This Site Has Moved!

Because “Cosmopolis” has wound up focusing more on economics than geography, I have decided to morph the site, changing its name and moving it to another location.

Nothing else has changed. Not even the theme.

You can now get your fix – for what it’s worth – at

http://www.thedismalscientist.wordpress.com

Thank you for spending time here, and I hope to see you soon!

A Primer on Keynesian Economics, with Help from JS Mill

Here’s JS Mill contra Say’s Law:

There can never, it is said, be a want of buyers for all commodities; because whoever offers a commodity for sale, desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must e more buyers than sellers for another. This argument is evidently founded on the supposition of a state of barter; and, on that supposition, it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying. Unless he chooses to buy some other person’s commodity, he does not sell his own. If, however, we suppose that money is used, there propositions cease to be exactly true. It must be admitted that no person desires money for its own sake […] and that he who sells his commodity, receiving money in exchange, does so with the intention of buying with that same money some other commodity. Interchange by means of money is therefore, as has been often observed, ultimately nothing but barter. But there is this difference – that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do the one without doing the other. Now the effect of the employment of money, and even the utility of it, is, that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur, that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible.

So I’m saying to myself: Here is John Mill, a “classical economist” par excellence, arguing against Say’s Law – that production creates its own demand – in what appears to be quite a Keynesian fashion.

“So what’s the difference,” I’m asking myself (I’m such a novice), “between Mill’s analysis of the fallacy of Say’s Law and Keynes’s, that Keynes is such a big deal and Mill – well, not so much?”

On reflection, I located the difference (and have italicized it for your convenience). Although he recognized the “disjunct” between buying and selling made possible by the unique nature of money, Mill does not explicitly identify it as a store of value. In arguing that “he who sells really sells only to buy”, Mill shows that his thinking about money is still confined to what economists call “transactions demand for money”, in which people want to hold money only to buy and sell things with it.

Keynes, on the other hand, does not agree that “no person desires money for its own sake”. In fact, his insight that people sell – that is, buy money – for reasons wholly other than to buy more Things That Are Not Money – lies at the very center of Keynes’s whole theory of unemployment and his disagreement with the “classical” economists.

According to Keynes, people can desire money “for its own sake”, rather than for its role as a medium of exchange. People want their wealth in the form of money not just as a lubricant to commerce (Hume’s “oil”), but also as a refuge from the uncertainty inherent in the values of non-liquid assets.

To see this, think about the current recession. Doesn’t everybody sort of wish they had just held on to their money, instead of buying stocks and bonds and houses and CDOs and all sorts of other things whose prices ended up tanking? Of course they do. And that’s why everyone is now “fleeing to safety”, holding their wealth in the form of idle cash deposits, or perhaps ultra-safe bonds.

This “flight to safety” hints at the other, related, key concept of Keynesian economics: uncertainty. Why do people take advantage of money’s function as a “store of value”? Because they have no idea what will happen to the value of anything else (but in times like the present, they have a feeling that the values of everything else will keep dropping).

If your wealth is in the form of houses, you could very well end up sitting on a bunch of houses that you cannot sell, and you can only enjoy one at a time for yourself, so your wealth isn’t very wealth-y. If you had not bought those houses, and just held on to your cash, your wealth would still be wealth-y, because you could turn that money over for stuff you can use. That’s the great thing about money: you can always turn it over.

Mill goes on to argue that a glut, even though it can happen, can never be permanent. This is the other crucial difference between Keynes and the classical economists. Keynes insisted that there is no automatic righting mechanism to lift demand for Things That Are Not Money to a level that would require the employment of everyone able and willing to work.

So these are the 3 core pieces of Keynes’s take-home lesson:

1. Uncertainty (which leads to)
2. the desire to hold wealth in the form of money instead of Things That Are Not Money (made possible by the)
3. absence of an equilibrating mechanism.

This absence of an equilibrating mechanism leads to the need for fiscal policy, such as ARRA.

But that’s another story for another post.

