Daniel Coyle on Deliberate Practice

The Talent Code on Amazon.
Video trailer for The Talent Code.

This post is part of my series on deliberate practice (also called deep practice or purposeful practice), which I consider very important for understanding education and human capital accumulation more broadly.

In the last few years, I have often taught an introductory macroeconomics class. Both at the beginning of the semester, and whenever a student comes to me puzzled that they have done worse-than-expected on an exam, I recommend that they read the book The Talent Code. What I hope they get from the book is a sense of what it means to study in a deep way, rather than just “going over the material.” In case students don’t read the book, I have had teams of students from an honors section of the class give a presentation on the book to the entire class of about 250 students. I strongly recommend this

Powerpoint file on The Talent Code put together by my Fall 2012 “Principles of Macroeconomics” students Hrishikesh Kulkarni and Madeline Wills,

which they generously gave me permission to post. I had the audience vote on this and presentations about 5 other books. This was voted best of all 6 presentations. I agreed with the audience’s assessment. (The other books were

• Red Ink, by David Wessel, 
• The White Man’s Burden: Why the Efforts of the West to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly
• The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker (a book I dearly love)
• The Rational Optimist by Matt Ridley, and 
• Happiness: Lessons from a New Science by Richard Layard (which I include partly so I can critique its ideas as I do on my happiness sub-blog.)

Here is the essence of the 3 key slides in Hrishikesh’s and Madeline’s Powerpoint file:

Deep Practice

Chunk it up

• Absorb–get involved with practice: imitation
• Break it into chunks–organize practice into smaller pieces
• Slow it down–take time to practice correctly

Repeat

Learn to feel it

Self-Learning Connection

Master Coaching

• Having someone inspire you to keep working can be effective
• However, your greatest coach is yourself

Ignition

• Make yourself passionate about learning
• Find your own source of ignition

Deep Practice

• Absorb–study deeply, not necessarily a lot
• Break it into chunks–all-nighters are less effect than spreading it out
• Slow it down–take time to make sure you are learning
• Repeat–practice makes perfect!

in the text above, I bolded a thought that got a particularly strong audience reaction: the greater effectiveness of spreading study out over time, instead of concentrating it in one all-nighter.

Benjamin Franklin's Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?

Here is a link to my 28th column on Quartz “Benjamin Franklin’s strategy to make the US a superpower worked once, why not try it again?”

Update: Steve Sailer has an interesting post pointing out the importance of birth rates, as well as the immigration rates I emphasize in the column. In order to keep an open mind, before reading Steve Sailer’s post, I recommend reading my post “John Stuart Mill’s Argument Against Political Correctness.” In his post Steve also points out that Ben Franklin favored English immigration over German immigration. 

Ezra and Evan’s Flag. I was very pleased to see Ezra Klein and Evan Soltas flag the column, and intrigued by the way they boiled it down:

KIMBALL: The Ben Franklin strategy to a U.S. renaissance. “The reason China’s economic rise matters for US grand strategy is that China has a much larger population than the United States…An excellent answer is to do everything possible to foster long-run growth of per capita GDP in the US. At a minimum, this includes radical reform of our system of K-12 education, removing the barriers state governments put in the way of people getting jobs, and dramatically stepped-up support for scientific research…The key to maintaining America’s preeminence in the world is to return to Ben Franklin’s visionary grand strategy of making many more of the world’s people into Americans.” Miles Kimball in Quartz.

How Conservative Mormon America Avoided the Fate of Conservative White America

The Mormon Church’s Conference Center

Reading Noah Smith’s incisive post “Conservative White America, You Need a New Grand Strategy,” my main reaction is that American Mormons, while predominantly white, and just as conservative in many dimensions, do much better than Noah’s description of Conservative White America in general. So Mormonism might provide clues to the new grand strategy Noah calls for for Conservative White America. Let me pursue that idea in the spirit of the grand research project I recommended in my post “Godless Religion” of trying to figure out how to get the non-supernatural benefits of religion without requiring supernatural beliefs (a research project saw Ari Schulman questions in his Wall Street Journal op-ed “Does Faith Make You Healthier?”).

I do not have all of the sociological facts at my fingertips, but let me give my impressions on each of the issues Noah raises for Conservative White America, subject to correction by readers who do have the sociological facts at their fingertips. (Lest I seem to be cheerleading too much for Mormonism in what follows, let me remind readers that I personally disagree with Mormonism’s supernaturalism, authoritarianism, patriarchy and opposition to gay marriage, and maintain the very different theology of Teleotheism.) 

Here are Noah’s concerns about Conservative White America and my reactions:

1. First, Conservative White America has failing families. Divorce rates are highest in the “Bible Belt” states where Conservative White America is strongest. While professional whites (who are often liberals) have reversed the trend toward higher divorce, working-class whites are essentially abandoning marriage. While conservatives would claim that this trend is due to the spread of liberal, secular values, the reverse is true; Bible Belters get married more often and earlier than their Northeastern cousins. They just get divorced a lot. Those conservative values are shoving white people, especially working-class white people, into unhappy marriages that cannot last in the modern world. 

