Wednesday, December 16, 2009

An Economist of Our Time

Few people stand up to a close scrutiny. Paul Samuelson, who died on Sunday at the age of 94, fell apart at first glance. The man was a mountebank, a particularly offensive mix of knave and fool whose crowning as “Titan of Economics”, as the Wall Street Journal put it, said volumes about the society which did the crowning.

He neither understood nor followed the age-old advice that Clint Eastwood’s Inspector Callahan disdainfully summarized: “A man’s got to know his limitations”. In that, he was a fool. He knowingly and methodically downplayed, dismissed and covered up the contradictions that came into his ken, especially the ones which sprang from his “theories”. For that, he was a knave.

He was a “popularizer”; he stripped the “complexities” from the ideas to make them more palatable to the masses. He explained, according to the New York Times obituary, “what Marx could have meant by a labor theory of value”. (Marx meant what he said!)

He dabbled in everything and left behind “voluminous” writings. To the Times, they are the evidence of his “astonishing array of scientific theorems and conclusions”. What they are is a circular canon of superficiality; they show how one may write million of words on a subject and not advance it one iota forward. His Economics is a case in point. It sold millions of copies. It was a veritable cash cow for the Titan over a half a century. And it reads like a Danielle Steel novel, only with more inconsistencies. It is a hillbilly tune to the grand symphonies of the classical economics.

Here is a sample of the Times’ description of Samuelson’s contribution to economics, beginning with his much touted Neoclassical Synthesis.
Mr. Samuelson wedded Keynesian thought to conventional economics. He developed what he called Neoclassical Synthesis. The neoclassical economists in the late 19th century showed how forces of supply and demand generate equilibrium in the market for apples, shoes and all other consumer goods and services. The standard analysis had held that market economies, left to their own devices, gravitated naturally towards full employment.

Economists clung to this theory even in the wake of the Depression of the 1930s. But the need to explain the market collapse, as well as unemployment rates that soared to 25 percent, gave rise to a contrary strain of thought associated with Keynes.

Mr. Samuelson’s resulting “synthesis” amounted to the notion that economist could use the neoclassical apparatus to analyze economies operating near full employment, but switch over to Keynesian analysis when the economy turned sour.

To summarize: Theory A worked under Condition A, but not Condition B. Theory B worked under Condition B and not Condition A. Paul Samuelson came along and “wedded” the two together to create Theory AB. He suggested using part A under condition A and part B under condition B. This, he called “Neoclassical synthesis” – or “Can’t We Just Get Along?” (He probably got the idea from quantum mechanics, where the light is shown to be both wave and particle at the same time).
His speeches and his voluminous writing had a lucidity and bite not usually found in academic technicians. He tried to give his economic pronouncements a “snap at the end”, he said, “like Mark Twain”. When women began complaining about career and salary inequalities, he said in their defense, “Women are men without money.”
So the “Titan of Economics” wanted his comments to have bite, just like Mark Twain! How could have one explained to him that Mark Twain’s comments had a bite because he was conscious of the larger social inequalities. On this topic, he would have probably said: Women are black men.
Mr. Samuelson also formulated the theory of public goods – that is, goods that can be provided effectively only through collective, or government, action. National defense is one such public good. It is nonexclusive; the Navy, for example, exists to protect every citizen. It also eliminates rivalry among its many consumers; that is, the amount of security that any one citizen derives from the Navy subtracts nothing from the amount of security that any other citizen derives.

The features of public goods, Mr. Samuelson taught, stand in direct contrast to those ordinary goods, like apples. An apple eaten by one consumer is not available to any other. Public goods, he concluded, cannot be sold in private markets because individuals have no incentive to pay for them voluntarily. Instead they hope to get a free ride from the decisions of others to make the public goods available.
Here, Samuelson compares the U.S. Navy with an apple and “concludes” that no one would voluntarily buy a nuclear attack submarine, no matter how bad the crime situation got in the neighborhood. From this, he draws the further conclusion that the government has to force everyone to pay for the navy. (Notice how he chooses the safely remote Navy and ignores police, a more logical and intuitive example of the “public good”. Some might have questioned the “nonexclusivity” of the police force from their experience.)