Superfunk

Here’s Mark Thoma opining concerning the “villains” of the present crisis. (He opens by listing candidates: irresponsible borrowers and lenders, benighted economists (incidentally, this is my vote), China, the Fed (I swear to heaven, some people would blame the Fed for their common cold, but that doesn’t mean they’re not to blame), etc. I will have a couple of unimportant things to say afterward:

But even that wasn’t enough to produce a bubble by itself, we have to ask why the checks and balances within the housing sector, both from the market and from regulators, failed to stop the massive flow of money into these assets. The reason is that there were incentive problems all the way through the system. The homeowner gets a non-recourse loan which makes risks mostly one-sided, real estate agents are paid on commission giving them to incentive to maximize the number of houses sold at the highest price they can get, real estate appraisers were in the pocket of the real estate agents (that’s obvious when you buy a house), if they don’t give the values the agents are looking for, their phone stops ringing. The mortgage brokers were being paid, essentially, on commission and they were able to move these loans off their books – sell them as repackaged securities – so as to remove any long-run interest in the outcome of the loans (so they didn’t care what the appraisers said). Their incentive was to sell as many loans as possible with no real concern for quality. Why did people buy these repackaged loans from banks and brokers? Here we come again to the ratings agencies and the poor risk assessment models, the culture within these institutions, moral hazard from implicit or explicit government guarantees, compensation structures, and so on. The incentives at just about every step of the process were to create as many loans as possible with little regard to quality, every check and balance that ought to be in place was missing. The market did not self correct, and regulators clearly fell down on the job, fixing any one of these incentives could have made a big difference by plugging up the pass-through of the excess liquidity from China and the Fed, but the regulators were absent. Whether this is due to incompetence, poorly structured regulatory procedures, or regulatory capture – money talks and nobody wanted to spoil the party – I don’t know for sure. But the regulatory failures were clearly broad based.

Now, a couple of unimportant things, arranged in order of unimportance:

First of all, Mark Thoma needs to learn how to use commas. I love the View (no, not that one), but come on.

Second of all, in regard to incentives, I’ve been thinking lately – and I have a feeling I’m not the first to say this in so many words, but I’m not well enough read in economics to say who my (surely illustrious) predecessors are or in what illustrious tomes they iterated this idea – that economic security, like every other kind of security, is among those public goods, of which Adam Smith wrote so long ago, which need to be provided by the state precisely because there are not sufficient private resources to create it or because there is not sufficient incentive to recruit private resources to its creation. Everyone wants security, but no one is willing to pay the cost of security, because there’s nothing in the way of a return on investment, in the sense that the return on investment would belong to everyone rather than exclusively to the people who paid for it. Given the miserable failure of monetary policy – on full display right now – this is, I believe, a sound argument for fiscal policy. In fact, I think this is the broadest statement of the conclusions of Keynesian economics: the private realm is in a superfunk, and part of being in a superfunk is that you cannot get yourself out of it. Somebody else has to get you out of a superfunk. (In 1907, JP Morgan got the U.S. out of a not-quite-super funk.) Now, while the possibility that Jesus will descend from the clouds and raise economies from the dead cannot be ruled out entirely, it seems that only governments can lift us out of a superfunk right now. In other words, only governments can provide security, because it is a public good.

Of course, there are problems here that fall squarely under the “moral hazard” umbrella. But I think – and I don’t know, I just think – that professional economists, sociologists, political scientists, and anybody else who cares to give it a shot should take this opportunity to rethink the relationship between the public realm, the private realm, and the moral hazard phenomenon. I say this because, as easy and seemingly simple as it seems to rid the world of the moral hazard by minimizing the role of government to the very limit, the cookie does not crumble this way in the real world. In the real world, we have this pattern in which the private realm tells the state “Hands off!” during boom times and then runs to the government for bailouts and “rent” during the thus-far-apparently-inevitable superfunks. So the moral hazard does not disappear when government is minimized, as much because the private realm wants the government ready to hand for morally hazardous purposes as because the government is – well, you know, doing its job and trying to make life secure for everybody.

My question, then, is where is the moral hazard socially located? Is it in an overly involved government, or is it in a private realm that wants its government neither small nor large but just right, i.e., a private realm that wants the government to be, quite frankly, its enabler, its messiah, its defender, its bitch, and out of the way, all at once?

Rethinking (at least a Component of) the American Dream

Richard Florida writing for the Atlantic this month (in my estimation one of the most creative and important pieces of literature to emerge from the global downturn so far):

The housing bubble was the ultimate expression, and perhaps the last gasp, of an economic system some 80 years in the making, and now well past its “sell-by” date. The bubble encouraged massive, unsustainable growth in places where land was cheap and the real-estate economy dominant. It encouraged low-density sprawl, which is ill-fitted to a creative, post-industrial economy. And not least, it created a workforce too often stuck in one place, anchored by houses that cannot be profitably sold, at a time when flexibility and mobility are of great importance.