Miles: 

With a strong prohibition on premarital sex and its approaches, and social encouragement for marriage as soon as at least the male has served a proselyting mission, Mormons tend to marry young. But after accounting for the inevitable effects of age at marriage, it is my impression that Mormon divorce rates are relatively low. On the supernaturalist side, the notion that with “eternal marriage,” a marriage lasts even into the afterlife may encourage investment in the marriage relationship. In addition, weekly Mormon teaching focuses heavily on trying to help Mormons have a loyal and rewarding marriages and family life.  

2. Next, Conservative White America has failing health. Of course, this is true of all of the United States, and American blacks and Hispanics fare worse than American whites on most health measures. But white Europeans significantly defeat their American cousins on most health outcomes, while Americans pay much more and enjoy much more uncertain access to care. This is due mainly to the success of conservatives in blocking the implementation of universal health care (a case of all America having problems due to CWA policy triumphs). Some small part of it may also have to do with the effect of suburban sprawl and lightly regulated corporate food (loaded with sugar and/or fat) on obesity rates. Additionally, suburban and rural drug use may be rising, even as urban drug use has fallen steadily. And white teens are more likely than black or Hispanic teens to abuse drugs. These trends do not bode well for the health of Red America.

Miles: 

Mormon prohibitions on alcohol and tobacco–and according to many Mormons, all caffeinated beverages–have direct good effects on health, and also make it possible for rebellious souls to express their rebellion with alcohol, tobacco or even caffeinated beverages, instead of through illegal drugs. The scourge of obesity does not spare Mormons, but overall, Mormons on average live much longer than most other American groups.  

3. Add to that failing economic mobility. Much is made of the economic dynamism of Red states like Texas (well, mainly Texas). But white Americans experience the least economic mobility in the South, the most conservative region. And upward mobility for whites seems to be lowest in regions with heavy sprawl.

Miles: 

Although relatively large Mormon family sizes quickly dilute inherited wealth, Mormons are relatively well educated and have standards of honesty and diligence that make them relatively attractive employees for a given level of education. Academically skilled and religiously faithful  Mormon teenagers can get a heavily subsidized college education at Brigham Young University, which is comparable in quality to many top state universities but with lower tuition, regardless of state of residence. Mormon congregations also provide a source of good educational and career advice for young people. And casual conversation in Mormon country often turns to career and even entrepreneurial ideas to get ahead enough financially to support a relatively large family.    

4. Conservative White America, like the rest of America, also has failing economic performance. Sure, rich people - who have done pretty well over the past 13 years of stagnating incomes - tend to be conservative. But the vast majority of conservative white voters are not rich, and have seen their incomes fall along with the rest.

Miles: 

Utah’s economy, where Mormons predominate, has been doing very well compared to the national economy for quite some time. It isn’t just the long-run trend for Utah that is positive. Visiting Provo and Salt Lake City in Utah regularly over the last few years I have seen no signs at all of effects of the Great Recession. 

5. And to some degree, Conservative White America also has failing social lives. Studies show that suburban residents are less satisfied with their neighborhoods than urban residents, with loneliness and social isolation probably to blame. Other research has shown that urban design has a big influence on social connection. It’s just really hard to meet people in the spread-out, isolated non-cities into which conservatives would have us move - and into which much of white America has moved over the past sixty years. Gone are the days of small-town America where everyone knew their neighbors. In the modern suburbs, you are stuck in a box with nobody and nothing.

Miles: 

Mormon congregations insure that any Mormon who is religiously involved will have an extensive social network. It is very hard to be socially isolated as a Mormon, even for those who would like a little more social isolation. Part of the genius of Mormonism is the way a Mormon congregation functions as an ersatz small town, where everyone knows everyone else. But unlike an actual small town, Mormons can move across the country and immediately be integrated into another ersatz small town.    

6. Now finally we get to Conservative White America's failing electoral clout. The poor performance of the GOP cannot, as some hopeful conservatives have claimed, be ascribed to “missing white voters”. Whites for whom race defines politics - i.e. most of the current Republican base - have shut themselves out of future political coalitions. They could have followed the example of liberal whites, who allied with minorities, including poorer minorities (blacks, Hispanics) and richer minorities (Asians), and thus will have a big say in shaping America’s future policies. Meanwhile, stuck in permanent racial panic mode, all Conservative White America can do is pull their veto levers - the filibuster, etc. - to gum up the machinery of American politics and slow the inevitable.

Miles: 

Mormons are still a small minority, so great electoral clout is not to be expected. But despite Mitt Romney’s liabilities as a presidential candidate, Mormons can feel gratified by having passed the milestone of having had their own major party nominee. Even if Mitt doesn’t run again (far from a bygone conclusion), in John Huntsman, the Mormons have a credible candidate should the Republicans lose too many presidential elections due to overly extreme nominees and become willing to nominate someone who (so far) appears relatively moderate.

