What Scottish independence ought to look like

A real bid for Scottish independence needs to have a manifesto, an emotional statement of values that the new country stands for. It might go something like this:What Scottish independence ought to look like“We the Scots want to end all association with the United Kingdom and the British Empire. Scotland will be a democracy and the queen of England will be regarded as a foreign diplomat in our country. We will nationalise crown estates and lease the palaces to the UK government as embassies, with a view to returning them to Scotland as monuments. Scotland will remove all symbolism relating to Britain or the crown from its institutions and replace it with a Scottish identity.

We recognise and wish to undo the damage done in the worst periods of our history, including the clearances. Following independence there will be a reform of large land holdings in Scotland, which will return the land of large estates to local communities and encourage people to settle in areas that are presently sparse.

We assert that the culture of Scotland is predominantly celtic. We will revive and nurture our celtic heritage and seek to form the strongest cultural ties with Ireland, Brittany, Wales, Cornwall and the isle of Man. We feel European as well as Scottish and will pursue a vision of a strong federal Europe composed of regions rather than nation-states.

Our culture is joyful, and the purpose of culture and the state is to allow all people to thrive and enjoy life to the fullest. We reject puritan repression and all forms of discrimination and control over people. We embrace personal freedom, the pursuit of pleasure, inquiry, and industry, responsible participation in society, and democracy as the means to settle all social affairs.

We believe that people are the same one the the other and the world over, and that a good society is defined by its values. Our borders will be open to all who wish to settle in Scotland and live by those value, as long as can be supported by our small country.”

That’s what an inspired call for independence might look like. I’d vote for that. Or people might vote against it for deeply felt reasons. Either way, when setting out on independence you need to nail your colours to the mast like this. It’s not hard to do, you just have to say it.

That’s what I feel is lacking from tomorrow’s bid. Friends who vote yes for these reasons, or who think we’ll get there post-independence, I hear you but I’m not as optimistic.

Marginal contribution nonsense


Consider two imaginary artists, Jay and Ani. Jay raps about problems not caused by women and Ani sings ballads about problems created by men.

Unequivocally Jay is more popular. At almost any time and place more people want to listen to Jay than Ani. Of course popularity is not the only measure of worth. We could make qualitative arguments as to why Ani’s work should be more prominent, and these ultimately translate to predictions about hidden preferences: Maybe everyone will value her more in the future, or some people value her really strongly, or would value her if it weren’t for marketing. We’ll return to these concepts later.  But for now let us concede that the market has ranked Jay’s contribution higher than Ani’s.

How much higher is Jay’s contribution relative to Ani’s? Today, Jay is 50 times richer. Does this mean his contribution to the world through music is 50 times greater? Not so fast!

Suppose our wonderful artists started their careers in the 1900’s. There’s no amplification and no recording, so all they can do is acoustic concerts in relatively small halls. Jay is still more popular and manages to book 3 times as many gigs. In these circumstances where the artist’s product scales with their labor we can say that yes, Jay’s contribution is 3 times Ani’s or close enough.

Then it’s 1950 and we have amplification. Now people can gather to really big concerts in stadiums. Jay can pull in the big crowd and earns 10 times as much as Ani who’s still doing small gigs. Did Jay just expand his contribution, or did the work of engineers and athletes and builders do that?

Fast forward to 1980 and someone invents CDs. Imagine at first there’s only two CDs on the market, Jay’s work and Ani’s work, and they’re very expensive. Let’s say they’re $100 so consumers can only afford one. Forced to choose, the vast majority of people go for Jay’s CD and he ends up selling 100 times as much as Ani. Is his contribution now 100 times greater? Why? What changed since the acoustic days?

A few years later in the 1990s publishers have figured out how to make CDs cheaply and price them properly, so now they’re $10. Suddenly consumers can afford to buy both Jay’s and Ani’s work, and Jay is now making 50 times Ani’s sales. Did their relative contribution actually change?

Now it’s 2010 and some geeks invented streaming music. They charge $10 a month and let you listen to whatever you like, distributing money to artists according to how often each song is played. Now people have access to both Jay’s and Ani’s work and it turns out that Jay’s work gets played 200 times more than Ani’s. Wait, what happened? Jay now earns 200 times as much as Ani. Does that reflect his contribution, or is his music more everyday entertainment compared to Ani’s deep stuff?

Now let’s revisit the qualitative questions about worth that we parked at the start. Is it correct to reward artists according to how many times their songs get played? What if people value listening to Ani’s songs occasionally, or just having the option to listen? Remember people don’t pay per listen, they pay a flat fee. What if artists were rewarded progressively, say by the log or square root of play counts? What if the money was apportioned by listener ratings, or an even more direct listener choice to support specific artists? Changing the model of what’s essentially an interpretation of the subscriber’s preferences completely changes the valuation of each artist’s work.

The moral for economists is that marginal contribution is nonsense. A meritocratic market can rank contributions with plausible veracity but says nothing about the magnitude of contributions. Earnings are an emergent result of technology, ownership, legal structures, trust, marketing, and other factors. These factors determine the shape of the earnings curve – how much winners win and losers lose. A meritocracy, at best, defines who the winners are.

23 better things than Right to be Forgotten

The recent EU legislation called “Right to be Forgotten” is idiotic. The legislators who drafted it are clueless about digital matters, and this as well as the previous “cookie alert” fiasco reduces the EUs standing in any substantial debate. Who is even going to listen to the EU negotiator’s arguments if we’ve just passed such farcical laws. Just to put this in perspective, here’s 23 better things the EU could be legislating in the digital domain. There’s probably many more but 23 was a good number to think of.

Consumer rights:

  • One copyright region: Treat the EU as one region with respect to book, music, movie, etc. rights so that buying across member states is allowed, all products are available everywhere, and people can keep their purchases and subscriptions when they move.
  • One communications region: Treat the EU as one with respect to mobile, land phone, and internet providers. No roaming charges, no long distance pricing per country, no other per-country differentiation.
  • Net neutrality: Treat all data equally irrespective of content or source. The same principle that has long been held in the US, and is currently under threat, should be legally guaranteed also in the EU.
  • Open data standards: Products that achieve significant market share in consumer markets (such as office, photo management, etc) must allow import and export of the customer’s data in a format not controlled by any vendor.
  • Own your data: Online services, including ones that are provided free, must allow each user to delete or migrate (download, upload) their data in a format not controlled by any vendor.
  • Buy means buy: Vendors of digital rights such as books, music, movies etc. must use words such as “rent” or “subscription” to indicate rights that are time limited. Words like “buy” or “own” must apply only to permanent and transferrable rights. The selling of other kinds of rights such as “lifetime subscription” must be approved by regulators and labelled on a case by case basis.
  • Commitment for loyalty: Providers of online services that achieve broad market share (such as gmail, facebook, online games, music streaming etc.) must at any time provide a public guarantee that the service will remain available for a minimum of 5 years, or must set a binding date for termination of the service within 5 years.
  • After we’re gone: Providers or permanent, lifetime, or other long-term digital rights (such as iTunes, Google Play, Kindle, Steam) must provide a transition plan in case of service termination, where a customer’s rights either become DRM-free data or are transferred to an equivalent provider free of charge.