Mr. Saber, now, really. You must be exaggerating; having fun at the expense of the dearly departed. There had to be some value to Samuelson’s work. More than half a century of prizes, awards, citations, recognitions; his book being translated to more than twenty languages and now all these posthumous praises. Surely you are not suggesting that all that is due to chicanery and the man fooled most of the people all his life. You, yourself call him an economist of our time. Even with the hint of disapproval that it is there, he had to do something to deserve the designation. No?

Samuelson influenced our world in two ways. Both were destructive. Both set back the cause of science and gave a black eye to civilization.

One is his “introduction” of mathematics to economics and, later, finance. A single sentence in the Times obituary – in code, as usual – captured this sinister deed:
Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.

Here, “mathematical rigor and clarity” means calculation. It is referring to Paul Samuelson taking economics, which was a social and philosophical discipline concerned with discovering the laws of the dynamics of social change, and bringing it down to the service of the businessmen, putting it to use for the calculation of profit and loss. It was the opportunistic seizing of an opportunity by an opportunist. And it was a serious blow. If the war of ideas were fought like wars, Samuelson would be shot for treason. I wrote about this in Vol. 1:
Pursuing mathematical finance along the lines of Portfolio Selection was advantageous in other ways too. It provided a respite from the contentious ideological disputes in economics between the Left and Right that in the era of McCarthyism were beginning to assume an ever sharper, and potentially career-ruining, tone. Research in mathematical finance had no downside risk. It was socially safe, it provided a perfectly respectable line of research and, with luck, it could lead to new discoveries and from there, to fame and fortune.

But, taking the Times’ descriptions, how does one solve problems and answer questions about cause and effect without ruminating about the issues? This question did not concern Samuelson. He was not interested in the larger social issues that resulted from the business decisions. His work on linear programming is the Exhibit A in this regard. From Vol. 1:
Linear programming epitomized the “objective” science. It seemed to be the embodiment of Friedman’s assertion that “positive economics is in principle independent of any particular ethical position.” The solutions it offered were arrived at mathematically and were indisputable. There was only one best way of scheduling oil tankers between a given number of ports if the profits were to be maximized or costs minimized. Democrats and Republicans, capitalists and communists, oil producers and tanker owners, all had to agree on it.

But while mathematics is abstract, it is always applied in the context of given social conditions. And precisely because mathematics is abstract, upon application it assumes the characteristics of the context to which it is applied. If the context is the Battle of Britain, the mathematics of linear programming shows the best way of organizing fighter planes. If the context is the profitability of commercial airlines, it still shows the best arrangement, which is establishing “hubs” and cutting service to low traffic destinations. Both solutions are mathematically correct. In the latter case, because the purpose behind the application of the method has changed–and that purpose is determine by social conditions–the solution leads to a different kind of consequences: medium-sized and small communities become further isolated.
It mattered little that Samuelson’s knowledge of mathematics was, like his knowledge of economics and finance, shallow. In Vol. 2 of Speculative Capital, you may recall, I examined a densely mathematical passage he wrote on warrants pricing. I was taken aback by flagrant flaws in calculation and reasoning and, especially the way Samuelson handled a contradiction that his own formulation had created; he simply dismissed it as “prosaic”. I wrote: “The passage, after it ceases to be funny, remains difficult to believe”.

What mattered is that Samuelson “delivered” the goods, the goods being the nations’ best and brightest to the service of finance. “When today’s associate professor of security analysis is asked, ’Young man, if you’re so smart, why ain’t you rich?’, he replies by laughing all the way to the bank or to his appointment as a high paid consultant to Wall Street”, he wrote in the introduction to Merton’s Continuous-Time Finance. That was the new goal of economics: training highly paid consultant to Wall Street. Looking back at what took place in the business schools and economics departments in the past 30 years, we must, in fairness, acknowledge Samuelson’s service.
When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson,” said Robert M. Solow, a fellow Nobel laureate and colleague of Mr. Samuelson’s at M.I.T.
Exactly. That is the secret of Samuelson’s fame and success: genuflection in the direction of the businessman. What a falling off was there.