Where Does Conservative White America Go Wrong?

Noah makes the following strategic judgment for Conservative White America: 

The five big pieces of Conservative White America’s Grand Strategy that I think need reevaluation are:

1. “White flight” to suburbs and exurbs
2. Rigid and inflexible “family values" 
3. Hostility toward immigrants and minorities
4. Excessive distrust of the government
5. Distrust of education, science, and intellectualism

Miles: 

White Flight. 

Mormons were never thick on the ground in areas that had many African-Americans, so "white flight” has not been a big phenomenon for them in the first place. Although racism is not absent among Mormons, most Mormons I know are so embarrassed by Mormonism’s history of having denied the Mormon priesthood to blacks before 1978 that they try extra hard to have good race relations and to have positive attitudes toward African-Americans.  

Family Values. 

Mormons have what Noah would call “rigid and inflexible ‘family values’” but, I think, manage to implement them better. One reason Mormons can implement family values better is that they have high church leaders spelling out the ramifications of those family values in relatively sensible ways, given the overall family-values commitments. Popular culture alone tends to result in a worse version of “family values.”  

Immigration. 

Mormonism’s eagerness to make the whole world into Mormons spills over into a positive attitude toward immigration. If they want people to come into the Mormon Church and become Mormons, why shouldn’t they want people to come into America and become Americans? Moreover, a large fraction of Mormons serve proselyting missions in other countries in their late teens and early twenties. That not only fosters positive attitudes toward people in other countries (and for languages other than English), but also creates personal ties to non-Americans who would like to become Americans. In its official statements, the Mormon Church is remarkably pro-immigration relative to the Republican norm.  

Government. 

Mormons are negative about government, but positive about the Mormon Church, which has the capacity to take on all the functions of a government–as it did when the Mormon settlers first arrived in Utah. Thus,  Mormonism is not at all prey to radical individualism. Collective action is fine, it is just that government is not seen as the best form of collective action. You can see a notion of collective action inspired by the insights I have gained from my Mormon background in my posts “No Tax Increase Without Recompense” and “Yes, There is an Alternative to Austerity vs. Spending: Reinvigorate America’s Nonprofits.” Science, Education and Intellectualism. Overall, Mormonism distrusts education, science and intellectualism only where education, science and intellectualism cause people to stop believing in Mormonism. The Mormon Church has realized that, in practice, science is not the main enemy of supernaturalist religion, Postmodernism is. (There is a post to come on that topic.)

One advantage Mormonism has in its relationship with science is that its founder, Joseph Smith, fully incorporated early 19th century science into Mormonism. Because Joseph Smith was murdered by a mob in 1844, he did not live to see the publication of Darwin's The Origin of Species, and so could not fully incorporated evolution into Mormonism, so Mormonism has a testy relationship with Darwinism, but BYU professors are allowed to teach Darwinian evolution.

Mormonism lauds its scientists, as long as they continue believing in Mormonism. And it has many believing scientists that it can point to, among them my great uncle, the renowned (but not quite nobel-laureate) chemist Henry Eyring.     

Summing Up

To me, it seems that Mormons have avoided the major problems faced by the bulk of Conservative White America. It is worth thinking about why. In that effort, this post barely scratches the surface. I would love to see a broader discussion of this question.

John L. Davidson on the Decline of the Quality of Information Processing in Lending

Marcus Goldman, founder of Goldman Sachs

My friend John Davidson sees information as the central issue for the economy. In this guest post, he argues that one of our big supply-side problems is the decline in the quality of human-brain information-processing behind lending decisions. 

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Noah Smith argues that “Something Big Happened in the Early 70s.”

You and others have your macro theories and I am Keynesian, but I have told everyone until I am blue in the face that short-run stimulus is not enough and events bear me out.

This country is broken because community and commercial banking is broken by risk aversion, undercapitalization, and mis-regulation. We need to return to community bankers being almost merchant bankers.

I also have no regard for economists in the Koch orbit as they are political operatives and nothing but crony capitalism at its worst, so I will start with a real life model.

It is really simple to see a lot of what is wrong in America if one just reads the second chapter of Goldman Sachs: The Culture of Success.while at the same time, watch Copper on Netflicks (which is set in NYC at the time Goldman Sachs was formed).

For more than a few hours, contemplate an economic world in which Goldman was operating as he walked those streets in NYC in 1870 in his Top Hat and Frock coat. He could see, hear, taste commerce all around. The imagination can paint an easy word picture of the streets of New York and Chicago. By contrast, you see, hear, or taste nothing on a trading floor.

Goldman first lent on signature, not collateral. That is the world we need, in America, today. People who have skin in the game (Nassim N.Taleb just taught this lesson on Twitter about the losses at Harvard by Larry Summers)living on their wits, making loans on the street, door to door.

Banking has it backwards, today, lending on collateral and never on signature, worrying about collateral not character.