Identity, anonymity, and pseudonymity:

  • Open identity: Services that provide a digital identity to the general public (such as facebook, google+, twitter, etc.) must interoperate so that a person can use the identity provided by one service to participate fully in any other service. Log in to facebook with google+ and vice versa, merge feeds, post across services, etc.
  • Pseudonymity: Services that provide an online identity must allow members to register without revealing their true identity to the provider. Services must display whether an identity is verified but otherwise the service treats identities equally (what google+ does).
  • Straight privacy: Online services must display prominently in plain language and less than 1000 words whether the service provides the following guarantees: No revealing the member’s identity; no tolerance for “outing” by a third party; a mechanism to stop impersonation; a means to block unwanted contact; and no revealing a member’s identity or contact details indirectly through pictures, location, social links, etc. Once set, privacy guarantees may never be reduced, even after the service is discontinued.
  • Proper names: Services that provide an online identity must accept member’s names according to the same criteria, if any, accepted by society and must not impose length, word number, format, or other arbitrary restrictions.

Transparency and data security:

  • No back doors: Vendors of digital equipment such as computers, system software, mobile devices etc. guarantee the equipment is free of back doors that would allow a vendor, government authority, or other party to gain access to the user’s data. Vendors must offer return and refund of all affected equipment regardless of age, and may be liable to damages.
  • No recording: Vendors of consumer equipment that can record or transmit audio, video, location, or other data in its vicinity must include physical switches, visual signals, or simple software controls to ensure any recording has the consent of the owner and people nearby.
  • Know your spy: Providers of online services such as cloud computing, social networks, etc. must clearly indicate one country or jurisdiction that a particular user’s data is legally subject to. Surveillance, censorship, etc. may be carried out by that country only. Providers must publish a quantitative anonymised report of such incidents within 31 days.
  • Competent security: Vendors of digital equipment and providers of communication or online services must exercise competent care to ensure that user data is not intercepted by personnel other than those with a technical need to know, by other users of the service, or by outsiders. Providers must inform the public of any data breaches within 3 days and publish a record of all past breaches.

Public service education, self-help, and awareness of limitations:

  • Encrypt it: Governments and telecommunications providers must inform the public that communications, especially email, may be under surveillance and allow and encourage the use of encryption for all communications. Public authorities should educate people, especially young adults, on basic encryption and password discipline.
  • Do not track: Authorities, employers, ISPs, and system software vendors must inform the public that web activity is typically tracked and provide opt-outs such as private browsing. The limitations of these opt outs must be made clear (like Google does).
  • Insecurity questions: Banks and online services must not use demographic information (such as date of birth, mother’s maiden name) or non-secret personal information (such as pet’s name, first school) to unlock customer accounts. Such information is easily captured by attackers. In-person identification with government-issued ID, or strong passwords must be used.
  • Smell the fish: Corporations,and other entities that deal with the public must publish, within one link of their front page, a complete list of web addresses (domains), phone numbers, brand names, or any other channels through which they interact with the public. Authorities must educate the public to check all communications against this list to recognise phishing attempts.
  • Sharing is forever: Authorities and online services such as facebook, blogs, forums, etc. must educate the public, especially young people, that any material posted online is effectively permanent and may be seen by people beyond the intended audience. Everyone has a moral right to renounce their past opinions or behaviour and a legal right to be protected from discrimination on that basis, but people have no right to erase their past from the public record.
  • No suppression: Governments and online services must inform the public that once data such as pictures, recordings, facts, etc. is published online, rightly or wrongly, there is no way to suppress such data. Authorities may pursue a few criminal or politically significant cases, and individuals and rights holders may have civic recourse to “take down” data from specific sites, but there isn’t and there should not be a mechanism of total suppression.
  • Delete is not enough: Vendors of digital devices such as computers, mobile devices, cameras, etc. must provide a simple and usable method to erase unwanted data from the device securely (like Macs do). Authorities and device vendors must educate the public that “delete” is not enough and they must use the secure erase option whenever dealing with sensitive or embarrassing data.

Legislators, in the EU or elsewhere, could perhaps concentrate on a modern and realistic set of digital principles like these instead of retrograde efforts such as fearing cookies and abetting the “reputation management” industry.

Income from capital is where the fun is

I’m half way through Piketty’s book but have a methodological criticism.In keeping with convention, Piketty classifies the income of top professionals such as managers as “income from labour” if it’s paid as salary. He classifies as “income form capital” only overtly financial income such as rents, dividends, capital gains on shares, etc. I agree in accounting terms but not in economic terms, and as such I feel Piketty’s conventional approach paints a more optimistic picture of the ratio of income from capital vs. income from labour than is actually pertinent.

Arguably it’s more correct in terms of economic analysis to treat upper middle class incomes, especially the incomes of managers and professionals in tech, pharma, banking, and other sectors with highly concentrated capital structures as deriving from capital, even if these people receive their income through salaries. The justification is twofold:

Firstly, if we also assume the conventional notion that salary for labour is compensation for one’s time, that implies the intrinsic worth of a top professional’s time is several times higher than that of an ordinary worker. That reveals an extremely discriminatory conception of human worth, which is also implausible. Much more likely, top professionals are highly compensated for something that they have, human capital, and not for yielding their Marxian capacity for labour. Arguments about diligence or laziness are about yielding a different capacity for labour, say 90 vs. 30 hours a week, and they may have some truth but however generously they don’t account for more than a 2x or 3x pay difference.

So the high pay of top managers and professionals must derive from a kind of human capital. What kind of capital would that be? I speculate it’s a mixture of skill and trust, with the major difference deriving from trust. Skill is things like being a good lawyer or a fabulous programmer, largely the result of practice and education. Trust is who you know and how you are perceived, and in particular the perception as to how faithfully you’ll serve the interests of capital. Trust, not skill, in my view is what distinguishes CEOs and VPs from mere mortals and what gets them invited and placed into these roles in the first place. But it is a resource. Trust is something that an elite enjoys and the multitude doesn’t automatically have, so it’s capital, not labour in the sense of capacity to do work.

