flinthills

The New Communism?

This in from France: Free market economics is the new communism (free registration with the UK Telegraph may be required.  Hat tip to Rod Learned for the editorial).  Only from Chirac, who seems to be contending with the likes of Mugabe, Chavez and current governor of Virginia for idiotarian of the year.  Marx and Smith must be having a good laugh over this one.

Finally a Coherent Rebuttal to my Trade Deficit Position...

I don't agree with it... but Robert Samuelson wrote what, I think, is a plausible argument for why we might be concerned about a growing trade deficit.  To quote:

At present the greatest peril may lie in huge global trade imbalances -- and the financial pressures they create. The basic dilemma is that the world needs American trade deficits as an "engine" of growth, compensating for weak growth in Europe and Japan. But the same trade deficits may now be destabilizing because they send large amounts of dollars abroad. The danger: a dollar "crash" on foreign exchange markets that spills over into the U.S. stock and bond markets, driving down those markets and triggering a global recession.

This argument is not new -- I question the premise of a world needing U.S. trade deficits -- but he goes on to explain how this mechanism happens (which in my humble opinion is unique as most don't bother -- because they can't or because they don't want to expose their underlying assumptions):

What's the problem? Foreign exporters receive dollars for what they ship to the United States. If those dollars aren't reinvested in American assets -- say, U.S. stocks, bonds or Treasury securities -- they'll be sold on foreign exchange markets for other currencies: the euro, the yen, the pound. As dollar sales drive down its value, foreigners note that their existing U.S. stocks and bonds are worth less in their own currencies. So they may sell U.S. securities to limit losses. At the end of 2003, foreigners owned $1.5 trillion in U.S. stocks; widespread sales could trigger steep market declines.

The risk is an economic implosion. A sinking stock market could damage American consumer confidence and spending. Higher currencies for Europe and Japan could weaken their export competitiveness. (A higher currency tends to make a country's exports more expensive and its imports cheaper.) Together, the United States, Europe and Japan are half the global economy. If they went into recession, other countries might follow.

This seems a long chain of if's along a very slippery slope of an argument however...  If I consider just the argument of widespread stock market panic selling due to dollar devaluation:  People invest with the expectation of a return relative to their opportunity costs.  While the devaluation of the dollar might make a stock less valuable in relative terms, the word relative invites us to ask "compared to what?"  The price of a stock in large part represents its investors' forward call on its earnings potential.  The U.S. continues to grow at a faster pace than every other country.  It's not the short term now that investors (foreign or domestic) will consider -- the devaluation and current relative price are sunk -- what matters to them on the margin is tomorrow's value compared to the alternative available investments right now. 

If you sell U.S. stocks and bonds you end up with U.S. dollars... what will you do with them?  Convert them to Euros and invest in european companies growing at a slower rate -- and after this potential disaster will have even less appealing future opportunities?  What's the point in that?   

This all seems to have less to do with a trade deficit and everything to do with trade policies, savings rates, capital investment, innovation, etc., etc.

Polanyi and Spontaneous Order

Another "Dennis Hopper Moment" this morning reading Michael Polanyi's chapter titled, "Two Kinds of Order" in his book, "The Logic of Liberty."  I've previously only read his essay, "Republic of Science," and am currently reading his famous book, "Personal Knowledge" in addition to the Logic of Liberty. 

I have definitely found a friend and mentor in M. Polanyi.   By the way - I'd forgotten until Dick Anderson pointed it out to me that "Mentor" comes from the name of Odysseus' old friend whom he places in charge of his son, Telemachus, and his palace while he is off fighting the Trojan war written about by Homer in The Odyssey.

Polanyi, well known in history and philosophy of science circles, is unfortunately not read by many in the economic, social and political sciences.  But he had a lot of deeply insightful things to say about markets, economics, and politics -- drawing many parallels with processes within the scientific community. 

This morning's journey into his discussion of Spontaneous Order was sublime.   He defines it as the order achieved by allowing people to freely interact with each other on their own initiative, subject to laws that uniformly apply to all of them.  This is as opposed to intentional order that comes from limiting freedom by assigning to specific individuals a specific position / command / etc. according to a pre-determined plan.

He refers to situations that operate according the principle of spontaneous order as "systems of free adjustment," and suggests they can achieve some things that other systems of order cannot.  He uses the developing body of Common Law and the progress of Science as examples.

A judge who is on the margin making a decision about a case relies (consciously and unconsciously) on the historical precedents of all the judges deciding similar cases before him.  His mind is in touch with all those judges as well as being aware of the present society's conventions, opinions, etc. -- and he weighs all this and other considerations in making his decision.  Once made, this decision alters the body of Common Law by becoming a precedent as well -- either reinforcing it or modifying it. 

The public adjusts to the new information and we have ordered growth of law through a sequence of adjustments, "re-applying and re-interpreting the same fundamental rules and expanding them thus to a system of increasing scope and consistency."  He refers to the system, by this process, as being the "direct embodiment of wisdom,"  in which any specific decision is an adjustment to all the decisions that went before it.

He then turns his attention to Science.  This is where it gets hugely interesting to me.  Like the judge, the scientist follows a, "process of consultation," in which he voluntarily submits to the established methods of science and reviews all the knowledge gained on his topic before him (or currently being worked on).  But there is also a competitive process in which he is always seeking the problem to which he can apply is unique talents in the hopes of being able to make a discovery for which he can publish and get credit. 

Similar to property rights being the essential pre-condition to the profit motive for a healthy functioning market, we have "credit" and "personal reputation" driving the scientific community, providing each scientist the incentive to communicate his or her progress with all other interested scientists to allow for a system of free adjustment that spurs progress.

There so much more -- I haven't come close to capturing the essence, but I absolutely love this quote:

"Law and science are only two among the many intellectual fields in society.  Though no other activities of the mind form such precise systems as those of legal and scientific thought, they all prosper similarly by the mutually adjusted efforts of individual contributors.  Thus language and writing are developed by individuals communicating through them with each other.  Literature and the various arts, pictorial as well as musical; crafts, including medicine, agriculture, manufacture and the various technical services; the whole body of religious, social and political thought -- all these and many other branches of human culture, are fostered by methods of spontaneous order similar to those described for science and law.  Each of these fields represents a common heritage accessible to all, to which creative individuals in each successive generation respond in the form of proposed innovations, which, if accepted, are assimilated to the common heritage and passed on for the guidance of generations yet to come...."

Tru dat.