And, consider the agglomeration economies of information. Look at the network that was in Goldman’s mind. He probably knew 10,000 people first hand and 100,000 second hand. He was the model for my original thinking on information. A partner, with skin the game, walking the street looking to make loans: now that is a node of a powerful information network that made our great cities work.

Sorry for tone but feel strongly about this.

Quartz #26—>The Government and the Mob

Link to the Column on Quartz

Here is the full text of my 26th Quartz column, “The US government’s spying is straight out of the mob’s playbook,” now brought home to supplysideliberal.com. It was first published on July 4, 2013. Links to all my other columns can be found here. My preferred title above better represents my broader theme: what governments need to do to foster economic growth.

I pitched this column to my editors as an Independence Day column. I am proud of our American experiment: attempting government of the people, by the people, and for the people. This column is about the principles behind that American experiment, from an economic perspective. 

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© July 4, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

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Reading Ben Zimmer’s “How to talk like Whitey Bulger: Mobster lingo gets its day in court“ in the International Herald Tribune provided by the hotel during my recent stay in Tokyo reminded me of my litany of the basics the government must provide to make anything close to market efficiency possible:

1. blocking theft,
2. blocking deception, 
3. blocking threats of violence.

Let me give two examples of what I have written in this vein. The first is from “So You Want to Save the World“:

If someone’s overall objective is evil or self-serving, the only way what they do will have a good effect on the world is if all their attempts to get their way by harming others are forestalled by careful social engineering. It is exactly such social engineering to prevent people from stealing, deceiving, or threatening violence that yields the good results from free markets that Adam Smith talks about in The Wealth of Nations—the book that got modern economics off the ground.

The second is from ”Leveling Up: Making the Transition from Poor Country to Rich Country“:

The entry levels in the quest to become a rich country are the hardest.  The basic problem is that any government strong enough to stop people from stealing from each other, deceiving each other, and threatening each other with violence, is itself strong enough to steal, deceive, and threaten with violence.  Designing strong but limited government that will prevent theft, deceit, and threats of violence, without perpetrating theft, deceit, and threats of violence at a horrific level is quite a difficult trick that most countries throughout history have not managed to perform.

“How to talk like Whitey Bulger: Mobster lingo gets its day in court“ describes the example I have in mind when I write about “threats of violence”:

Charging “rent” is extorting money from business owners under the threat of violence.

I have thought about whether I should include actual violence in the list, but decided that, with only a few exceptions, the motivations for violence boil down to either theft or being able to provide some credibility for one’s threats of violence.

Deception covers a wide range of destructive activities. The idea that the free market requires tolerance of corporate deception is itself a big lie. Even routine secrets have a measure of deception to them, and as Sissela Bok demonstrates in her book Secrets: On the Ethics of Concealment and Revelation, the ethical justification for keeping secrets is much trickier than many people think.

Blackmail presents an interesting case that doesn’t quite fit my litany: the threat to reveal deception is used to distort the deceiver’s behavior. But there is an element of deception in such a revelation, since the selective revelation of one person’s secrets and not the secrets of others makes the person whose secret is revealed look much worse than if all secrets were revealed. I think I would fare very well if the day ever came that Jesus predicted when he said:

For there is nothing hidden that will not be disclosed, and nothing concealed that will not be known or brought out into the open. (Luke 8:17)

But I have no doubt that if someone revealed all of my secrets, while everyone else got to keep theirs, I could be made to look very bad.

The possibility that threats of selective revelation of secrets could be used by members of the government to blackmail others—or to deceive the public about the relative merits of different individuals—is the most serious concern raised by government spying. That is why I join Max Frankel in advocating that government spying be overseen not by judges in their spare time, but by a dedicated court whose judges can develop special expertise, with lawyers who have high-level security clearance given the task of representing the interests of those whose communications are being monitored, whether directly or indirectly. Frankel said it this way in his New York Times editorial ”Where did our ‘inalienable rights’ go?“:

Despite the predilections of federal judges to defer to the executive branch, I think in the long run we have no choice but to entrust our freedom to them. But the secret world of intelligence demands its own special, permanent court, like the United States Tax Court, whose members are confirmed by the Senate for terms that allow them to become real experts in the subject. Such a court should inform the public about the nature of its cases and its record of approvals and denials. Most important, it should summon special attorneys to test the government’s secret evidence in every case, so that a full court hears a genuine adversarial debate before intruding on a citizen’s civil rights. That, too, might cost a little time in some crisis. There’s no escaping the fact that freedom is expensive.

If modern technology makes it harder to keep secrets in general, I think that is all to the good. People usually behave better when they believe that their actions could become known. (See for example this TedEducation talk by Jeff Hancock, “The Future of Lying,” which reports evidence that people are more honest online than offline.) Those overthrowing tyrants may benefit from secrecy in putting together their revolutions, but tyrants need secrecy even more. So a general decline in the ability to keep secrets is likely to be a net plus even there.

