Categories
Despair Meta Miscellany

Cover, Dispersion, and the Defense of Schools in Depth

The principal problem with liberal gun rights policies in the modern age is the same problem that has bedeviled all modern warfare: firepower. What do you do when a single rifleman with enough ammunition can wipe out hundreds of people per minute?

This was, of course, a problem with which militaries were much concerned between 1914 and 1918 in particular. One might have expected that the principles that they developed in response would have been put to use already by school defense planners, especially since those principles govern the way all armies today deal with the same problem of firepower that schoolchildren now face.

But they have not been applied.

To my knowledge, the principal principle employed today by schools is that of concealment. If a shooter enters the building, classroom lights are to be turned off, doors are to be locked and barricaded, and children are to hide.

Concealment is, indeed, one of the methods that World War One tacticians identified as a means of dealing with firepower.

But it’s just one, and far from the most important—especially when the enemy has a rough sense of where you are. If he knows you’re behind a wall, or a door with a few chairs and desks up against it, he doesn’t need to know exactly where you are. With enough firepower, he can shoot up the entire wall or the entire door, and everyone behind. Just so, the modern soldier is taught to distinguish between concealment and cover.

Cover as in armor or concrete: stuff that stops bullets and negates firepower.

Cover is another method that World War One tacticians identified as a means of dealing with firepower. But it, too, is not enough. Cover works, but only if you can prevent the enemy from closing with you and pulling you out of your cover. In war, that is done by marrying cover with firepower of your own. You can close on a tank that has no gun, but not so easily on a tank that has a gun.

But it’s hard to marry a school with firepower of its own. The trouble has to do with the element of surprise. You need to have a lot of guards on duty at any given moment in order to minimize the advantage an attacker gets from surprise. Guards get bored and fail to notice things. They panic. They run. And they get shot before they can reach for the arms that they have careless cast aside. You would need a garrison effectively to support an armored school.

Absent such a garrison, you can armor your doors and make desks and chairs from concrete, but all the enemy needs to find is one unlocked classroom door and he’s in—and will have plenty of time to step behind every concrete desk or chair therein.

Cover, too, does not exhaust the principles developed by World War One tacticians.

Another is: dispersion.

Modern weapons can bring astonishing amounts of firepower to bear on discrete areas, but they can’t bring astonishing amounts of firepower to bear on everything at the same time. That is especially true for a lone rifleman.

The more dispersed the targets, the longer it takes to hit all of them.

Which brings us to one of the principal school design flaws from the perspective of modern defense: schools concentrate students. Once the shooter has entered a classroom, the walls of the classroom corral his targets whereas modern tactics demand that targets disperse in order to defend successfully.

But the most important lesson that tacticians learned in World War One was something else: combination.

A successful defense cannot be mounted using any one of these principles alone. Concealment alone won’t do it (the enemy will just shoot all the concealed places). Cover won’t do it (the enemy will just close with you and pull you out). Dispersion won’t do it (given enough time, the enemy will find a bullet for every target).

You have to use them in combination.

If you disperse and conceal yourself behind cover, the effects of the enemy’s firepower are much reduced. It will take him longer to find you, make it harder for him to hit you, and take him longer to hit all of you.

This was the rationale behind the defense in depth developed by the Germans toward the end of the war.

Rather than concentrate thousands of defending troops in a frontline trench against which the allies could bring to bear massive firepower, the Germans created a deep patchwork of trenches, lightly manning each. They took advantage of natural obstacles, like hills, by stationing troops on reverse slopes. And they devolved authority onto commanders of small teams of defenders whose job was to adjust their positions dynamically as the battle evolved to maintain dispersion. This approach soon became a staple of modern tactics.

Modern militaries deal with firepower by deploying cover, concealment, and dispersion in combination. The least schools can do for their students is to deploy same.

The first and most important change that must be made to school defense is to eliminate the corralling effect of classroom walls. As soon as an attacker is known to be inside a school, the walls separating the classrooms from the outside world must disappear. Make them garage doors, say, and program them to spring up at the first sign of trouble. (A more fanciful approach is illustrated below.)

Interior walls should be armored and stay in place, as one doesn’t want temporarily to increase the number of available targets—concealment and cover still matter within the building—but the exterior walls should disappear, allowing students and teachers to disperse as fast as their legs will carry them.

But that, alone, is not good enough.

Rather than disperse into open fields enabling our rifleman to mow down fleeing students like a World War One machine gunner overlooking no-man’s land, students must disperse into concealment and cover.

To achieve this, schools must be ringed by concrete blocks in irregular patterns (irregular to deny the shooter an unobstructed field of fire in any direction). (Even better, they should be great concrete busts of historical figures, so that they both teach and protect.) As soon as the outside walls go up in response to a threat, students must be able to flee into cover and concealment of this kind. The blocks must be spaced closely enough to conceal and cover, but not so closely as to prevent students from continuing to run and run and run; for they must not stop behind these blocks, but weave through them, continuing to disperse (according to arrows conveniently painted throughout this field of cover) until they have arrived behind the cordons set up by first responders.