Still, this retrogression pales next to the effects of Samuelson’s other deed, whose impact went further and deeper in the society. I do not suppose the man who emptied economics of social elements noticed or appreciated the irony.

Prior to Samuelson – and Friedman – writing and speaking about economics had been in the form of discourse, which is “proceeding from one judgment to another in logical sequence”, according to its dictionary definition. All classical economists were schooled in logic and philosophy. They could disagree with each other – and they often and vehemently did – but each side could answer and refute the opposing arguments point by point. Because there was a logical relation between the points of a case, in this way one could, if he had the logic on his side, refute the core thought of his opponent.

Samuelson, and his partner in crime, Milton Friedman, changed that. The change was violent and disorienting. It had a similar effect on the intellectual terrain that the introduction of the machine gun had brought to the battlefields of WWI. Whilst previously cavalry had charged the enemy lines, now two men behind a machine gun could hold the line against a thousand charging cavalrymen.

Samuelson and Friedman had no core theory, no central point, no logical anchor, only an “astonishing array of scientific theorems and conclusions”, which meant that they could not be nailed down to any particular position; they switched the subject and sides at will. And they were “formidable debaters”, according to the New York Times, precisely because the substitution of the spoken word for the written word created the ideal environment for their style of polemics. They uttered rapid-fire sequence of nonsensical assertions, peppered with false statistics that they knew no one could check.

With the rat-a-tat of their drivel, they killed discourse. They made discussion, and even conversation, impossible. What do you do with a man who goes on and on about the contrast between the U.S. Navy and an apple and cannot be thrown into a madhouse because of his Nobel Prize and M.I.T. tenure?

In this way, the Tweedle Dee and Tweedle Dum of economic scene invented the aggressive in-yourfaceness of unreason that we see today in talk radio hosts, Rush Limbaughs and the public figures. That is the main legacy of Samuelson with which we will have to live for years to come.

The Times obituary mentioned that Samuelson had trained and mentored many “brilliant” economists who went on to occupy important positions in academia, government and the private industry. Looking around at the social and economic landscape, I must say that I could have surmised that on my own.

The Trojan War
is over now; I don’t recall who won it.
The Greeks, no doubt, for only they would leave
so many dead so far from their own homeland.

Sunday, December 13, 2009

The U.S. Treasury Reaps Big Profits

The news that the U.S. Treasury had “reaped” $936 million from the sale of JPMorgan warrants was everywhere over the weekend. Google “treasury + $936 million” and see for yourself.

Credit the U.S. Treasury with the P.R. job. Its announcement said that JPMorgan’s warrants provided “an additional return to the American taxpayer from Treasury’s investment in the company”.

Additional return. Investment. American Taxpayer. Only Apple Pie and Motherhood were missing from the formal communiqué.

If the “return to U.S. taxpayer” had any meaning, or if the sum involved even matched what Maddoff “investors” are going to get back from the IRS, I would go through the trouble of showing in numbers what this “return” entailed; I know a thing or two about warrants and options.

Still, you can form an informed opinion about the matter from the concluding sentence of the FT article that reported the happy news on its front page:
The Treasury said the price was well above what JPMorgan had offered to buy back the warrants, adding that the auction had been oversubscribed.

The price was well above what JPMorgan had offered. That is called lowballing.

The auction had been oversubscribed. There was nary a word about the buyers, but you could bet your top dollar that they were all professional traders and fund managers. And they were falling over one another to buy the warrants, which is why the auction was oversubscribed.

Bravo, Secretary Geithner – playing one scene of excellent dissembling and letting it look like perfect honor.

A Brief Commentary On a Picture

According to the New York Times, this is how Prof. Sidney Plotkin of Vassar “dramatizes the pressure a president faces in a falling economy”. Click here to see how.

The paper said that Prof. Plotkin shines “a Marxist light” on the economic crisis, though Marx is an “uninvited guest,” the professor was quick to add.

What does he know about his uninvited guest?