Above, I pointed out the fundamental problem of political economy:

… any government strong enough to stop people from stealing from each other, deceiving each other, and threatening each other with violence, is itself strong enough to steal, deceive, and threaten with violence.

Although it pains me to say so, the literature on economic growth (see for example Pranab Bardhan’s Journal of Economic Literature survey article ”Corruption and Development: A Review of the Issues“) argues that centralized corruption by a strong but evil state can yield better economic outcomes than decentralized corruption by many local mob bosses or warlords. Nevertheless, I believe the elimination of tyrants and the progress of democracy throughout the world will be one of the most important contributors to human welfare in the coming decades. May those of us who enjoy the blessings of democracy be willing to make the sacrifices that could be necessary to help others enjoy that blessing. And may all nations add to democracy all of the other restraints on government necessary to make government our servant rather than our master.

Yichuan Wang: How China's Poorest Regions Are Going to Save Its Growth Rate

Here is a link to Yichuan Wang’s excellent Quartz article “How China’s poorest regions are going to save its growth rate”–Required reading for anyone who wants to understand the future of China.

Eric Hanushek on the Importance of Improving Teacher Quality

Image source: “Professor Eric Hanushek: Using Evidence to Improve Education” on the Policy Exchange website

I recently ran across Eric Hanushek’s October 19, 2010 Wall Street Journal op-ed “There is No ‘War on Teachers.’” Here are two key excerpts from what he has to say:

No longer is education reform an issue of liberals vs. conservatives. In Washington, the Obama administration’s Race to the Top program rewarded states for making significant policy changes such as supporting charter schools. In Los Angeles, the Times published the effectiveness rankings—and names—of 6,000 teachers. And nationwide, the documentary “Waiting for 'Superman,’” which strongly criticizes the public education system, continues to succeed at the box office….

My research—which has focused on teacher quality as measured by what students learn with different teachers—indicates that a small proportion of teachers at the bottom is dragging down our schools. The typical teacher is both hard-working and effective. But if we could replace the bottom 5%-10% of teachers with an average teacher—not a superstar—we could dramatically improve student achievement. The U.S. could move from below average in international comparisons to near the top.

The principle that a small fraction of employees usually causes most of the trouble for productivity is well known in manufacturing. (I think of that as one of the ideas behind the “Six Sigma” approach to process improvement.) Eric is applying that principle to education.  

I did some illustrative calculations using the assumption of a normal distribution of teacher effectiveness. (If the distribution of teacher effectiveness has fat tails, the results below would be more dramatic.) On the left is the fraction of teachers at the bottom of the distribution who are fired (firing the same percentage of the replacement teachers until none of the teachers that remain are in the bottom of the distribution). On the right is the resulting change in the mean of the distribution of teacher effectiveness in standard deviations of the original distribution of teacher effectiveness. 

Mass deleted            Improvement in performance

5%                          +.11   cross-teacher standard deviations 

10%                        +.20   cross-teacher standard deviations

15%                        +.27   cross-teacher standard deviations

20%                        +.35   cross-teacher standard deviations

[The left column is the normal distribution function of x, solved for 5%, 10%, 15% and 20%; the right column is the normal density function–giving an incomplete expectation integral–divided by one minus the normal distribution function.]

To help in interpreting the meaning of these improvements measured in standard deviations, I converted the average teacher effectiveness after deleting the bottom of the distribution into the percentile in the original distribution of a teachers of a teacher who has the same effectiveness as the average effectiveness of teachers after the bottom of the distribution has been fired.  

Mass deleted       Average quality = what percentile of original distribution?

0%                           50

5%                           54.3

10%                         57.9

15%                         60.6

20%                         63.7

[The right column is the normal distribution function of the performance improvements in the table above.] 

Update: @aryal_ga flags some nice graphs of the contribution of teacher quality to long-run student outcomes created by Raj Chetty, John Friedman and Jonah Rockoff:

The Long Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood.

Adam Ozimek: The Free Market Plan To Save Detroit →

Stop telling people they can’t come to Detroit!

How Ben Franklin's Plan for Seignorage Without Inflation Could Have Forestalled the American Revolution

s Ben Franklin the Father of Electronic Money?

The illustration, above, that I know from Noah Smith’s @noahpinion Twitter homepage, appears to be the work of Aaron Jasinski. See this link. This is one of the few illustrations I love so much I have used twice. The other time was in my post “Niklas Blanchard Defends Me from the Wrath of Paul Krugman, Despite My Lack of Nuance.” It is fully appropriate here, since Ben Franklin’s plan for negative interest rates anticipated modern electronic money proposals for generating seignorage without inflation, as  detailed in “Paul Romer on the Cashless Society.”