The second justification is considering where the efforts of different kinds of waged employees go. The daily efforts of an ordinary worker, such a delivery driver, industrial worker, sales clerk, customer service attendant, and so on unequivocally go into production. That accords to the familiar production function of a firm, combining labour, capital, and other factors to achieve production. But crucially, the efforts of ordinary workers do not change the capital stock of the firm or the coefficients of the production function. In that sense labour is a dispensable commodity and its return scales linearly with the turnover of the firm all other things being equal. This activity, I argue, is correctly captured by the classical term “labour”.

The efforts of highly paid managers and professionals, in contrast, overwhelmingly go into capital formation. A Google employee who creates the company’s next innovation, a pharmaceutical researcher, or a financial deal maker are not contributing labour as an input into production. They work to increase the capital stock of the firm, and they do so qualitatively, so that the increase in the coefficients of the firm’s production function compounds exponentially. Top professionals are directly rewarded for their multiplicative effect on the production function, which arguably means their income should be properly classified as income from capital however the money is actually paid.

If we account for top professional incomes as incomes from capital as opposed to labour we will arrive, I think, at an even more alarming picture concerning the yield of capital vs. the yield of labour than Piketty already paints. And I think that truly reflects reality as we observe the relative bargaining powerlessness of capital (who cares if your strike if capacity to do work vastly outstrips demand) compared to the leverage enjoyed by the class of people who work in capital formation.

Beyond the economics, metaphysically it’s worth noting that all the good jobs, in the sense of initiative, sense of achievement, intrinsically rewarding activity, and so on today are in capital formation. Tech workers tend to have an optimistic view of the state of the world because, by and large, we work in capital formation, an experience that even at the lowest level is qualitatively different from those who truly work in production. All the fun jobs are in capital formation and that is a very serious problem in many dimensions.

Economies are graphs, study them as graphs

Economies are graphs. The workings of economies would be better illuminated if economics were developed as a study of graphs, the things with nodes and edges, instead of aggregate stocks and flows.

A person is a node in the graph. Real value (goods and services) flows from one person to the other in a direction that we label with an arrow, and sometimes money flows in the opposite direction. The purpose of money is to shortcut loops or debts of value reciprocity that would otherwise take too long to balance. When you want interdependence you don’t settle in cash, which is why you don’t pay for gifts or for the services of family members and co-workers.

An artisan is a person who delivers value directly to customers and gets paid immediately or soon along the same arc. In a market, like a Sunday fruit market, arcs are transient but in other situations arcs are long lived and capture trade relationships including trade debt. Customers can put up money at the end of arcs to motivate them, and we call this demand. The social function of money is largely to motivate value arcs that would otherwise be hard to negotiate. The fact that money sometimes accumulates is an aberration.

A market is a device for arc formation. A variety market such as a bazaar or department store serves to reveal and create the value arcs that meet demand, by rewarding certain links among the vast space of possible production. It’s a network phenomenon with persistence, like learning in the brain. The kind of commodity market much loved by economists is a much lesser creature. It aims to create and destroy arcs instantly, in atomic transactions, to avoid long term graph formation and only accumulate the money imbalance. At best it’s an inefficient method for optimising aggregates.

Companies and families are structurally the same, in that individuals send value to each other according to internal relationships without getting paid by the receivers. They’re explicitly not markets. Money arrives at some distinguished nodes and gets shared along different arcs than the value flow. People tend to identify and be invested with their outgoing value arc, not the incoming money arc – this is what I do, not that’s what I get paid – and when the opposite happens it’s a dysfunction.

People pass incoming value as well as add their own, such as when a leader or seller delivers a finished item, or when an academic synthesises the wisdom of others. Value creation is a graph process quite distinct from money capture. Everyone understands value creation by aggregating flow on their graph and most approach it with a well-developed moral sense, egalitarian or biased. Few people have the inclination or low morals to monopolise money capture in the opposite direction.

Value flows will in general be unbalanced, from the more to the less productive, in an economy or any meaningful subgraph or time period. They have to be unbalanced if they are optimally large. Debt will maintain unbalanced flows that may be desirable, but is not a device to achieve balance or fairness. We have to set up, as societies, the value flows that we want including unbalanced transfers for education, misfortune, or old age.

Money accumulates because the settlement of transactions is not perfect and economic graphs such as firms are set to aggregate this imbalance, though not as a direct mirror of value flow. Wealth aggregates to different people and more unequally than their value contribution, because graphs have evolved to make it so. There’s no guarantee or even tendency for wealth to mirror value creation in the long run; there are just emergent graph effects and motives to steer them.

Value flows matter. Money flows in the end should not, although today they do. In the short run and all other things being equal, money and finance serve to motivate and adjust value flows differentially. Beyond that, any large accumulation of wealth or debt is emergent and arbitrary. It should not be treated as power or bondage, but as a relative claim to future flows made self-limiting by inflation.

Someone who is unemployed has no outgoing arcs. No-one wants their value output, perhaps because they have no incoming arcs either: No training, no colleagues or equipment, etc. A menial service worker or someone in a predatory profession like a spammer recognises that they transmit zero or negative value. All are unhappy, in the psychological sense of lacking purpose or value, even if some money somehow flows in their direction by other means.

What about a person who cultivates themselves, through erudition or physical training? In graph theory that’s a node with an arc pointing to itself, and can be formalised the same as other value transfers. Perhaps value towards self will later join output for others, such as when studying before publishing. Leisure is then either a restorative value transfer, i.e. useful, or if it achieves nothing it’s the absence of value flow.

In either case, utility is a relatively transient attribute of the self. It’s things like energy, joy, hunger, tiredness, sleep, etc. People consume value including leisure to increase their utility and partly damage it by working, mostly in a daily or weekly cycle. Work is a disutility insofar as it damages us, and a utility when it makes us greater. In a graph theory of the economy utility is more of a temporary, limiting but also self-correcting, state of individuals than something that could be amassed, precisely calculated, or time shifted.

Incidentally a lazy person is someone who, for one reason or another, needs to consume more leisure to restore their utility. To be more productive, learn to rest more efficiently. Firms that emphasise the quality of the work experience recognise this. Grim dwellings for the poor destroy utility.