Here the box-like outside walls of a schoolhouse are tethered to a boom which jerks the walls away at the first sign of trouble. Students are then free to flee to safety in all directions using the cover and concealment provided by a dense assemblage of irregularly-spaced concrete blocks.

In this way, the rifleman’s firepower is almost completely negated. In seconds, his targets disappear behind cover and concealment. He must chase them down on foot, close with them, one by one, and each time he pauses, all the other targets recede further from him. He cannot see them. He cannot shoot them from afar.

A country that gives each person a right to that hallmark of modern warfare—firepower—must give its students the benefit of modern defensive combat tactics. It must give them the defense in depth.

Of course, another approach would be not to honor an individual right to modern firepower in the first place.

Categories
Meta Regulation

The Other Conflict of Interest and the Root of Inequality

It is common in the study of corporate governance to worry about the conflict of interest between shareholders and managers. Managers are supposed to run the firm to maximize shareholder value, but because they run the firm on a day-to-day basis, not the shareholders, they have plenty of opportunity to enrich themselves are shareholder expense. Others worry that the power of shareholders and managers over firm governance enables them to cheat creditors, workers, and sometimes even suppliers.

But there is another interest that no one ever talks about, and which is even less able to defend itself than are shareholders against managers, or creditors, workers, or suppliers against shareholders and managers.

That is the firm itself.

The firm is not its shareholders. It is not its managers. It is not its workers, creditors, or suppliers.

It is a fiction in the sense that a firm always is a fiction, a thing that exists only because shareholders, managers, workers, creditors, suppliers, and the government act like it exists. It has no flesh and no blood. It cannot be found anywhere; or, rather, it is located wherever the law says that it is located rather than where the laws of physics place it.

But it has a name: the name of the business.

It can open bank accounts.

It can own property.

It can sue.

It even has a right not to be deprived of life, liberty, or property without due process of law.

The firm exists in the way that the mime’s wall exists. There is nothing there, but his hand stops as if it were there.

Just so, the corporation exists because we speak as if it exists. Because we find all of our legal institutions bending around its form as if there were something there to bend them.

And yet, despite all the care that we take to act as if there really were an independent, living, breathing thing that is the firm, when it comes time to count up conflicts of interest, we never talk about the conflict between the interests of shareholders, managers, workers, creditors, and suppliers—and the firm itself.

We recognize that there must be such a conflict, and we even have an entire body of law—agency law—devoted to protecting the firm itself against managers and employees who put their interests before the firm’s. We say that managers and employees have duties of loyalty and care to the firm.

And yet we seem hardly able to take such duties seriously, or, at any rate, fully to appreciate that they are owed to the firm—to the mystery, to the fiction, to the hollowness beneath the mime’s hand.

We say that the board of directors owes a duty to the firm, but we think that the duty is really owed to the firm’s shareholders, or to its workers, or to whatever set of actual, living, breathing persons are ultimately harmed by the cupidity of the firm’s agents.

We comply with the fiction that managers and employees owe their duties to the firm by describing the shareholders who sue careless or disloyal managers as filing a “derivative” lawsuit on behalf of the firm. The shareholders have no direct claim against the wrongdoers, we say, because the wrong was done to the firm and not directly to the shareholders.

And we comply further by asking that any recovery be paid first to the firm as compensation for harm to the firm and only thence to shareholders.

But we experience this part of the fiction of the corporate person as unnecessary. Nothing would be lost were shareholders to be permitted to sue managers directly.

We are wrong to do that.

If we were actually to take conflicts with the firm seriously, we would come to a very troubling thought indeed: that the mute, defenseless fiction that is the firm is surely the worst victim of self-interested behavior of all.

Conflicts run deepest not between shareholders and managers, or even between managers and workers, but between all of these groups and the firm, because of all of these groups only the firm lacks a physical presence and hence even the slightest semblance of autonomy. The firm exists entirely in the unseen world behind the world, and speaks only through the very groups—the shareholders, managers, workers, and so on—from which the firm needs protection.

And the firm does need protection because the firm’s interests are necessarily always in conflict with those of shareholders, managers, workers, and all the other counterparties of the firm.

Because the firm never dies. It alone is in business for the long term and the long term interest is almost always in conflict with the short term interests of mere mortals.

Imagine that a firm generates a billion dollars in net income and that maximizing the long-term—as in over the course of the next two centuries—profits of the firm can be achieved only by investing that billion in clean energy technology.

It is easy to imagine that no flesh and blood humans associated with the firm might be interested in actually investing the money. The shareholders might want it paid out as dividends (they want to party). The managers might want it paid out in executive compensation (they want to party). The workers might want it paid out in retirement benefits (they want to party). The creditors want their debts paid. The suppliers want higher contract prices.