So how do we move past the bubble, the crash, and an aging, obsolescent model of economic life? What’s the right spatial fix for the economy today, and how do we achieve it?

The solution begins with the removal of homeownership from its long-privileged place at the center of the U.S. economy. Substantial incentives for homeownership (from tax breaks to artificially low mortgage-interest rates) distort demand, encouraging people to buy bigger houses than they otherwise would. That means less spending on medical technology, or software, or alternative energy – the sectors and products that could drive U.S. growth and exports in the coming years. Artificial demand for bigger houses also skews residential patterns, leading to excessive low-density suburban growth. The measures that prop up this demand should be eliminated.

If anything, our government policies should encourage renting, not buying. Homeownership occupies a central place in the American Dream primarily because decades of policy have put it there. A recent study by Grace Wong, an economist at the Wharton Shool of Business, shows that, controlling for income and demographics, homeowners are no happier than renters, nor do they report lower levels of stress or higher levels of self-esteem.

And while homeownership has some social benefits – a higher level of civic engagement is one – it is costly to the economy. The economist Andrew Oswald has demonstrated that in both the United States and Europe, those places with higher homeownership rates also suffer from higher unemployment. Homeownership, Oswald found, is a more important predictor of unemployment than rates of unionization or the generosity of welfare benefits. Too often, it ties people to declining or blighted locations, and forces them into work – if they can find it – that is a poor match for thei interests and abilities.

As homewonwership rates have risen, our scoeity s become less nimble: in the 1950s and 1960s, Americans were nearly twice as likely to move in a given year as they are today. Last year fewer Americans moved, as a percentage of the population, than in any year since the Census Bureau started tracking address changes, in the late 1940s. This sort of creeping rigidity in the labor market is a bad sign for the economy, particularly in a time when businesses, industries, and regions are rising and falling quickly.

[…]

[D]ifferent eras favor different places, along with the industries and lifestyles those places embody. Band-Aids and bailouts cannot change that. Neither auto-company rescue packages nor policies designed to artificially prop up housing prices will position the country for renewed growth, at least not of the sustainable variety. We need to let demand for the key products and lifestyles of the old order fall, and begin building a new economy, based on a new geography.

What will this geography look like? It will likely be sparser in the Midwest and also, ultimately, in those parts of the Southeast that are dependent on manufacturing. Its suburbs will be thinner and its houses, perhaps, smaller. Some of its southwestern cities will grow less quickly. Its great mega-regions will rise farther upward and extend farther outward. It will feature a lower rate of homeownwership, and a more mobile population of renters. In short, it will be a more concentrated geography, one that allows more people to mix more freely and interact more efficiently in a discrete number of dense, innovative mega-reigions and creative cities Serendipitously, it will be a landscape suited to a world in which petroleum is no longer cheap by any measure. But most of all, it will be a landscape that can accommodate and acclerate invention, innovation, and creation […].

Forecasts from “a postevangelical reformation Christian in search of a Jesus-shaped spirituality” (?)

On the heels of a USA Today article (sorry, no link) reporting a recent ARIS survey reporting a dramatic rise in “Nones” (people who check the “none” box when asked what religion they identify with) comes this musing from Michael Spencer, a self-described “post-evangelical reformation Christian in search of a Jesus-shaped spirituality”:

The coming evangelical collapse
An anti-Christian chapter in Western history is about to begin. But out of the ruins, a new vitality and integrity will rise.
By Michael Spencer
from the March 10, 2009 edition

Oneida, Ky. – We are on the verge – within 10 years – of a major collapse of evangelical Christianity. This breakdown will follow the deterioration of the mainline Protestant world and it will fundamentally alter the religious and cultural environment in the West.

Within two generations, evangelicalism will be a house deserted of half its occupants. (Between 25 and 35 percent of Americans today are Evangelicals.) In the “Protestant” 20th century, Evangelicals flourished. But they will soon be living in a very secular and religiously antagonistic 21st century.

This collapse will herald the arrival of an anti-Christian chapter of the post-Christian West. Intolerance of Christianity will rise to levels many of us have not believed possible in our lifetimes, and public policy will become hostile toward evangelical Christianity, seeing it as the opponent of the common good.