Most value flow is not in markets with transient arcs and immediate settlement but along economic relationships that have some permanence: Family, work, knowledge, reputation, trust, social contribution. People like to adjust their graph connections to gain higher status, but they don’t seek an extemporaneous, fully market disciplined existence.

Although utility and value transfers are in the here and now, people desire security for the future. The need for security is a preference for being included in the value graph of the future. People invest in their position in the graph of the present, by and large the outgoing value arcs, during their productive years, and expect some reciprocity i.e. to receive flows value in young and old age.

Ordinarily we treat these as social value-debts shared by the immediate graph neighbourhood: Family, professional guild, nation or other social group. Increasingly we’ve treated these time shift problems as money-debts: Student loans, private savings. Since the purpose of money is explicitly to avoid permanence or long-term reciprocity, this fails to engender security. Far too much money is amassed to achieve security for a few, creating a massive loss of utility. And that, too, is an aberration.

Economies are graphs. Study them as graphs.

On Bitcoin

My thoughts on Bitcoin, originally a comment here: http://rwer.wordpress.com/2014/03/22/bitcoins/

Bitcoins are virtual gold, or maybe palladium. The have low use value, high scarcity, can’t be forged, and aren’t controlled by any government. They’re clearly designed to facilitate payments and store value. People aren’t obliged to accept them, but they do so voluntarily. Very few real-world vendors accept Bitcoins, making their use value low and uncertain, but the speculation is that acceptance will grow making them valuable. Currently they’re like an obscure precious metal, say palladium. Proponents hope they’ll become mainstream like gold, silver, money.

So are they money? They’re clearly an attempt at commodity money, like gold. Let’s assume the proponents/speculators are correct and they achieve broader acceptance. What are the implications? Continue reading

Why I’ll vote against Scottish independence

I’ll be voting against Scottish independence this year. Here’s why. In Summary:

  • The cultural vision is weak
  • The specifics are bad
  • It’s a terrible time to be doing it
  • I don’t trust the offer, especially in this political climate

Background: I’m Greek and have lived in Scotland since 1988. I’d be in favour of Scotland becoming an independent Celtic state like Ireland, or joining Ireland. But I think the offer on the table by Alex Salmond and the SNP is bad in the specifics, and since we can only say yes or no to specifics it’s a no. Missed opportunity. I’d like to see a better offer by someone else.

Continue reading

How to price air travel properly

The current pricing model for air travel is nonsense stacked upon nonsense. Single fares, return fares, fees for changes, discounted and flexi fares, business fares, loyalty bonuses… all nonsense. It developed as an anti-competitive arms race between the airlines of the 70s and escalated from there. Nonsense. Here’s how to price air travel properly.

The cost of a seat has three components:

  • A fare, valid for a segment class, season, and class of service. For example “Between UK and East Coast US, standard service (economy), spring-summer 2014” £345.
  • An option to travel on a particular date, flight, and seat. For example “Option to travel on VS45, LHR-JFK, May 17, 2014, rows 28-37” £73.
  • An efficiency bonus. For example “Returning within a week, returning on the same weekday, checked baggage, full flight” -£65 (discount). Or another example “Short connection, Roll-on luggage, meal” £35 (surcharge).

To travel, you need to purchase a fare and at least one option for the flight you want. When you check in you may get money back as an efficiency bonus, or if you do certain things you may be asked to pay surcharges.

Continue reading

Asmussen leaves, Schaüble stays. Bad.

German coalition government announces cabinet ministers

Bad: Joerg Asmussen is leaving the ECB. He was an austerity hawk / debt dove. He’s likely to be replaced by a Bundesbank hawk on both fronts, who will then undermine Mario Draghi’s OMT bond-buying program. The OMT is the one policy currently holding the Eurozone in relative stability and removing it will likely let the crisis spiral out of control.

Bad: Wolfgang Schaeuble is staying as German Eurozone finance minister. He will then continue on his brave plan to burn down Europe’s economy outside of Germany, while funnelling to Germany massive financial profits through capital flight and manufactured risk arbitrage. German stocks, which dipped 5% in anticipation of the cabinet announcements, will jump back. Non-german European industry will fall.

The Eurozone crisis is about taxation vs. inflation

This formidable crisis that we’re having is, still, about taxation vs. inflation as a means of surplus recycling. A handful of countries including Germany have managed to make taxation work sufficiently well for surplus recycling (sort of, given high surpluses and still rising inequality). The Germans have foolishly written that into the constitution. All other countries, including the US and Japan, find taxation politically or practically insufficient as a means of surplus recycling and make up with a measure of monetary expansion. We’ll call that inflation although it’s not the same thing.

Monetary expansion taxes all assets denominated in a currency and is thus a form of recycling. In the US the market rises when easing is expected. Why? Because investors know that firms will have an opportunity to capture the surplus that is so recycled. Otherwise surplus will be more and more concentrated in retained profits, it won’t return to the market, and investments will have diminishing yield.

Southern Europe and the so-called lazy Greeks have been especially bad at taxation and especially reliant on inflation, devaluation, and the like. All countries pay their way if inflation is allowed. Fiscal obligations are covered in nominal terms and purchasing power for imports diminishes. The Eurozone was created, foolishly, with a German-inspired “there shall be no inflation” clause, and foolishly Greece applied and was admitted knowing that making taxation work in the timescale was unrealistic (and it’s a tall order for any country ever). The Eurozone then persisted, foolishly, in denial. The Greeks will endure anything but make taxation work, and the Germans will contemplate any measure but admit that taxation is insufficient and monetary expansion is a necessary pillar.

So please, let’s not moralise about lazy this and cruel that. Let’s see how we can back out of past decisions that were foolish, and that means talking about the role of both taxation and inflation (monetary expansion) in the Eurozone.

Inspired from Yanis Varoufakis’s blog here

A short critique of the Efficient Market Hypothesis

The so-called Nobel prize in economics has been awarded to Gene Fama for his Efficient Market Hypothesis. EMH states that markets instantly price in all available information and so nobody would be able to outsmart or otherwise outperform the market consistently in the long run.

Here’s my short critique of the theory.

The EMH assumes there’s an event horizon. Events behind the horizon, be they unknown future events or insider secrets, have no bearing on prices. Then events pop up over the horizon and instantly the market computes new asset prices to fully reflect the new information. Ergo you can’t out-compute the market.

The assumption that the market computes prices instantly is idealistic but we’ll go with that. The market is pretty fast, down to seconds or less.

Real-world events don’t flip from fully unknown unbiased probability to fully known outcomes. There’s a bias i.e. any particular event is predicted as more likely to happen than not, or vice versa, and better confidence estimates of the event’s probability become available over time. But so long as we assume everyone has access to the same stream of predictions the EMH still makes sense.