The the profit-maximizing firm—yes, the firm, that metaphysical life force, that abstract interest—would want the money invested and, if all the assumptions of general equilibrium theory hold, the fact that the profit-maximizing firm would want the money invested implies that investing it is necessary for the efficient operation of the economy. It is required to maximize economic growth and otherwise to launch society forward to the greatest extent possible.

But the firm with not invest the money. Because the flesh and blood humans who control what the firm does, who are agents to the firm’s fiction, mimes to its hollowness, don’t want that to happen. The door might want to be opened, but the mime will shut it.

The money will be spent instead on shareholders, managers, workers, creditors or suppliers, and both the firm and the economy will be smaller for it in the long run.

What’s more—and this is important—legal duties will have been breached by this failure to invest. Management will have violated the duty of care, which requires managers to operate the firm with a view to maximizing the firm’s long-term profits.[1]

But no one will sue.

Shareholders will not bring a derivative suit on behalf of the corporation—they wanted to be paid.

Competition will not force the firm’s agents to behave—lest competitors take the firm’s market share and put the agents out of their jobs—because the consequences of a failure to invest for the long term manifest in the long term.

One can only imagine how much bigger the economy would be, and how much more successful the firms in it, if the conflict of interest between the firm itself and its agents were not to exist. Or if there were some way of protecting firms against it.

Imagine all the investments that have not been made throughout history because those in control of firms preferred consumption to saving.

One gets the barest hint of how bad the problem must be in the hysterical objection of business elites to mid-20th-century price regulation in industries such as telecommunications, air transport, and energy distribution. Or the hysterical objection of business elites today to attempts to limit the scope of patent grants in order to prevent windfall gains from intellectual property.

The government, businessmen argue, systematically sets prices—or, in the intellectual property context, rewards—too low, because it fails to take into account all of the investment that must be made in the future of a business.

Firms must invest in research and development.

They must insure against risk.

And so, businessmen argue, what looks like profit really is not profit, but rather a cost of long-term survival and flourishing of the firm.

Ah, but if that is the case, if we cannot trust rate regulators adequately to determine how much must be spent for a firm to flourish, why should we be able to trust shareholders or managers to do that either?

It is not, after all, in their interest to carry out that analysis faithfully, for they can never have an outlook quite as long as the firm’s.

If we think that rate regulation was bad for American business in the mid-20th century, or that stinginess with the patent grant is a big problem for the dynamism of the American economy, we must—must, must—wonder just how bad the totally unaccountable dominance of flesh and blood over fiction, of the agents over their dumb master, must be for American business.

How much less is invested than optimally should be?

This, it seems to me, explains much—not just about a structural inefficiency in the economy but also about the structural maldistribution of wealth.

Why is it that the captains of industry are so rich? Is it just that they control scarce resources? Or that they have some monopoly power? Those are, to be sure, causes.

But I wonder whether the most important is not, quite simply, that they underinvest—and keep the difference for themselves.

When I was in high school, I ran an assassin game with a classmate. I ordered some very cheap waterguns direct from China. We asked every student to pay $30 to participate in the game. We gave each student a cheap water gun and the winner $200 as reward.

There were perhaps thirty participants, which made the game very profitable.

I was so embarrassed about this windfall that I let my surprised coventurer keep all of the profits, which he used to take a trip to Europe.

I was afraid to profit and he rejoiced in it. But the point is that both of us thought of the windfall as profit.

But was it? Neither he nor I thought for minute about the interests of the business.

Perhaps the best thing for our assassin business would have been for us to invest that money in the following year’s game. We could have increased the reward, attracting more participants. We could have ordered better guns. We could have organized a joint game with another school. Whatever.

But while these were the interests of the business, they were not our interests. The business was mute; and so we ignored it.

One sees this also, I think, in how homeowners treat their houses. It is very often the case that a person will buy a house that he would not be willing to rent because the rent would be too high.

Perhaps the house is very large, or there is a shortage of rental units in the area. Whatever the case, when a person owns and lives in a house that he would not be willing to pay to rent, he is putting his own interests as a customer and indeed shareholder (i.e., owner) of the space-selling business that is his home before the interests of the business itself.

His home could generate greater profits by being rented out and indeed those profits could be invested to improve the home or expand the business to include other properties, making the business and the economy better off.

But none of this happens because the flesh and blood person who controls the business would rather forego (read: consume) the profits that could otherwise be generated by renting to others—and which would lead to long-run profits—in order to enjoy the pleasure of living in a big house, or in the right neighborhood, or what have you, right now.

Once you understand the problem, you see it everywhere.

The owner of my car repair shop was kind enough to give me a lift in his personal, very expensive vehicle while I was getting my oil changed. What portion of the purchase price of that car should he have reinvested in his business? We will never know.

Indeed, one wonders what proportion of all the executive compensation, all the share buybacks, and all the dividends paid out to owners over the past few decades—payouts that turned an L-shaped postwar inequality curve into the U-shape of Piketty fame—should optimally have been reinvested in the firms themselves.

That is, one wonders whether, if the fiction that is the firm were real and could defend itself, captains of industry would be no richer than the rest of us, and the economy a whole lot larger.