The 1765 Stamp Act the British parliament levied on the American colonists (to help pay the debt incurred by Britain to fight the French and Indian War) was one of the key steps leading to the American Revolution. Conrad Black’s  book The Flight of the Eagle: The Grand Strategies That Brought America from Colonial Dependence to World Leadershiptold me a story about the Stamp Act that I had never heard before: Ben Franklin had an alternative to the Stamp Act that just might have averted the American Revolution. Intriguingly, Ben Franklin’s plan can be seen as a cross between Silvio Gesell’s proposal for stamped currency and the proposal for generating seignorage without inflation detailed in “Paul Romer on the Cashless Society.” But Ben Franklin’s proposal preceded Silvio Gesell’s 1891 book Die Reformation des Münzwesens als Brücke zum sozialen Staat (The reformation of the monetary system as a bridge to a social state)–his first book on reforming the monetary system–by 126 years! 

To understand the following passage, the Wikipedia definition of bill of credit is helpful: “a document similar to a banknote that is issued by a government and designed to circulate as money.” From pp. 39-40;

Shortly after Franklin’s return to London in 1764, debate began on the Stamp Act, which imposed a tax on printed and paper goods in the colonies, including even newspapers and decks of cards, and was so called because payment of the tax was certified by a stamp on the article taxed. Britain already had such a tax domestically. Pitt’s brother-in-law, George Grenville (not to be confused with Lord Granville), was leader of the government in the House of Commons. In presenting the measure, Grenville claimed the right of Parliament to levy taxes anywhere in the Empire, which was not contested by his fellow legislators, but he gave the colonies a year to propose alternatives. None did so, although Franklin himself did. Franklin achieved prodigies of diplomatic access and advocacy, but he had no legitimate status at all, and was merely an information service from Pennsylvania and other colonies that engaged him, to the British government establishment, and public. Franklin’s proposal was to have Parliament establish a colonial credit office that would issue bills of credit in the colonies, and collect 6 percent for renewal of the bills each year, and these could be used as currency. Gold and silver currency were scarce in the colonies, as all transactions with Britain had to be paid in cash, and Parliament had forbidden the issuance of paper money in America. Franklin’s theory was that this would be an adequately disguised tax, and would not be unpopular in American because of the desire there for paper money to replace an inordinate mass of informal IOUs. It isn’t clear how the interest would have been collected, or how inflation would have been avoided, but at least it was creative thinking, and a start.

John Stuart Mill on the Adversary System

“Nation Welcomes Return of Good Old-Fashioned Partisan Bickering,” The Onion. 

John Stuart Mill recommends the adversary system for the court of opinion as well as for courts of law.  In On Liberty Chapter 2 “Of the Liberty of Thought and Discussion,” paragraph 39, he writes:

I do not pretend that the most unlimited use of the freedom of enunciating all possible opinions would put an end to the evils of religious or philosophical sectarianism. Every truth which men of narrow capacity are in earnest about, is sure to be asserted, inculcated, and in many ways even acted on, as if no other truth existed in the world, or at all events none that could limit or qualify the first. I acknowledge that the tendency of all opinions to become sectarian is not cured by the freest discussion, but is often heightened and exacerbated thereby; the truth which ought to have been, but was not, seen, being rejected all the more violently because proclaimed by persons regarded as opponents. But it is not on the impassioned partisan, it is on the calmer and more disinterested bystander, that this collision of opinions works its salutary effect. Not the violent conflict between parts of the truth, but the quiet suppression of half of it, is the formidable evil; there is always hope when people are forced to listen to both sides; it is when they attend only to one that errors harden into prejudices, and truth itself ceases to have the effect of truth, by being exaggerated into falsehood. And since there are few mental attributes more rare than that judicial faculty which can sit in intelligent judgment between two sides of a question, of which only one is represented by an advocate before it, truth has no chance but in proportion as every side of it, every opinion which embodies any fraction of the truth, not only finds advocates, but is so advocated as to be listened to.

The problem I have with this in practice is that it doesn’t work well if too large a fraction of those in a discussion take the role of intensely partisan advocates and too small a fraction take the role of relatively nonpartisan judges. That is, if there are too few “calmer and more disinterested bystanders,” the adversarial system in public affairs cannot achieve the effect that John Stuart Mill hoped for.

Virginia Postrel--The Future of Bookstores: Serendipity and Samples →

I love what Virginia Postrel has to say about the future of bookstores. The world would be missing something if it had no bookstores. But they need a new business model.  

JP Koning—Transporting the Macroeconomics Blogosphere Back to 1809: Usury Laws and the 5% Upper Bound

Link to “Transporting the macroeconomics blogosphere back to 1809: Usury Laws and the 5% Upper Bound”

Thanks to JP Koning for giving permission to mirror this excellent Moneyness post (link above) as a guest post on supplysideliberal.com. Although the 5% upper bound in the bad old days was a disequilibrium interference with the market that created a gap between supply and demand, while the current zero lower bound is a promise of unlimited government supply of an asset earning 0%, what they have in common is a bound induced by policy, that can be repealed. 