Where the EMH falls down is that prices don’t change to reflect the final valuation of a future state as soon as that future is known. New information gets priced in over time, from when the information is revealed to the time when the new situation actually takes effect and directly bears on the fundamentals. People see the instant tick of the pricing and say “ha, EMH!” but there’s a lot more pricing yet to come, and that’s why prices change continuously even in the absence of important news.

The reason markets price in information over time is twofold:

  • Market participants have different trading time frames. If we know for certain that the US will default in one year that will cause stocks to drop instantly, but there’s still time to invest and get out during the year, so people do. If the time frame is uncertain there’s more scope for price change. Miscalculations about trader’s ability to enter and exit cause bubbles to inflate and then crash.
  • Since the market isn’t pressured to price in the impact of future events until the exit window of each type of trader closes, it doesn’t, and how it will eventually price the impact over time remains unknown. Market participants have to predict prices at specific times and and the analyst with the better prediction of the market’s reaction wins. For example if you and I predict that a default will cause a 5% or 30% drop in asset prices tomorrow (not eventually when the default happens) one of us will come out looking smarter.

So, even in a world where everyone has full access to information about events, including likelihood and confidence, there are still opportunities. Opportunities arise from being better or worse at estimating how the market will compute price changes over time given known inputs, which is a notoriously hard but valid computational problem.

How the 2013 US default will play out

Here’s what will happen with the US debt ceiling over the next few weeks.

Neither side will compromise to raise the debt ceiling. President Obama, who is in the right, won’t negotiate because caving in to blackmail will undermine his and every future president’s authority. Hardline Republicans won’t negotiate because they’re reckless and want to bring about a default and a fiscal collapse in order to implement libertarian utopia.

Wall Street, defence, and regular business leaders will call their republican senators and tell them in no uncertain terms that future campaign contributions will go to Democrats unless they back off. Most Republicans will be burned by this, but the Tea Party wont back down because they have grass roots and rich libertarian supporters.

The treasury will run out of money on October 15 or thereabouts, and then will hold back all payments equally until they can be covered by tax receipts. That will include Treasury bond payments, and the US will be in default. Rating agencies will downgrade US debt to hot potato status. The market will maintain the belief that the US will eventually pay the arrears after an unknown delay.

The Fed, being the only well-funded and well-run branch of government, will intervene massively. Mr Bernanke will generate trillions of reserves (Fed credit to US banks) and use it to buy Treasury bonds from the banks. This will keep Wall Street banks solvent and mitigate the fall of Treasury prices. They’ll fall by a few percent instead of crashing. The Fed may also elect to buy stocks to calm stock markets and later gain revenue. This intervention will be held tightly by banks and not generate consumer price inflation.

A fall in the value of US treasuries means a rise in the interest rate that the US has to pay for all its accumulated debt, not just new debt (although the new rate gets phased in over around five years as bonds mature). Something like a 2% rise is burdensome. At some level, be that 4% or 5% or similar the market starts to believe that the US will never pay some of the debt and interest rates spiral to 25% or more because of the risk. That makes it certain that the debt won’t be paid in full, and US debt changes form a safe asset to a speculator’s trade. That’s what happened to Greece. It’s not clear if the Fed will be able to avert the latter scenario.

Either way, if the debt limit isn’t raised and the US defaults the US will have to pay higher interest. It may be much higher or impossibly higher. If you’re concerned about lowering the US debt burden, default is not what you want!

Central banks outside the US, particularly in Japan, may elect to cover their own financial institutions’ exposure to Treasuries by generating reserves in Yen, Pounds, etc. This will keep the financial system from collapsing and convert immediate paper losses to long-term recession, as happened 2008. The ECB, because it’s in the grip of Teutonic myths about money and debt, will be the last to react and will do so in half-measures, putting several European financial institutions in peril and adding to the ongoing Eurozone crisis.

The collapse of demand for Treasuries doesn’t pose survival challenges to real economy firms. Successful US firms have large cash reserves. The abrupt fiscal tightening will significantly hurt firms in certain sectors. However the secondary effects are severe and they’ll come back to affect all US businesses through the world economy.

The largest foreign holders of US Treasuries, China and Japan, have these bonds because for years they maintained a trade surplus with the US. Every year Americans (the private sector) import more things from China than they sell to China, so that excess dollars pile up at the Chinese central bank. Then along comes Uncle Sam, takes back the dollars and spends them in the US economy, and gives China yellow debt certificates called Treasury bonds. The Chinese effectively subsidise American consumption (they work for less) in order to boost their own production, and Americans maintain unaffordable consumption by going into paper debt. To a lesser extent the same happens vis-a-vis Japan, Korea, Taiwan, and Germany. Outside of a crisis scenario, no-one expects the US to pay back accumulated debt. To creditors it’s a long-term safe investment that pays interest.

When the US defaults, this arrangement breaks down. Suddenly the Chinese will no longer accept Treasury bonds and will demand dollars to replace the amount they hold as they mature. The Fed may decide to fly plane loads of newly printed Benjamins ($100 bills) to China and take back expiring Treasuries to shred them. China won’t accumulate the dollars but will try to spend them immediately on asset purchases, in the US and abroad. This will have three major effects:

  • The value of the dollar will fall sharply compared to other currencies, as there will be a flood of dollars chasing assets worldwide. American wealth will be reduced significantly, and there will be inflation through imports.
  • Imports to the US, including things like industrial components and iPads, will be much more expensive for Americans or unaffordable to US firms. Demand, production, profits, and stocks will fall sharply around the world.
  • America’s creditors will pick up devalued stocks worldwide, making a long term shift of capital from American to Asian and a few European holders. Iconic US firms such as Apple may come under hostile takeover by foreign capital.

The US may instead refuse to pay cash for Treasuries that mature and no-one can force them because the US has aircraft carriers. However the economic effect will be the same or worse: If the US bluntly refuses to honour Treasuries the dollar will fall further and trade will halt as foreigners will trust neither Treasuries nor dollars.

Eventually, perhaps after a few weeks, the US will find a procedural way to end the debt ceiling stalemate. They’ll remove or convince recalcitrant congressmen to vote for a permanent increase. However, the damage done to the economy will be permanent. Markets will resume their upward trajectory but will not recover their lost value. Capital will have been permanently transferred from the US to its creditors. Global demand, income, and profits will be permanently lower than they were before the crisis. The US will not regain credibility with bond investors until they make a constitutional change to put debt under control of the executive.