One might think that the solution is for the state to step in to protect business fictions against their flesh and blood agents.

And perhaps that is right. We need regulation not just to protect consumers against grasping firms, or shareholders against grasping managers, but to protect firms—those helpless fictions—and indeed the economy entire, against all of the grasping human agents that constitute the sum total of a firm’s human capital.

But it might just as easily be right to say that unregulated firms produce more even after taking into account how much less they produce than they might thanks to the cupidity of their agents and the helplessness of the firm.

Regardless, we must see firms as almost always victims of their human controllers. And the wealth of those controllers as almost always funded in part not just by rents—revenues in excess of costs—but by theft in the form of underinvestment in their businesses.

It might well be that, in an optimally efficient world, every businessman would eat one meal a day and darn his own socks, for that is the real minimum that a businessman would accept in exchange for doing business.

And the profits that remain are best reinvested by firms in their own futures.

Notes

[1] Yes, the duty of care is subject to the business judgment rule, which means that courts defer to the judgment of managers regarding what actions will maximize profits, and so, in practice, even were shareholders to sue, it would be very difficult for them to win such a case. But the business judgment rule is meant only to give managers the benefit of the doubt. It does not make legal actions that are known in advance to fail to maximize profits. Indeed, in a world in which there were never any doubt regarding what course of action would maximize profits, the business judgment rule would count for nothing and a manager’s failure to take the known profit-maximizing course of action would give rise to immediate liability.

Categories
Meta

The Magic of Science

Suppose that it were discovered that knocking on wood reduces the incidence of premature death by, say, 10%. Suppose that the provenance of this statistical regularity were impeccable. That it were found not only in data gathered from life, but also in carefully constructed experiments involving millions of subjects observed over decades.

Suppose, further, that a great deal of research were done on the mechanism behind such a connection between a knock-knock-knock and longevity, and that all possible mechanisms were ruled out. Knocking on wood in a vacuum produced the same result. So too did knocking with a mechanical prosthetic rather than knuckles. Even asking someone else to knock for you did the trick.

Science would, then, be forced to conclude that the connection between knocking on wood and longevity is a fundamental law of nature, up there with gravity, albeit an eccentric law given its startling narrowness (suppose that it were only to work for humans—animals knocking on wood were not to live longer) and seeming lack of integrability with the other laws of physics.

Question: would we then be forced to conclude that magic is real, since, in effect, an element of human superstition had been found, in the light of science, to be empirically verifiable? Or would the fact that it had come to be empirically verifiable make it cease to be magic?

In other words, is our disenchantment with the modern world due to the fact that the laws that science has proven are, well, boring, and don’t involve the superpowers we once so hoped were real? Or is our disenchantment caused by science itself, by an orientation to the world that seeks always to shine a light on things instead of to respect the mystery?

Categories
Civilization Despair Meta Miscellany

The Possibilities of Hierarchy

We can represent the possibilities of hierarchy with a matrix of hierarchy. It looks like this:

Person B
Believes himself to be inferiorBelieves himself to be superior
Person ABelieves himself to be inferiorClassical Equality (each looks up to the other)Domination
Believes himself to be superiorDominationConflict (each believes himself to be better than the other)
The matrix of hierarchy.

In a world of hierarchy, each of us believes himself either to be better or worse than others, but never equal. When two people meet, there are therefore four possible relationships that can appear between them.

Two are relationships of domination, which occur when one believes himself to be better than the other and the other agrees.

One is a relationship of conflict, which occurs when each believes himself to be better than the other.

And the third is a relationship of equality, which occurs when each believes himself to be worse than the other, with the result that each seeks to follow the other and do for the other. I call this a relationship of “classical” equality because it is the only equality known before the modern period.

The matrix of hierarchy explains why domination is so often associated with hierarchical thinking: it is the most common outcome (i.e., you find it in two of the four boxes in the matrix).

It also explains why conflict is often associated with hierarchical thinking.

Finally, the matrix of hierarchy explains why romantic love so flourished in the premodern world, for is romantic love not an example of a relationship characterized by mutual feelings of admiration—of looking up at the beloved?

The new conception of equality that came into being with the modern world can be represented by a box of equality:

Person B
Believes himself to be no better or worse
Person A Believes himself to be no better or worse Modern Equality
The box of equality.

The modern conception of equality eliminates domination and conflict. It also eliminates that sweetest of all relationships, that of mutual admiration, which I have called classical equality. It eliminates love.

Question: Can we have classical equality without domination or conflict? Can we have a world in which each man looks up to every other?

That would be the best of all possible worlds.

It might require only that we change the way we look at others.

Or it might require that we change ourselves.

Categories
Civilization Meta Miscellany

Two Equalities

There is the equality in which one man looks up to another, and the other looks up to him. The first is convinced that he is inferior to the other. And the second is convinced that he is inferior to the first. The first therefore wishes to follow the second. And for the same reason the second wishes to follow the first. In the end, they follow each other. This is an equality bred of hierarchy and hierarchical thinking, of domination and obedience, of excellence and humility, of admiration and connection.