Marx wrote: “In the analysis of economic forms … neither microscopes nor chemical reagents are of use. The force of abstraction must replace both”.

Prof. Plotkin has substituted dramatization for abstraction. He no doubt thinks that this shows his enthusiasm. And he may well be enthusiastic. But there is a deeper rationale behind his theatrics which makes them appeal to his students and administrators.

Here is an excerpt from the manuscript of Vol. 4 of Speculative Capital. We pick up where the product is produced and must now be sold, i.e. converted into money. Without this conversion, the production process will come to a halt:
Given this centrality of sales and its practically limitless sub-specialties in a Capitalist society– in the U.S., one would find hiring ads for “nuclear waste salesman” – it is natural that the subject is deeply embedded – intertwined, really – with the culture. Often, it is the driver and creator of the culture, especially in the “Anglo-Saxon” U.S. and U.K., where the businessman’s influence goes further than it would in other nations. The culture in these countries could be said to be the culture of a salesman, as it is shaped by the habits, sensibilities, tastes and priorities of a salesman. This point can best be seen by a look at Dale Carnegie’s How to Win Friends and Influence People.

The book’s title is precise. It telegraphs the content, so attention must be paid. Carnegie wants to win friends. Why? Because he wants to influence them. But the purpose of this influence is not bringing new friends to the righteous path. Carnegie is not an Islamic zealot practicing the Prevention of Vice and the Propagation of Virtues. He wants to influence people in order to sell to them. Friendship is a strategy, a mere means, towards that end. Note the word “win” – not finding friends or making friends but winning friends. The purpose is exploitation, after which “friends” become what they always were: people. It is a singularly cold-blooded and cynical title.

A straight line connects Dale Carnegie to the modern financier, Michael Milken who, responding to a minion’s comment that the rate they were charging a friend was too much answered: “Who are we going to make money off of if not our friends?”

I am not overstating the role of this depression-era salesman. Dale Carnegie did not invent the ways of salesmanship. He merely categorized them – arranged them around a central theme and in doing so, gave them cohesion and focus. His is the authentic voice of a salesman the way braying is the voice of a donkey.

Look at his chapter titles: Three Ways of Handling People; Six Ways to Make People Like You; Twelve Ways of Winning People to Your Way of Thinking; How to Change People Without Giving Offense or Arousing Resentment (in 9 steps, ending with “Making People Glad to Do What You Want”). Little wonder, then, that his book became the manifesto for a country whose “chief business” President Coolidge had declared was “business”.

What Carnegie began has grown into a multi-billion a year “self-improvement” and “interpersonal skills” business. Millions of people have taken courses on dressing, speaking, walking, even sitting – that would be “your silent presence” – to hone in their selling skills.

The graduates have then gone on to quietly instill the culture with the values that they learned and internalized in the classrooms. In this way, the modus operandi of the salesmen has turned into the cultural trait of the society. When the modus operandi changes, the culture changes.

One main change in the past 40 years has been the intensified competition due to the falling rates of profit. That has made selling a far more stressful occupation than it was in the heydays of the U.S. industrial power. The salesman is under constant pressure to be more “productive”, meaning that he has to sell more in less time.

The ensuing stress has darkened his mood. The passive Willy Loman has given way to the obscenities-spewing, conniving and downright criminal salesmen of Mamet’s Glengarry Glen Ross.

In practical terms, efficiency squeeze has necessitated harsher sales tactics. One is that the prospective buyer has to be evaluated quickly: is he/she going to buy or not? There is no time to be wasted on those “just looking”. This could only be done visually, checking the prospective buyer’s car, clothes, shoes – in short, any outward signs of material wealth. Hence, the elevation of the visual and “first impression” above all else. Rorschach test is the “psychological” test of this culture in which the salesman constantly and quickly “sizes up” his prey ...

In this way, the reliance on the visual becomes the norm. The “visual art” rises.
Prof. Plotkin’s understanding of economics is shaped by the salesmen, in the same way that Black, Scholes and Merton’s understanding of options was shaped by the traders. Those who have read Vol. 3 know the price one pays for blindly following these agents of circulating capital.