Posts tagged with capitalism

The entrepreneurial class, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, … — what earlier century had even a presentiment [of] such productive forces…?

The need of a constantly expanding market for its products chases businesspeople over the entire surface of the globe. They must nestle everywhere, settle everywhere, establish connexions everywhere.

Business has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life.

Entrepreneurs, wherever they have got the upper hand, have put an end to all feudal, patriarchal, idyllic relations. They have pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors”….

Entrepreneurs cannot exist without constantly revolutionising the instruments of production, and thereby … the whole relations of society.

Charles Marx, 1848

(I just changed all reference to “the bourgeoisie”, which has an archaic or leftist ring to it, to “entrepreneurs”, which sounds more contemporary. Eat your heart out, Thomas Friedman.)

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(Source: marxists.org)




Research focuses on real wages—wages that are adjusted for inflation. Getting data on wages is tricky. But accounting for inflation is even harder. (For example, workers often paid rent informally, meaning that there are few records around).

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And so it is unsurprising that researchers differ in their estimations of real wages. Some, such as Peter Lindert and Jeffrey Williamson, suggest that full-time earnings for British common labourers, adjusted for inflation, more than doubled in the seventy years after 1780. But Charles Feinstein argued that over the same period, British real wages only increased by around 30%. It’s a bit of a … mess.

Most people agree that after about 1840, real wages did better. Nicholas Crafts and Terence Mills shows that from 1840 to 1910, real wages more than doubled. Their findings are mirrored by other researchers ….

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in almost all British cities, mortality conditions in the 1860s were no better—and were often worse—than in the 1850s. In Liverpool in the 1860s, the life expectancy fell to an astonishing 25 years. It was not until the two subsequent decades that rises in life expectancy were found

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The auction for capital has happened in such diverse places as under banyan trees, in coffee shops, in whore houses, near the sandal market (Egypt, Jerusalem), in a cave, at farm crossroads, near lake edges and river deltas, at magic springs, over a levee, in private country club gardens, etc.

The folks who made it more comfortable thrived (Mr. Lloyd, for example). The folks who made this process more uncomfortable eventually killed the golden goose (not many trades in Florence anymore, and it is all Savanarola and the Bishop’s fault. Bonfire of Vanities indeed).
user “Bachelier”

(Source: mail.nuclearphynance.com)




In any formal or semi-formal teaching, there are always two conflicting paradigms being carried out simultaneously.

The first one is a capitalist paradigm, where the teacher functions as a boss who assigns work, for which the students earn credit.
Lee Lady

(Source: www2.hawaii.edu)




Democrats have typically argued that no one company should control more than one-third of existing mobile spectrum—to ensure the existence of at least 3 competitors.

Republicans maintain that spectrum ought to be allocated through open markets — if a company has succeeded in attracting customers and cash flow, it deserves access to the spectrum necessary to serve them.

Bruce Gottlieb, US antitrust lawyer

 

Step one. Appeal to market liberalisation, the benefits of competition, private over public management, and capitalism-as-servitude.

Step two. Social Darwinism. Whoever “won” the market gets licence to a rival public resource (spectrum), preventing new entrants and locking in their lead over existing competitors.

Step two-and-a-half. What happened to the benefits to consumers? What happened to competition? Now the justification for the state granting monopoly has become to incent “winning”. Let’s hope the winner didn’t use money from another line of business to snatch the lead at this particular point in time.

Step three. Winner takes all. Survival of the fittest indeed.

(Source: The Atlantic)




There are very few facts I think “everyone should know”. The huge income differences across countries are an exception.

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Everyone should know that income per person in Burundi is about 1% of in the U.S. (yes, even though there’s a recession on).

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And everybody should know a rough quantitative history of the world.

13 minutes by Tyler Cowen & Alex Tabarrok




An Insider’s Perspective on the Basel Reforms (por stanfordbusiness)

  • regulatory framework contributed to market uncertainty over distresed banks
  • worried about transmitting financial distress to real economy
  • reduce procyclicality
  • focus on interconnectedness
  • trying really hard not to screw things up worse
  • trying to avoid unintended conequences … although some consequences were intended
  • common equity may be the only thing that really matters
  • didn’t intend Basel II to incent hybrid capital
  • even though Basel III didn’t increase capital requirement ratios much, it did increase the required capital simply by redefining risk
  • distressed banks, in order to save face, were paying dividends and buying back shares—blowing out their capital base—because if they conserved like they needed to, the market would smell blood and eat them
  • prior to the crisis of 2008, even regulators weren’t clear on why capital requirements were necessary or what capital actually meant
  • "tie our own hands"
  • countercyclical buffer
  • capital conservation is no longer about solvency or market perceptions: it’s about having enough capital to withstand a period of market stress and still being solvent even during the duress
  • "to state the obvious, we can’t know what «the capital level at which the firm would be viewed as viable by the market»"
  • trying to find a real-world 99% confidence interval for firm failure
  • (not easy, since probability doesn’t exist)
  • empirical 99% risk-weighted loss
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  • "eye of the beholder"
  • "leap of faith" (#econometrics)
  • "translating fun things like economics into real things like accounting is challenging"
  • only have Basel I and Basel II risk classifications, can’t find out what Basel III risk-weighting will be
  • requires a lot of “judgement” (I could think of a less nice word for that)
  • We have never seen the market’s worst because the Federal Reserve stepped in in 2008—so we really don’t know the most catastrophic case that banks might self-insure at.
  • Basel III requires 4.5% minimum capital ratio (Basel I was 4%-6%). “How did we get the half percent? Having sat in the room the whole time I’m still not sure how we got a half percent.”)
  • …plus Capital Buffer 2.5%
  • …plus Counteryclical Buffer up to 2.5%