There is another kind of equality in which one man looks straight across at another and says to himself: “he is no better or worse than I.” And the other man looks at the first and says: “he is no better or worse than I.” This is an equality of isolation, mediocrity, resentment, orgeuil.

Give me the first equality. Never the second.

Categories
Meta Miscellany

Doubt

Suppose that we happen to live in a universe in which magic is real, but only if everyone believes in it. It would follow that with the birth of the first scientist magic would shut down, and that scientist would be unable to find evidence of magic’s existence, other than in the accounts of those who had once experienced it first hand, which the scientist would of course attribute to delusion or hunger or psychotropic substance.

Of course, the consequences of magic would still exist in the world. If Merlin had indeed levitated that boulder and placed it over there, the boulder would still, of course, be over there. But the scientist would find other plausible explanations for the boulder’s location. The data supporting these other plausible explanations would be subject to omitted variable bias, with the omitted variable being, of course, magic. But the only way to test the influence of that variable on the boulder’s location would be to measure the historical incidence of magic. And that would be impossible because, again, in this universe as soon as even one person stops believing in magic, magic ceases there to be. There would be nothing to measure.

One might, of course, use proxy variables to try to measure historical magic—to measure historical magic by measuring its historical effects—but there would always be some other, non-magic variable that could be used to explain such effects, just as Ptolemaic geocentrism did a tolerably good job of predicting the planets’ positions in the sky despite being wrong. And, unlike magic, that variable would be measurable, and so would be more likely to convince science.

There being no way, therefore, to determine empirically whether we live in a universe in which there never was magic or in a universe in which there was magic but is none anymore, we are free to read the ancients, who tell us over and again about the interventions of the gods, as describing not delusion but a magic that really, actually was.

So, Greg Anderson, we need not merely pretend that what the ancients believed was real in order to understand them, we can also plausibly accept that the ancients were right.

Categories
Civilization Meta Miscellany World

Why Do Mechanical Explanations of the Social Deny Software?

They say that a good social theory must throw out some reality in order to have any explanatory power. Thinkers who favor mechanical explanations of the social—the people who claim that it is climate or asteroids or guns, germs, and steel that explain the rise and fall of civilizations—always seem to throw out the part of the mechanism that is the software. Why?

That is, all mechanistic explanations of the social treat people as machines—robots—that have certain operating limits. They need food and water. They need temperatures that are not too high and not too low. They cannot withstand the slash of a steel weapon. They are susceptible to disease. And so on and all true. These operating limits do constrain what the robots can do. But that is far from all.

Robots need an instruction set to run; they need, in other words, a behavior. And if the dawn of the age of artificial intelligence should be teaching us anything, it is that behavior matters a lot. There is a very big difference between a car, a car that knows to break before hitting something on the highway, and a self-driving car. There is a very big difference between a Rhoomba that moves only in straight lines and one that criss-crosses the room. It would seem to follow that the robots’ software should matter a lot in the rise and fall of civilizations. So why not make social theory by keeping the software and throwing out the robot hardware instead?

Programming in the social is thought, belief, training, worship, prejudice, emotion, philosophy, literature, letters, culture, art. It is the humanities. Humanistic explanations for things—Ruskin’s observation that you can read the decline of a civilization in its art—theorize the social in terms of the human robot’s programming. The humanities throw out the hardware.

(By programming I do not mean that we are necessarily controlled by others. In human beings we are dealing with semi-autonomous, artificially (nay, actually!) intelligent robots. So programming, for us, necessarily means self-programming at both the individual and social levels. Our programs are some peculiar function of inputs from other robots, inputs from the programs of the robots themselves (that is, we use our thought to influence ourselves), and hard-coded inputs (those determined by our genes).)

It is a peculiar thing that at the same moment that, as a technological matter, we are coming to recognize the transformative nature of artificial intelligence in relation to hardware, and indeed at the same moment that, thanks to the great financial success of companies like Google and Facebook, which derives entirely from the value of connecting businesses with individual minds, we are coming to appreciate the great difference influence over minds makes in social outcomes, we should continue to favor mechanical explanations for the social, to attribute the fall of Rome to barbarian invasions rather than decadence, or the rise of China to good policy rather than good spirit.

When we do consider the software, we tend to ignore the most important parts. We credit the power of propaganda, but not the power of religion, ideas, philosophy, love, or, indeed, art. But these too are a part of the programming, and if you judge by the things you yourself hold most dear, likely the most important part.

So do not tell me that talking won’t work. That writing will never change things. That symbolic protest is weak. Or that the only political power grows out of the barrel of a gun—unless you believe that your computer will behave the same no matter what software it runs.

Categories
Meta Miscellany World

If Mars Attacks, It Will Be Us

Maybe the best Martian policy would be to prevent anyone from colonizing Mars, rather than to colonize it first.

Let’s assume for a moment that Mars really can be developed into a self-sufficient Earth 2.0. A big if, of course.