In the medium term the default will hurt China, Germany, and other Asian countries harder than the US. They will lose a profligate customer who’s buying on credit and will have to substitute US demand with demand of their own. That may happen, if money flows liberally enough in the Asian middle and upper income classes, but most likely demand and the overall economies will be permanently depressed. In the long run world economies will move past their dependency on US demand and move on.

The US will be left a much more insular and backward economy than it is today. With the dollar sharply devalued and no foreign credit the US will have to produce and consume domestically, which it can do. Expect American cars, American PCs and smartphones actually made in the US, a resurgence of blue-collar workers, higher nominal incomes and much higher consumer prices. People will buy durable goods and not gadgets. Sort of how it was in the 60s. In a way this will be more balanced and robust and may appeal to conservative nostalgia. However, it’s not the path to a libertarian powerhouse. If anything, with capital severely weakened and a greater need for domestic labour, a stronger social contract or New Deal will be needed to see America through the aftermath.

How the US Federal Wealth Fund was created

Counterfactual fiction, showing what would be the ideal path through the crisis. Very unlikely though.

It all started with a rather childish standoff. It was late 2013. An increasingly recalcitrant Tea Party faction within the GOP was holding America hostage by refusing to vote on a budget unless president Obama took back his recently enacted health reform. With tempers frayed from the government shutdown, a mere nuisance in the great scheme of things, the ultra-right Republicans went on to blackmail over the debt ceiling. Do as we ask, they said, or in fifteen days America defaults.

Everyone warned this would not be pretty. In a rare alliance, Wall Street and the defence lobby, all major newspapers, and just about every economist and economic policy maker called on the Tea Partiers to end the nonsense. A default by the United States government would be unprecedented. US treasuries, held everywhere as collateral and reserve assets, would become uncertain in pricing. That would trigger a selloff and a paper collapse making every bank in the west technically insolvent (and China).

No-one blinked. President Obama correctly held his position, arguing that the threat of blackmail would become constant if one caves in today.

The days were running out. Markets jittered. Editorials proclaimed impending doom. Then the day when the Treasury said it would run out of money came. And passed. Nothing happened. Uncle Sam’s bills got paid. Markets started rising. Both parties proclaimed victory, although it would take a few more weeks to fully reveal what had taken place.

With other options exhausted, outgoing Fed chairman Bernanke and legendary chairwoman Yellen who was then the nominee hatched a plan. In the run up before day zero the Fed set about buying stock. Lots of stock. It was done quietly though the biggest Wall Street banks, and some 700 holding companies they set up to disguise the activity. Only the CEOs and a small group of traders at each bank knew. The Fed simply created cash and lent it to the banks, who then lent it to the shell companies that swept up every stock or fund on the US exchanges and many abroad. If it weren’t for the unprecedented scale of the operation markets would be crashing, aided by the front page articles (some of them politically pushed) predicting the crash. But the Fed took up shares as fast as scared investors were offloading them, no-one lost much money, and prices stayed almost table.

All in all, on the day the US government would supposedly default it was in possession of roughly 43.6% of US stocks.

When Uncle Sam needed money, the Fed started selling some of the stock at higher prices. It was also collecting massive dividends. The Fed returned these profits to the Treasury, as it ought to, and miraculously the Treasury was able to pay its bills. The Treasury refused to name where the money came from at first, and eventually issued a statement that money comes from “the profits from assets of the US government”. Newspapers took a few days to process what this meant. When they did, the Tea Party sank, for it had brought to America the nearest thing to Communism.

Over the next 18 months the numerous shell companies created to buy up the stock market were reorganized into the US Federal Wealth Fund, the largest economic actor in history. The fund expanded its holdings to its current mandate of 48-49.9% of US traded stock and since then has been generating 20-25% of annual revenues of the US government. The amount varies pro-cyclically, as the stocks owned by the Fund do better at times of boom. That in turn allows the government to build cash reserves and spend them in fiscal stimulus when the business cycle drops.

President Obama never asked for the debt ceiling to be raised, and it has not been raised since. No more borrowing has been necessary. To this day new Treasury bonds are issued to replace maturing ones, minus some, so that US debt declines at 0.05% a year in nominal terms. They’re kept mainly as an accounting device and an inflation-protected asset for investors. Inflation briefly rose to about 3% in the years after the Fed’s intervention and then fell back to a steady 1-2%. Since the massive monetary expansion by the Fed was held by investors, and was then pulled back in dividends and capital gains, it did not drive up consumer prices.

America is now, twenty years on, a much more egalitarian society, similar to the European nation of Norway. Counting the fund as representing all Americans, some 72% of wealth is owned by the lower 90% of the population. The bottom 50% own 63% of wealth roughly equally. Revenue from the fund has expanded Medicaid, Medicare, Social Security, and Obamacare (a slur that stuck) to cover all Americans with dignity. Taxes are actually higher than they were in 2013 by about 5%, or 11% for rich Americans, and no-one complains. Fuelled by broad middle-class incomes the economy has boomed, growing at 3-4% for two decades.

The ultra-conservatives of the Tea Party never intended to make the US a haven of egalitarian prosperity into the 21 century. They probably never heard of the ideas of Louis Kelso and other visionaries of egalitarian Capitalism. But we’re here today largely thanks to their misguided actions.

Conceptions of democracy

There are two conceptions of democracy. In one, it’s a product. You buy a governance product from a firm (called a party) and it lasts four years. People want to see shiny marketing for the product they buy and be reassured that it’s good. They care about isolated scandals the way they care about food scares, but otherwise they don’t want to be involved in the making of politics any more than they’d want to see the back offices of hotels or the workings of airlines. The parties, government agencies, and the administration guard their internals as any business would, and people who expose the works to the public are troublemakers.

Since everyone has to buy the same governance for a particular term, democracy as  product tends to be bland. Good marketing is to conform to broad and shallow expectations, and trail them slightly. It’s risky to overshoot. People who want special features feel neglected by the available offerings. Market discipline ought to curb self interest by the firms (parties) and their officers (politicians) but since a duopoly or oligopoly inevitably arises corruption and capture are problems. Democracy as product gradually leads to less government, as governance is one product among many and people buy more and more of their life from private firms instead of the state.

The other conception of democracy is collective management and we’re not used to it in most countries. Maybe the Swiss know a thing. Citizens are not customers of the state but owners-employees (partners). You have to decide what the sate including you will do, not what “The Government” will do for you. People have to care about the workings of the state and take time to understand them. For that kind of democracy, aside from extremely narrow military and banking operatons, full transparency is essential. The people who operate in secret are the traitors. In this relationship of people and the state, a bigger state is good because owning and controlling the major things in your life is better than buying them as a consumer.