Audience questions

  • Evan Pico, $C: Why assume wholesale credit can go all the way to zero?
  • "We’re trying to assume something worse than history could happen.”
  • The Basel Committee bases its rules not on the firms that did OK in the crisis but on failed banks—which if they weren’t acquired would have failed even harder—and on what might have happened if X,Y,Z hadn’t saved our arses as much as they did. Worst case scenario.
  • observation period
  • Mimi Mangus, Union Bank: QIS template. We don’t have the data to calculate LCR or NSFR. So it seems like you’re analysing B.S. Are we supposed to pay money to answer your questions?
  • MM: “Regional banks don’t have 100% Liquidity Coverage Ratio like Goldman. We hold a lot of GSE’s, MBS, and traditional loans. Maybe we need to replace Fannie and Freddie with a member-bank mutual.” Comparison of US to Australia.
  • "We want collateral to be liquid both in private markets and through the central bank."
  • "I have new sympathy for people who try to predict climate change—predicting something uncertain in the future with very certain costs in the now."




Energy consumption per person since 1820. by Gail Tverberg

hi-res




I do not believe that financial markets make the economy more efficient. The analogy I use is Earth. If it were reduced to the size of a basketball, it would be smoother than a billiard ball. However, at a human scale, there are mountains and oceans we can exploit….

The guy talking about making markets more efficient is thinking of something like rolling rocks down a mountain to power useful work. This indeed makes the Earth smoother, wearing down mountains and filling in oceans. But … [that] bears no resemblance to what people really do. They’re more likely to build a hydroelectric dam that holds water back, that is it keeps the system farther from equilibrium, not moves it closer.

Aaron Brown, Red-Blooded Risk

(I rearranged his words a little bit.)




The logic of Marshallian S&D curves are wonderful in several respects:

  1. resolves the “diamonds and water paradox” (why does unnecessary jewelry cost more than necessary water?)
  2. sounds reasonable across a variety of real-world scenarios (FCOJ futures, corporate bond issuance, grocery stores, machine parts, olive oil exports, Tyler Cowen’s umbrella term “markets in everything”)
  3. actually works in experiments! The legend is that Vernon Smith used to say in class that Marshallian S&D was “just a theory” — and then was shocked that prices actually converged to the predicted P*

File:Supply-and-demand.svg

Here’s a great way to misapply the Marshallian logic and arouse my ire:

  • Say "Markets make sure that people who want things more are the ones who get them."

That’s not what the theory says. We use the jargon willingness to pay or reserve price to talk theoretically about the maximum someone would counterfactually give up for something—and equate this (by rational consistency hypotheses) to how much utility they derive from obtaining it. (The experiments I mentioned above literally created a reserve price—a redeemable coupon for $13 if you get the paper at P*, so we as non-omniscient lab-gods know that you actually assign a personal dollar value on the good—and know what it is. So the fact that those experiments worked doesn’t prove the extra assumptions about the way people’s consent, pleasure, engagement, and desires interface with an opportunity for economic exchange.) Laura’s measured willingness to pay does not say how badly she wants something relative to Gemma. Why? Because maybe Gemma is poor and Laura is rich.

In the real world, rich people engage in retail therapy at prices that would pay for a poor person’s housing and food for months.

Maybe it makes them feel good, or they do it as a way to socialise (if you don’t consider yourself rich but you’re reading this on a computer: do you socialise at bars or restaurants or just outside on the street? Why?), or maybe they’re bored. Whatever.

brooklyn

Tip Top Bar

Clearly we can’t give Gemma £100 and give Laura £100,000 and conclude that Laura wanted the dress more because she paid more for it. It might be reasonable if both were in the same place with the same financial resources.

The mathematics behind the S&D graph aren’t that complicated. (It does require thought—but not years’ worth of thought—to understand the Marshallian model.) But still, I think because of the transition from English → maths → English, and the jargon words interposed with normal words, the overall rhetorical effect is to cover the obvious fact of inequality whilst redirecting attention to “optimal” (another jargon word budging in on the default namespace!) allocation.

The hypothesis of logarithmic utility per individual has been around since the 1700’s at least. (Implying €1000 means more to a poor person than to a rich person.) And yet people still use this fallacious reasoning that markets allocate goods to those who “want it the most”.

Sorry: willingness to pay is a function of both desire and of ability to pay.