But if true, then see: The New World.

Settlers always have high asabiya, thanks to the challenges they face, and homogeneous interests relative to those who remain in the Old World, with its historic divisions. The Old World always thinks it can control the new, otherwise it wouldn’t foolishly bankroll settlers. But the new is far, far away. It is protected by distance. It is bigger than the territory of any one mother country.

And because it is united—or will become united, because, again, regardless of the origin of the settlers, their interests are always more in common with each other than with those of their mother countries—it can exploit this bounty at scales that no one mother country can ever hope to match.

So, eventually, the new will know its own power and come to dominate the old.

It has, after all, happened before.

And even if we don’t think Mars might be viable, or we think it might be more likely to make a Cuba than a U.S.A., why risk it?

Indeed, colonizing activity by a dominant country is always a self-inflicted wound. Colonization necessarily dilutes the dominant country’s power, because any new territories dilute the power of the earth entire. If I’m two thirds of one and I add one, now I’m one third. The only reason to colonize is to preclude others from doing so; it’s a race to the bottom.

But you can also try to enforce a rule against racing.

And if you were wondering why, in the 15th century, it was the Spaniards who went off looking for new worlds, and not the great powers of the day, not the Ottomans or the Chinese, you have your answer.

Categories
Meta Miscellany

F-Stop

Source: Adapted from N.Y.Times.

The thing that astonishes me about photography is the proof it seems to provide that the past was real. I should never, ever have thought that was the case were it not for photography, my own memories appear so much as dream images to me. They crystallize, like Stendhal’s twigs pulled from the salt mines encrusted with diamonds, until I cannot be sure that they were real. Whatever led scientists to pick, out of the vast spectrum of possible explanations for memory, out of the fairies and gods, the view that memory is just the lasting impression made by light upon the brain?

Categories
Antitrust Meta Philoeconomica

Liu et al. and the Good and Bad in Economics

Liu et al.’s paper trying to connect market concentration to low interest rates reflects everything that’s good and bad about economics.

The Good Is the Story

The good is that the paper tells a plausible story about why the current era’s low interest rates might actually be the cause of the low productivity growth and increasing markups we are observing, as well as the increasing market concentration we might also be observing.

The story is that low interest rates encourage investment in innovation, but investment in innovation paradoxically discourages competition against dominant firms, because low rates allow dominant firms to invest more heavily in innovation in order to defend their dominant positions.

The result is fewer challenges to market dominance and therefore less investment in innovation and consequently lower productivity growth, increasing markups, and increasing market concentration.

Plausible does not mean believable, however.

The notion that corporate boards across America are deciding not to invest in innovation because they think dominant firms’ easy access to capital will allow them to win any innovation war is farfetched, to say the least.

“Gosh, it’s too bad rates are so low, otherwise we might have a chance to beat the iPhone,” said one Google Pixel executive to another never.

And it’s a bit too convenient that this monopoly-power-based explanation for two of the major stylized facts of the age–low interest rates and low productivity growth–would come along at just the moment when the news media is splashing antitrust across everyone’s screens for its own private purposes.

But plausibility is at least helpful to the understanding (as I will explain more below), and the gap between it and believability is not the bad part of economics on display in Liu et al.

The Bad Is the General Equilibrium

The bad part is the the authors’ general equilibrium model.

They think they need the model to show that the discouragement competitors feel at the thought of dominant firms making large investments in innovation to thwart them outweighs the incentive that lower interests rates give competitors, along with dominant firms, to invest in innovation.

If not, then competitors might put aside their fears and invest anyway, and productivity growth would then increase anyway, and concentration would fall.

Trouble is, no general equilibrium model can answer this question, because general equilibrium models are not themselves even approximately plausible models of the real world, and economists have known this since the early 1970s.

Intellectually Bankrupt for a While Now

Once upon a time economists thought they could write down a model of the economy entire. The model they came up with was built around the concept of equilibrium, which basically meant that economists would hypothesize the kind of bargains that economic agents would be willing to strike with each other–most famously, that buyers and sellers will trade at a price at which supply equals demand–and then show how resources would be allocated were everyone in the economy in fact to trade according to the hypothesized bargaining principles.

As Frank Ackerman recounts in his aptly-titled assessment of general equilibrium, “Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory,” trouble came in the form of a 1972 proof, now known as the Sonnenschein-Mantel-Debreu Theorem, that there is never any guarantee that actual economic agents will bargain their way to the bargaining outcomes–the equilibria–that form the foundation of the model.

In order for buyers and sellers of a good to trade at a price the equalizes supply and demand, the quantity of the good bid by buyers must equal the quantity supplied at the bid price. If the price doesn’t start at the level that equalizes supply and demand–and there’s not reason to suppose it should–then the price must move up or down to get to equilibrium.

But every time price moves, it affects the budgets of buyers and sellers, who much then adjust their bids across all the other markets in which they participate, in order to rebalance their budgets. But that in turn means prices in the other markets must change to rebalance supply and demand in those markets.