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The zero-lower bound is the well-known 0% floor that a note-issuing bank hits whenever it attempts to reduce the interest rate it offers on deposits into negative territory. Should the bank drop rates below zero, every single negative yielding deposit issued by the bank will be converted into 0% yielding notes. When this happens, the bank will have lost any ability it once had to vary its lending rate.

The ZLB is an artificial construct. It arises from the way the banking system structures the liabilities that it issues, namely cash and deposits. We can modify this structure to either remove the ZLB or find alternative ways to get around it. Much of the discussion over the econblogosphere over the last few years has been oriented around various ways to get below zero.

There is another artificial bound, this one to the upside—let’s call it the 5% upper bound, or FUB. The FUB is an archaic bound. Up until 1854, the Usury Laws prevented the Bank of England from increasing rates above 5%. This constraint meant that for almost two centuries, the Bank of England’s discount rate was bounded within a narrow channel that had as its upper limit the 5% mark as stipulated by the Usury Laws and a lower limit of 0% due to the existence of 0% yielding banknotes (see chart above).

Imagine that we had a time machine and transported the econblogosphere, still hot over the ZLB debate, back to 1809. What sorts of discussions would we be having if we had risen up against the FUB? Given that the conventional route of increasing rates was constrained by the usury prohibitions, what sort of unconventional monetary policies would bloggers be providing to the Directors of the Bank of England to deal with inflationary booms? Would this advice be symmetrical to the policies they have been advocating for escaping the ZLB?

1809 is a significant date because the convertibility of the pound into gold had been suspended for over a decade. Although convertibility would be resumed in 1821, England would be on a ‘fiat’ standard very similar to our own for another decade. In the years since suspension, the pound had gradually depreciated against gold and other European currencies. A healthy debate began to flourish over whether the Bank of England was responsible for the pound’s depreciation (ie. inflation) or if external events such as crop failures were to blame. It was in that context that banker/economist Henry Thornton published his famous Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Although Thornton was circumspect on the precise causes of the deprecation of the pound, he drew attention to the difficulties that the Usury Laws caused in controlling the volume of credit. Here is Thornton:

In order to ascertain how far the desire of obtaining loans at the bank may be expected at any time to be carried, we must enquire into the subject of the quantum of profit likely to be derived from borrowing there under the existing circumstances. This is to be judged of by considering two points: the amount, first, of interest to be paid on the sum borrowed and, secondly, of the mercantile or other gain to be obtained by the employment of the borrowed capital…

The borrowers, in consequence of that artificial state of things which is produced by the law against usury, obtain their loans too cheap. That which they obtain too cheap they demand in too great quantity.

Thornton pointed out that if there was a large deficit between the price at which a businessman could borrow from the Bank of England and the mercantile rate of profit—the rate at which the same businessman could invest the borrowed money—then the demand for and granting of credit would become excessive. While nudging the discount rate higher would normally be sufficient to reduce this excess, the laws against usury might prevent these increases from taking place.

If we were to drop Nick Rowe into the 1809 economic debate, he would complement Thornton quite well by making good use of the same pole-on-a-palm analogy he has so aptly used to explain the ZLB. Running an inflation targeting central bank is sort of like balancing a long pole upright in the palm of one’s hand, says Nick. The bottom of the pole is the interest rate and the top is the inflation rate. As the pole starts to lean (ie. the price level begins to change), the holder needs to quickly move their palm far enough in the same direction (ie. interest rates must be changed) so as to stop the pole from falling over. A wall to the either the north or south impedes the holder’s palm from moving sufficiently far and will cause the pole to tumble over.

Applying this analogy to monetary policy, the Directors of the Bank of England might be required to stop excess inflation by moving rates north of 5%. With the Usury Laws in place, the Director’s efforts would be impeded. Nick’s illustration is Thornton all over again.

Scott Sumner, Lars Christensen, David Beckworth, and other monetarist-types have been strong advocates of quantitative easing as a way to get below the ZLB. Whisk them back to 1809 and would they advocate getting above the FUB by quantity dis-easing, or QD — mass repurchases of Bank of England notes through the liquidation of the Bank of England portfolio of assets?

Assuming that the threat of QD is able to increase the expected purchasing power of the pound (just as the threat of QE is supposed to reduce the same), then the Directors could initiate a QD program to improve the real return on pound notes and deposits. As soon as the real return on notes and deposits exceeds real returns on capital, the inflationary boom will come to a halt. Conveniently for the Directors, the nominal 5% rate will have remained in place — only real rates will have increased — thereby allowing the Directors to abide by the Usury Laws.

What about New Keynesians like Paul Krugman? Promising to hold off on future interest rate increases after a recovery has begun is the sort of advice New Keynesians have given to the Fed as a way to bridge the ZLB. This is called providing forward guidance. As Krugman says, a central bank needs to “credibly promise to be irresponsible”.

