If only Greece had exports, that would be a great idea. Greece makes its Euros from tourism and in the Grexit scenario that income would be the same or slightly less. Tourism is price sensitive but it’s not that scalable. If you have capacity for a million visitors you can’t bring in two million by being slightly cheaper the way you can scale up industrial production.

Greece’s other exports are oil product (basically running a refinery, it has no wells) and things like ore and agricultural goods. Again, what is Greece going to do? Grow twice as many tomatoes? Greece’s competitiveness problem is not having industrial, not that they’re expensive. The idea of being more competitive by devaluing the currency is beside the point for Greece. Greece’s long term competitiveness needs to come from things like boutique exports and tech startups, and there’s nothing about Grexit that works against these. Sweden is not in the Euro and full of tech startups.

Overall the supposedly disastrous scenario of Greece leaving the Euro won’t be disastrous. For Greece. It may be disastrous for the Euro, or for the careers of some politicians and mainstream economists because Greece will be doing spectacularly better almost immediately and various parties will begin to question what benefits the Euro really delivers.

The ECB broke the Euro, already

Can we get something straight? Euro deposits in Eurozone banks are liabilities of Eurosystem to individual EU citizens. Euro deposits in Greek banks are liabilities of those banks, and indirectly of the ECB, to individual depositors who live in Greece. Not to the Greek state. The Greek state is not part of this contract. If Greek banks were drachma banks they’d be the responsibility of the Bank of Greece. Now that they’re Euro banks they’re the responsibility of the ECB.

This is a contract of trust between the ECB and individual residents of EU states, including the Greeks. The Greek state is another actor, in essence a very large bankrupt business. The ECB is justified to be angry that the Greek state is threatening non-payment of its debt to the ECB, but that’s a dispute between a bankrupt business called the Greek state and the ECB. Because the ECB is unhappy with the Greek state, it decided to breach its contract with individual Greek citizens and refuse to honor their deposits. Sure enough, Greek citizens have a say in what the Greek state does but in the supposedly professional world of banking and contracts the individuals and the state are not the same thing.

To put this in perspective it’s like JP Morgan, the US bank, seizing the deposits of its customers in Detroit because it is owed money by Ford, Chrysler, etc. where these same people work. JP Morgan would then say “Ford employees refused to waive their pension claims in order to give Ford money to pay us, so we’re grabbing the deposits of these same employees directly”. Americans, how does that sound? I thought so. You cannot seize one person’s private property to recover the debt of another entity, however related. Well, you can if you are a political sovereign, but not with any pretence of legality.

Spaniards, how would you like it if the ECB decided not to honour your deposits after September because you voted Podemos?

Scots, what if your country voted Yes on independence and a few months down the line the Sottish state had a falling out with England? Inconceivable, I know. What if then the Bank of England refused to honour the deposits of individual RBS customers?

Germans, your banks now have tens of billions of liabilities to Greeks, Cypriots, Spaniards, etc. who decided as individuals to transfer their deposits to Germany. In the world of banking every liability requires a corresponding asset and in the Euro system the asset is something called TARGET2 balance from Greek to German banks. The asset behind that is Euro loans of Greek citizens to Greek banks. If you let the ECB seize deposits in Greece, Euro loans in Greece will go bad, Greek banks will fail, and said TARGET2 balances would be worth nothing.

German banks will then have tens of billions of Euros of liability to individual people, many of whom happen to be Greeks and Cypriots, with no corresponding asset. What solution will you legislate for that? Will you let your banks honour individual deposits or not based on the passport of the account holder? Will you haircut all deposits in Germany? Will you bail the banks out?

The rules of the game are that he ECB is responsible for all Euro accounts. It has accounts more or less directly with states – states are treated like very large businesses. The faith of the ECB also stands behind private banks, so that the private banks can honour Euro accounts of individuals. With Cyprus, and now with Greece, the ECB has decided to price in default risk, country by country, by refusing to honour the full value of the accounts of individuals.

If that is so the Euro has already failed. It is not one currency, it is already three: Cypriot Euro, Greek Euro, and the rest. If this policy line continues soon there will be a fourth, fifth, and more currencies all called Euro but having different net present value depending on in which country they exist as bank deposits. This is not a single currency system, it is a failure.

How QE works

Various commentators are saying that Europe’s QE won’t work, or QE in general doesn’t work because it just boosts the value of assets. Increasing the reserves of banks, critics say, doesn’t cause banks to lend money to the real economy.

That’s irrelevant. QE is not supposed to make banks lend more money. Banks don’t need reserves to lend money, or rather it works the other way. Banks lend money if there’s demand for loans, and then ask for reserves which are always given.

What QE does is indeed to boost asset prices. Central banks buy bonds, people who sold the bonds buy stocks, stocks go up in value. Or people who sold the bonds spend money, money ends up in company profits, stocks go up in value.

And this how QE works. What happens when stocks go up in value? Companies expand and hire more people. What happens when stocks fall in value? They cut costs and lay off people. When stocks rise in value pension funds are wealthy. When they fall, poor.

In our imperfect system QE is a blunt instrument that makes rich people richer while boosting the economy. The problem, though, is with concentration of financial wealth, not with QE.