The proof showed that there is no guarantee that the adjustments won’t just cause prices to move in infinite circles, an increase here triggering a reduction there that triggers another reduction here that triggers an increase back there, and so on, forever.

Thus there is no reason to suppose that prices will ever get to the places that general equilibrium assumes that they will always reach, and so general equilibrium models describe economies that don’t exist.

Liu et al.’s model describes an economy with concentrated markets, so it doesn’t just rely on the supply-equals-demand definition of equilibrium targeted by the Sonnenschein-Mantel-Debreu Theorem, a definition of equilibrium that seeks to model trade in competitive markets. But the flaw in general equilibrium models is actually even greater when the models make assumptions about bargaining in concentrated markets.

We can kind-of see why, in competitive markets, an economic agent would be happy to trade at a price that equalizes supply and demand, because if the agent holds out for a higher price, some other agent waiting in the wings will jump into the market and do the deal at the prevailing price.

But in concentrated markets, in which the number of firms is few, and there is no competitor waiting in the wings to do a deal that an economic agent rejects, holding out for a better price is always a realistic option. And so there’s never even the semblance of a guarantee that whatever price the particular equilibrium definition suggests should be the one at which trade takes place in the model would actually be the price upon which real world parties would agree. Buyer or seller might hold out for a better deal at a different price.

Indeed, in such game theoretic worlds, there is not even a guarantee that any deal at all will be done, much less a deal at the particular price dictated by the particular bargaining model arbitrarily favored by the model’s authors. Bob Cooter called this possibility the Hobbes Theorem–that in a world in which every agent holds out for the best possible deal, one that extracts the most value from others, no deals will ever get done and the economy will be laid to waste.

The bottom line is that all general equilibrium models, including Liu et al.’s, make unjustified assumptions about the prices at which goods trade, not to mention whether trade will take place at all.

But are they at least good as approximations of reality? The answer is no. There’s no reason to suppose that they get prices only a little wrong.

That makes Liu et al.’s attempt to use general equilibrium to prove things about the economy something of a farce. And their attempt to “calibrate” the model by plugging actual numbers from the economy into it in order to have it spit out numbers quantifying the effect of low interest rates on productivity, absurd.

If general equilibrium models are not accurate depictions of the economy, then using them to try to quantify actual economic effects is meaningless. And a reader who doesn’t know better might might well come away from the paper with a false impression of the precision with which Liu et al. are able to make their economic arguments about the real world.

So Why Is It Still Used?

But if general equilibrium is a bad description of reality, why do economists still use it?

It Creates a Clear Pecking Order

Partly because solving general equilibrium models is hard, and success is clearly observable, so keeping general equilibrium models in the economic toolkit provides a way of deciding which economists should get ahead and be famous: namely, those who can work the models.

By contrast, lots of economists can tell plausible, even believable, stories about the world, and it can take decides to learn which was actually right, making promotion and tenure decisions based on economic stories a more fraught, and necessarily political, undertaking.

Indeed, it is not without a certain amount of pride that Liu et al. write in their introduction that

[w]e bring a new methodology to this literature by analytically solving for the recursive value functions when the discount rate is small. This new technique enables us to provide sharp, analytical characterizations of the asymptotic equilibrium as discounting tends to zero, even as the ergodic state space becomes infinitely large. The technique should be applicable to other stochastic games of strategic interactions with a large state space and low discounting.

Ernest Liu et al., Low Interest Rates, Market Power, and Productivity Growth 63 (NBER Working Paper, Aug. 2020).

Part of the appeal of the paper to the authors is that they found a new way to solve the particular category of models they employ. The irony is that technical advances of this kind in general equilibrium economics are like the invention of the coaxial escapement for mechanical watches in 1976: a brilliant advance on a useless technology.

It’s an Article of Faith

But there’s another reason why use of general equilibrium persists: wishful thinking. I suspect that somewhere deep down economists who devote their lives to these models believe that an edifice so complex and all-encompassing must be useful, particularly since there are no other totalizing approaches to mathematically modeling the economy on offer.

Surely, think Liu et al., the fact that they can prove that in a general equilibrium model low interest rates drive up concentration and drive down productivity growth must at least marginally increase the likelihood that the same is actually true in the real world.

The sad truth is that, after Sonnenschein-Mantel-Debreu, they simply have no basis for believing that. It is purely a matter of faith.

Numeracy Is Charismatic

Finally, general equilibrium persists because working really complicated models makes economics into a priesthood. The effect is exactly the same as the effect that writing had on an ancient world in which literacy was rare.

In the ancient world, reading and writing were hard and mysterious things that most people couldn’t do, and so they commanded respect. (It’s not an accident that after the invention of writing each world religion chose to idolize a book.) Similarly, economics–and general equilibrium in particular–is something really hard that most literate people, indeed, even most highly-educated people and even most social scientists, cannot do.

And so it commands respect.