Participating citizens will still want to delegate their democratic duties to people who are more expert, more engaged, and at times more passionate about causes. But there’s no need for broad constituencies or elections that make representation blunt. Each citizen can in theory pick their own ideal representative, and change their nomination at any time. This is well within reach of a digital society. Superstar representatives will have many followers, finge representatives whose program is marketable will have some followers, and “undecided” citizens will decide if only passively the way they’d pick insurance. The main issue with this democracy, if any, is that it might work and yield unsavoury results such as racism that lots of people want.

These conceptions of democracy are radically different. I think the participatory one is better. Current politicians won’t do it, but the technology is here to create it to the point that it’s an irresistible reality begging to be adopted.

On flawed heroes

At times like this it’s worth remembering that the point of heroic acts is to do good, and not to place people neatly in the categories of heroes and villains.

Heroes, such as there are from time to time, tend to be flawed. Many are violent. Others untrustworthy. Heroes may be jerks, or worse, in their personal lives. Heroes inspire fools and decent people unto their deaths. Well-adjusted people don’t become heroes. When you see heroism, selection bias says you’ll also see flaws.

Edward Snowden, like Assange, did a heroic act for the public good. The act is for the public good, not necessarily their motives. It is irrelevant (and petty) to deconstruct their motives and attack them ad-hominem. Those who cherish democracy will call the acts heroic and those who love authority will call them treacherous. The people are more tragic characters than protagonists.

I hear that Snowden has fled to China. Bad call. If I was the leader of China I’d press him for information, pay him handsomely if he cooperates, and promptly execute him. Empires despise rogues infinitely more than they antagonize each other.

Being a hero is like being held under the hammer. You tend to do rash things. Judge whether you want to see heroic acts, not what the hero does shortly after.

Either there’s parity between M0 and M1 or there isn’t

For a given currency such as the Euro, either there is 1:1 parity between M0 (central bank money) and M1 (commercial bank money) or there isn’t. Actualy many problems would be mitigated if there was no guaranteed parity, i.e. if bank deposits could fall in value when monetary-financial bubbles burst. If in 2008 there had been a haircut on all bank deposits to write off bad debts, that would have been much preferable to austerity as a means of rebalancing. At least it would be so in substance – selling it to the public would have been a challenge.

However, parity or not parity has to be uniform across a currency. If Euro-denominated bank deposits in some Cypriot banks are overvalued and must be cut then all Euro-denominated deposits in the zone must be cut equally, by a smaller amount. That is necessary for a single currency and banking system to work. Otherwise, Cypriot bank money, or Greek, or whoever’s is next is not actually trading 1:1 with German bank money due to risk perception and we don’t really have a single currency. Or more accurately we have single M0 (central bank money and printed notes) but M1 (bank deposits and nearly all inter-bank payments) is already fragmented and exposed to de-facto exchange rate risk. That risk premium is opaque and thus much higher than if it were a properly floating national currency. Greek businesses, and presumably soon Cypriot ones, are unable to pay for imports with Greek-bank M1 (bank money) at parity. Businesses in countries with stricken bank systems are de-facto thrown out of the single currency already.

The Bundesbank hawks can’t have it both ways. Either the Euro is a single currency, which means a Euro in a bank in Cyprus is a Euro in a bank in Italy is a Euro in a bank in Germany so you can use it for payments, or it isn’t. That absolutely means that whetever happens to one Eurozone commercial bank in terms of crisis response has to be collectivized across the zone. Otherwise we don’t have the benefts of a single currency. We just have the penalties and there is no reason that electorates should accept such a flawed construction.

The free trade externality

Neoclassical economists will tell you that, invariably, free trade is a good thing. If there’s a barrier to trade between any two parties anywhere in the world, everyone would be better off with its removal. That’s not necessarily so. Often it is, but I present here a case for where and when protection is necessary for trade to lead to a universally good outcome.

Following a somewhat paradoxical Enlightenment result known as comparative advantage economists will point out that even if one party is better at everything than another, so long as they have different natural efficiencies they benefit from specializing. For example if Italy can produce both wheat and wine better than England, but Italy is better at wine than wheat and England the opposite, it will be to their mutual benefit if they specialize so Italy produces only wine, England only wheat, and they trade. At a basic level, the model holds.

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New categories

Friends, I’ve decided to focus this blog more clearly by categories so that those of you who want to follow only some of my writings, on economics say, can do so easily. I’ve added RSS feeds by category.

The main category is “Economics and Moral Philosophy” because that is how I see the subject. For me, a technical and dry tratment of economics is of no value. My more applied thoughts on leadreship, design, and other businesslike topics are under “Business, Design, and Software”. I see these two categories as an oeuvre with some aspiration to stand the set of time. The “Commentary and Politics” category is ephemeral, and I may delete what becomes too dated. Posts on Greece and the Eurozone crisis are in Commentary.

As always it gives me great pleasure to reach people with this blog. Thank you for your readership.

Είναι επικίνδυνος ή αναγκαίος ο ΣΥΡΙΖΑ?

An unusual blog post in Greek about the suitability or otherwise of the socialist SYRIZA party for governance. I think it’s what Greece needs. Translate this badly with Google.

Το παρακάτω ακολουθέι απο μια συζήτηση με τον πατέρα μου, που λέει περίπου τα παρακάτω (συνοπτικά):

Ο ΣΥΡΙΖΑ είναι επικίνδυνος γιατί διακατέχεται απο αριστερές επαναστατικές ή λαικίστικες ιδέες που δεν ταιριάζουν στην εποχή μας ή δεν είναι δυνατόν να τις εφαρμόσει η Ελλάδα όταν περιβαλλόμαστε απο μια άκρως καπιταλιστική Ευρώπη που απαραίτητα μας στηρίζει. Αν βγεί λοιπόν θα κάνει κινήσεις τύπου Αντρέα ή τίποτα ή χειρότερες τυχοδιωκτικές ζημιές.

Η απάντησή μου:

Οι δυο παραμετροι που προσδιορίζουν την κίνηση της Ελλάδας ειναι το πρωτογενές έλλειμα/πλεόνασμα, αν δηλαδή μπορούμε να ζήσουμε τον εαυτό μας, και οι προσδοκίες των Ελλήνων για το πώς θέλουν και φαντάζονται τη χώρα αυτή και το μέλλον.