Millions of Evangelicals will quit. Thousands of ministries will end. Christian media will be reduced, if not eliminated. Many Christian schools will go into rapid decline. I’m convinced the grace and mission of God will reach to the ends of the earth. But the end of evangelicalism as we know it is close.

Why is this going to happen?

1. Evangelicals have identified their movement with the culture war and with political conservatism. This will prove to be a very costly mistake. Evangelicals will increasingly be seen as a threat to cultural progress. Public leaders will consider us bad for America, bad for education, bad for children, and bad for society.

The evangelical investment in moral, social, and political issues has depleted our resources and exposed our weaknesses. Being against gay marriage and being rhetorically pro-life will not make up for the fact that massive majorities of Evangelicals can’t articulate the Gospel with any coherence. We fell for the trap ofbelieving in a cause more than a faith.

2. We Evangelicals have failed to pass on to our young people an orthodox form of faith that can take root and survive the secular onslaught. Ironically, the billions of dollars we’ve spent on youth ministers, Christian music, publishing, and media has produced a culture of young Christians who know next to nothing about their own faith except how they feel about it. Our young people have deep beliefs about the culture war, but do not know why they should obey scripture, the essentials of theology, or the experience of spiritual discipline and community. Coming generations of Christians are going to be monumentally ignorant and unprepared for culture-wide pressures.

3. There are three kinds of evangelical churches today: consumer-driven megachurches, dying churches, and new churches whose future is fragile. Denominations will shrink, even vanish, while fewer and fewer evangelical churches will survive and thrive.

4. Despite some very successful developments in the past 25 years, Christian education has not produced a product that can withstand the rising tide of secularism. Evangelicalism has used its educational system primarily to staff its own needs and talk to itself.

5. The confrontation between cultural secularism and the faith at the core of evangelical efforts to “do good” is rapidly approaching. We will soon see that the good Evangelicals want to do will be viewed as bad by so many, and much of that work will not be done. Look for ministries to take on a less and less distinctively Christian face in order to survive.

6. Even in areas where Evangelicals imagine themselves strong (like the Bible Belt), we will find a great inability to pass on to our children a vital evangelical confidence in the Bible and the importance of the faith.

7. The money will dry up.

What will be left?

•Expect evangelicalism to look more like the pragmatic, therapeutic, church-growth oriented megachurches that have defined success. Emphasis will shift from doctrine to relevance, motivation, and personal success – resulting in churches further compromised and weakened in their ability to pass on the faith.

•Two of the beneficiaries will be the Roman Catholic and Orthodox communions. Evangelicals have been entering these churches in recent decades and that trend will continue, with more efforts aimed at the “conversion” of Evangelicals to the Catholic and Orthodox traditions.

•A small band will work hard to rescue the movement from its demise through theological renewal. This is an attractive, innovative, and tireless community with outstanding media, publishing, and leadership development. Nonetheless, I believe the coming evangelical collapse will not result in a second reformation, though it may result in benefits for many churches and the beginnings of new churches.

•The emerging church will largely vanish from the evangelical landscape, becoming part of the small segment of progressive mainline Protestants that remain true to the liberal vision.

•Aggressively evangelistic fundamentalist churches will begin to disappear.

•Charismatic-Pentecostal Christianity will become the majority report in evangelicalism. Can this community withstand heresy, relativism, and confusion? To do so, it must make a priority of biblical authority, responsible leadership, and a reemergence of orthodoxy.

•Evangelicalism needs a “rescue mission” from the world Christian community. It is time for missionaries to come to America from Asia and Africa. Will they come? Will they be able to bring to our culture a more vital form of Christianity?

•Expect a fragmented response to the culture war. Some Evangelicals will work to create their own countercultures, rather than try to change the culture at large. Some will continue to see conservatism and Christianity through one lens and will engage the culture war much as before – a status quo the media will be all too happy to perpetuate. A significant number, however, may give up political engagement for a discipleship of deeper impact.

Is all of this a bad thing?

Evangelicalism doesn’t need a bailout. Much of it needs a funeral. But what about what remains?

Is it a good thing that denominations are going to become largely irrelevant? Only if the networks that replace them are able to marshal resources, training, and vision to the mission field and into the planting and equipping of churches.

Is it a good thing that many marginal believers will depart? Possibly, if churches begin and continue the work of renewing serious church membership. We must change the conversation from the maintenance of traditional churches to developing new and culturally appropriate ones.