I have long savored the way the mathematical economist gives the literary humanist a dose of his own medicine. The readers and writers lorded it over the illiterate for so long, making the common man shut up because he couldn’t read the signs. It seems fitting that the mathematical economists should now lord their numeracy over the merely literate, telling the literate that they now should shut up, because they cannot read the signs.

It is no accident, I think, that one often hears economists go on about the importance of “numeracy,” as if to turn the knife a bit in the poet’s side. Numeracy is, in the end, the literacy of the literate. But schadenfreude shouldn’t stop us from recognizing that general equilibrium has no more purchase on reality than the Bhagavad Gita.

To be sure, economists’ own love affair with general equilibirium is somewhat reduced since the Great Recession, which seems to have accelerated a move from theoretical work in economics (of which general equilibrium modeling is an important part) to empirical work.

But it’s important to note here that economists have in many ways been reconstituting the priesthood in their empirical work.

For economists do not conduct empirics the way you might expect them to, by going out and talking to people and learning about how businesses function. Instead, they prefer to analyze data sets for patterns, a mathematically-intensive task that is conveniently conducive to the sort of technical arms race that economists also pursue in general equilibrium theory.

If once the standard for admission to the cloister was fluency in the latest general equilibrium techniques, now it is fluency in the latest econometric techniques. These too overawe non-economists, leaving them to feel that they have nothing to contribute because they do not speak the language.

Back to the Good

But general equilibrium’s intellectual bankruptcy is not economics’ intellectual bankruptcy, and does not even mean that Liu et al.’s paper is without value.

For economic thinking can be an aid to thought when used properly. That value appears clearly in Liu et al.’s basic and plausible argument that low interest rates can lead to higher concentration and lower productivity growth. Few antitrust scholars have considered the connection between interest rates and market concentration, and the basic story Liu et al. tell give antitrusters something to think about.

What makes Liu et al.’s story helpful, in contrast to the general equilibrium model they pursue later in the paper, is that it is about tendencies alone, rather than about attempting to reconcile all possible tendencies and fully characterize their net product, as general equilibrium tries to do.

All other branches of knowledge undertake such simple story telling, and indeed limit themselves to it, and so one might say that economics is at its best when it is no more ambitious in its claims than any other part of knowledge.

When a medical doctor advises you to reduce the amount of trace arsenic in your diet, he makes a claim about tendencies, all else held equal. He does not claim to account for the possibility that reducing your arsenic intake will reduce your tolerance for arsenic and therefore leave you unprotected against an intentional poisoning attempt by a colleague.

If the doctor were to try to take all possible effects of a reduction in arsenic intake into account, he would fail to provide you with any useful knowledge, but he would succeed at mimicking a general equilibrium economist.

When Liu et al. move from the story they tell in their introduction to their general equilibrium model, they try to pin down the overall effect of interest rates on the economy, accounting for how every resulting price change in one market influences prices in all other markets. That is, they try in a sense to simulate an economy in a highly stylized way, like a doctor trying to balance the probability that trace arsenic intake will give you cancer against the probability that it will save you from a poisoning attempt. Of course they must fail.

When they are not deriding it as mere “intuition,” economists call the good economics to which I refer “partial equilibrium” economics, because it doesn’t seek to characterize equilibria in all markets, but instead focuses on tendencies. It is the kind of economics that serves as a staple for antitrust analysis.

What will a monopolist’s increase in price do to output? If demand is falling in price–people buy less as price rises–then obviously output will go down. And what will that mean for the value that consumers get from the product? It must fall, because they are paying more, so we can say that consumer welfare falls.

Of course, the higher prices might cause consumers to purchase more of another product, and economies of scale in production of that other product might actually cause its price to fall, and the result might then be that consumer welfare is not reduced after all.

But trying to incorporate such knock-on effects abstractly into our thought only serves to reduce our understanding, burying it under a pile of what-ifs, just as concerns about poisoning attempts make it impossible to think clearly about the health effects of drinking contaminated water.

If the knock-on effects predominate, then we must learn that the hard way, by acting first on our analysis of tendencies. And even if we do learn that the knock-on effects are important, we will not respond by trying to take all effects into account general-equilibrium style–for that would gain us nothing but difficulty–but instead we will respond by flipping our emphasis, and taking the knock-on effects to be the principal effects. We will assume that the point of ingesting arsenic is to deter poisoning, and forget about the original set of tendencies that once concerned us, namely, the health benefits of avoiding arsenic.

Our human understanding can do no more. But faith is not really about understanding.

(Could it be that general equilibrium models are themselves just about identifying tendencies, showing, perhaps, that a particular set of tendencies persists even when a whole bunch of counter-effects are thrown at it? In principle, yes. Which is why very small general equilibrium models, like the two-good exchange model known as the Edgeworth Box, can be useful aids to thought. But the more goods you add in, and the closer the model comes to an attempt at simulating an economy–the more powerfully it seduces scholars into “calibrating” it with data and trying to measure the model as if it were the economy–the less likely it is that the model is aiding thought as opposed to substituting for it.)