Οσον αφορα το πρωτογενές έλλειμα:

Όλη τη σύγχρονη περίοδο το Ελληνικό κράτος δε μπορούσε να συλλέξει αρκετά χρήματα για τα έξοδα του και κάλυπτε το κενό με κάποιου είδους πληθωρισμό: Έκδοση χρημάτων, υποτίμηση της δραχμής, ή δανεισμό (έκδοση ομολόγων) χωρίς να υπάρχει πρόθεση ή προοπτική αυτο το “χρέος” να επιστραφεί ποτέ. Έτσι κάνει και η Αμερική. Τα ομόλογα των χωρών κατα κανόνα ανακυκλώνονται και αυξάνονται αενάως. Οι πρώτες δυο μέθοδοι έκλεισαν με το ευρώ, και τα ομόλογα δούλευαν μέχρι το 2008 οπότε τα χτύπησαν οι επενδυτές και τα επιτόκια εκτινάχτηκαν.

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Why the internet needs to be free

You may have heard that there’s a move by the ITU, an inter-government telecoms management committee, to take control of the internet. Take control of course means convince governments to give it control. This is a bad thing, and you should sign the petition against it here: http://www.freeandopenweb.com

However everything is not so simple and black and white. Why does the internet “need to be free”. Well we know the answer of course. It’s so we can download porn and make Skype calls without paying. These are important activities that bring the world together and make it a better place, but if we look past the everyday what is it that gives the internet its sense of freedom and power, and how is that in danger?

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The American Dream will have to be revised

The republican party lost the election despite fielding the most competent, centrist, and generally acceptable candidate since Bush sr, or even including him. The hate fringe didn’t help the GOP, but it’s not what lost them the election either. The republicans still got nearly half the vote despite including individuals who would alienate more than half of the population. It’s not the individuals, it’s the policies that lost the elections.

The issue at the heart is the future vision for the individualist and affluent society that we call the American Dream. All can see that the dream has ran into problems lately. Instead of delivering prosperity and self-actualization America seems mired in social stress and inequality. The parties differ as to what to do about that. The democrats feel that the Dream has veered and want to do a course correction. The republicans are panicking and would desperately step on the gas.

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The cardinal error of design

The cardinal error of design is to survey your users, observe what they do, gather your use cases, understand the use cases in detail, and then design your artifact to embody each of those use cases as directly and faithfully as possible. It’s to design your artifact explicitly according to the way it’s supposed to be used.

Wait, what? Isn’t this how you are supposed to do design?

It’s not. People will not use your system the way you designed it to be used. It’s a mistake to assume it will be used one way, or five different ways, or as many ways as you’ve explicitly enumerated. However many distinct use cases or paths you identify, people will use it in more ways. They’ll use it their way. They’ll combine different ways and jump between one use case and another. Or they’ll interpose a different product in the middle of using yours. A well-designed product accepts that actual use patterns are emergent. You cannot list them, but you can hope to facilitate as many patterns as possible beyond the ones you’ve envisaged.

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Two tales of free speech

Amazon got WikiLeaks. Google got The Innocence of Muslims.

Each company hosted the controversial content, on Amazon Web Services and YouTube respectively. Both of these are self-service platforms. Members of the public upload what they wish and are legally responsible for it. The companies neither vet nor admit any legal responsibility for the content. Both companies have terms-of-use clauses that prohibit interfering with IT (flood attacks, etc) and copyright violations. Amazon also has a catch-all “no content that might reflect badly on us” clause, and YouTube doesn’t.

When the stories broke out, Amazon quickly kicked WikiLeaks off their servers. This was not motivated by a legal or political request – Amazon just decided to do so. See their statement here: http://aws.amazon.com/message/65348/ So far, Google is still hosting the anti-Islam video but is blocking it in the Middle East. The White House asked Google to consider taking it down, but Google declined.

No-one has been harmed by WikiLeaks as far as I know, other than the source of the leak who is detained in the US. There was grave risk that people in the spy services, their informants, and perhaps well-meaning dissidents might be imprisoned, tortured, or killed as a result of being identified. The WikiLeaks team made a diligent effort to minimize this risk by redacting, and as far as I know there were no confirmed or officially claimed victims. Of course given the secrecy we may never know. So far, several people have been killed in Libya as a result of anger at the anti-Islam film, including the US ambassador, and there have been riots elsewhere.

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There is no “privacy”

I tend to disagree with the common public expectation of “privacy”. I respectfully disagree with the privacy laws common in Europe that put limits on collecting and keeping data on people. Although professionally I greatly respect medical privacy rules, I personally wish we had a different set of rules that put the focus of protection elsewhere. When some court or civil rights organization in some country accuses Google of a privacy breach I tend to think that they bring an outdated, basically wrong, idea of privacy to the debate.

The reason I disagree with privacy is that there’s no such thing. It doesn’t actually exist.

When we think loosely about privacy, in fact, we think about three distinct things:

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Europe’s two problems

Europe has two big problems. Doubtless one of them is political, or to put it more precisely, it’s in the space of national politics.

The post-national European project has  stalled. It has certainly taken us a long way, from warring nation-states to an open community where we feel free and entitled as citizens throughout the continent. We’ve largely lost our national identities, and it may come as a surprise to Americans that we don’t care about our flags. National cultures are cherished as heritage, but not something to be defensive or overly proud of – certainly not something to kill or die for. The nation state was born in Europe in the 1700s and it died in Europe in 1945. Generations of visionary leaders have taken the people of Europe from the aftermath of an existential war to a point where the state is little more than an old-fashioned cultural and administrative unit. It took a lot of paternalism and manipulation to get us here, but on the whole we are grateful. Even the insular British do not prefer to go back to a time of animosity where crossing the border to Germany or France had the significance that entering Israel or Iran has today.

The problem is that after the Maastricht treaty and the introduction of the Euro the post-nationalist transformation has stopped. The Euro obviously came too soon for Europe, but also obviously it was the first of a sequence of bold steps that the then heads of state could not take all at once. Having the Euro is like putting one foot on a moving streetcar, but not climbing on board, instead limping desperately after it with the other foot on the street. The onward steps were very much expected and obvious, but they didn’t come: an elected European presidency; real powers for the European Parliament or some reformed elected chamber; continent-wide taxation, social security, and pension systems; business reform to allow companies to operate across the zone without country subsidiaries; stronger education, development, and technology agencies. None of this happened. The Euro and the ECB were the last post-national institutions that Europe saw.

We haven’t stopped to ask why. Continue reading