The ascendency of Charismatic-Pentecostal-influenced worship around the world can be a major positive for the evangelical movement if reformation can reach those churches and if it is joined with the calling, training, and mentoring of leaders. If American churches come under more of the influence of the movement of the Holy Spirit in Africa and Asia, this will be a good thing.

Will the evangelicalizing of Catholic and Orthodox communions be a good development? One can hope for greater unity and appreciation, but the history of these developments seems to be much more about a renewed vigor to “evangelize” Protestantism in the name of unity.

Will the coming collapse get Evangelicals past the pragmatism and shallowness that has brought about the loss of substance and power? Probably not. The purveyors of the evangelical circus will be in fine form, selling their wares as the promised solution to every church’s problems. I expect the landscape of megachurch vacuity to be around for a very long time.

Will it shake lose the prosperity Gospel from its parasitical place on the evangelical body of Christ? Evidence from similar periods is not encouraging. American Christians seldom seem to be able to separate their theology from an overall idea of personal affluence and success.

The loss of their political clout may impel many Evangelicals to reconsider the wisdom of trying to create a “godly society.” That doesn’t mean they’ll focus solely on saving souls, but the increasing concern will be how to keep secularism out of church, not stop it altogether. The integrity of the church as a countercultural movement with a message of “empire subversion” will increasingly replace a message of cultural and political entitlement.

Despite all of these challenges, it is impossible not to be hopeful. As one commenter has already said, “Christianity loves a crumbling empire.”

We can rejoice that in the ruins, new forms of Christian vitality and ministry will be born. I expect to see a vital and growing house church movement. This cannot help but be good for an evangelicalism that has made buildings, numbers, and paid staff its drugs for half a century.

We need new evangelicalism that learns from the past and listens more carefully to what God says about being His people in the midst of a powerful, idolatrous culture.

I’m not a prophet. My view of evangelicalism is not authoritative or infallible. I am certainly wrong in some of these predictions. But is there anyone who is observing evangelicalism in these times who does not sense that the future of our movement holds many dangers and much potential?

Hmmm. I wonder if Mr. Spencer would settle for Jesus-shaped cookies?

Unusual Organizations Pt 4

Introducing…

The Christian Boys’ and Men’s Titanic Society!!!

This organization, headquartered in San Antonio, TX,

is devoted to portraying the story of the Titanic as it really happened. We stand for the proposition that the strong must sacrifice for the weak, that greater love hath no man than he lay down his life for another, and to the enduring legacy of those men who died that women and children might live.

What this looks like in practice the website leaves unclear. Probably looks like any other manifestation of patriarchal condescension…

Is (Macro)Economics Science?

Dani Rodrick applauds Keynesian warriors DeLong and Krugman, but concludes there’s something wrong with macroeconomics that needs explaining.

A commenter (apparently off a very long and learned speech by Friedrich Hayek) trenchantly observes that “An untold number of economists are at bottom bad philosophers with a false, Marvel Comics understanding of ‘science'”.

Stimulus Shushdown?

Here’s video ofBrad DeLong and Michele Boldrin arguing over the effectiveness of Stimulus.

I felt for DeLong, because it’s very difficult to remain dignified in debate with an overbearing – and rather pompous – clown. I am pretty sure Brad expected a grappling with the issues at hand, but Boldrin was simply not interested. He just did a lot of shoulder-shrugging and shushing.

I also felt for the debate’s auditors, who probably expected edification from an open debate between “experts” but were instead treated to a farcical performance by Boldrin that left DeLong with nothing to sharpen a saw against and therefore unable to edify.

DeLong is right; it was “very strange”. Almost as though Boldrin had no grasp of the most basic economic concepts, such as “unemployment” and “spending”. For instance, he seems not to know (or is pretending not to know) what people do with increases in their income (answer: they spend some and save some) or how (or even that) asset deflation bled into the rest of the economy.

Final note: Boldrin dismissed a very good analogy by DeLong. My mother always told me not to trust anyone who didn’t appreciate a good analogy.

Oh, well. Here’s wishing Brad DeLong worthier opponents in the future.

India-Africa Medical Link-Up

BBC reportsthat India will try to “bridge the digital divide” between South Asia and Africa by offering on-line physician consults and medical training to the struggling continent.

Another illustration that globalization, like almost everything else in this world, is a double-edged sword.

CBO on Stimulus

Here is the Congressional Budget Office’s estimate of the short-run and long-run effects of the American Recovery and Reinvestment Act of 2009.