Parachute Krugman into 1809 and he would be counseling the Directors to do the opposite: hold off on reducing rates from 5% after a contraction had already set in. In other words, the Directors need to “credibly promise to be hard-asses.” As long as this promise is taken seriously by the market, the promise of future monetary tightening translates into lower inflation in the present, and the real interest rate rises. This should reign in the inflationary boom. Much like Sumner and Christensen, Krugman’s advice would allow the Director’s to hold steady at the 5% nominal rate dictated by the Usury Laws, letting real rates do the job of reeling in prices and slowing down the economy. 

What about Miles Kimball? Transport Miles back to 1809 and he’ll probably be the most aggressive in the outright removal of the Usury Laws. Just as he is currently campaigning for the ability of central banks to set negative rates on deposits, I’m sure he’d by picketing outside of Parliament for the right of the Director’s to bypass the Usury Laws and set 6-7% nominal rates.

Incidentally, what did the Directors of the Bank of England actually do? According to Jacob Viner, there is evidence that

bankers found means of evading the restrictions of the usury laws. In 1818, the Committee on the usury laws stated in its Report that there had been “of late years … [a] constant excess of the market rate of interest above the rate limited by law.” Thornton notes that borrowers from private banks had to maintain running cash with them, and borrowers in the money market had to pay a commission in addition to formal interest, and that by these means the effective market rate was often raised above the 5 per cent level. Another writer relates that long credits were customary in London and a greater discount was granted for prompt payment than the legal interest for the time would amount to.

More convincing evidence that the 5 per cent rate was not of itself always an effective barrier to indefinite expansion of loans by the banks is to be found in the fact that the directors of the Bank of England, although they professed that they discounted freely at the rate of 5 per cent all bills falling within the admissible categories for discount, in reply to questioning admitted that they had customary maxima of accommodation for each individual customer and occasionally applied other limitations to the amount discounted.

In Paper Credit we find Henry Thornton verifying Viner’s claim, noting the “determination, adopted some time since by the bank directors, to limit the total weekly amount of loans furnished by them to the merchants.”

So the Director’s preferred route for getting out from under the thumb of the Usury Laws was to maintain the 5% discount rate, but ration the quantity of loans issued at these rates, thereby limiting the quantity of credit in circulation. While this policy might not have been sufficient to prevent an inflationary boom, it may have prevented a hyperinflation from breaking out. 

Before I sign off, I want to reverse something I said at the outset. I wrote that the 5% upper bound was archaic, but that’s not entirely true. Sure, high interest rates are no longer illegal. But high nominal interest rates have never been politically palatable. Central bankers are not independent of politics, and therefore probably still operate with something akin to a 5% upper bound. Let’s call it an “upper-ish” bound, or the point at which a central banker starts to get dirty looks from those who have the power to reappoint him. Central bankers may need to resort to unconventional techniques to free themselves of the upperish-bound. The Fed’s motivations for adopting quantity targets in 1979, for instance, may have been such a technique. An overt jacking-up of interest rates to 15-20% would have been political suicide, goes the theory, so the FOMC chose to engage in a bunch of hand-waving about hitting money supply targets, thereby distracting would-be critics with a new set of monetary verbiage. This left Paul Volcker free to implement what would be at its peak a tremendously onerous 22%+ fed funds rate.

We’re of course not anywhere near the upper bound these days, at least not in the developed world, but it’s still an interesting puzzle to work through in order to help understand the current situation.

Labels: Bank of England, Henry Thornton, history of thought, inflation, Miles Kimball, Nick Rowe, nominal interest rates, open market operations, Paul Krugman, real interest rate, Scott Sumner, usury, zero lower bound

Three Big Questions for Larry Summers, Janet Yellen, and Anyone Else Who Wants to Head the Fed

Here is a link to my 27th column on Quartz, “Three big questions for Larry Summers, Janet Yellen, and anyone else who wants to head the Fed.”

Update: I am delighted that Gerald Seib and David Wessel flagged this column in their August 2, 2013 Wall Street Journal “What We’re Reading” feature. They write

University of Michigan economist Miles Kimball says the best candidate to take over as leader of the Fed will back negative short-term interest rates, nominal GDP targeting, and high equity requirements for banks and financial firms. If a candidate is chosen who opposes any of these three, Mr. Kimball predicts another serious financial crisis in the next two decades. [Emphasis added.]

In their last sentence, they go beyond what I intend when I write

But any candidate for the Fed who gives negative answers to these three questions will be indicating a monetary policy and financial stability philosophy that would leave the economy in continued danger of slow growth (with little room for error) and high unemployment in the short run, and the virtual certainty of another serious financial crisis a decade or two down the road.

Let me clarify. First, it is not these beliefs by the Fed Chief alone that would lead to a financial crisis, but the philosophy that would answer my three questions in the negative, held more generally–by the Fed Chief and other important players around the world. But of course, the Fed Chief is a hugely important player on the world stage.  Second, I write “who gives negative answers to these three questions” meaning negative answers to all three. To separate out the causality more carefully, what I have in mind with the parallel structure of my final sentence in the column (quoted just above) is 

1. Rejection of both negative interest rates and nominal GDP targeting–and perhaps rejection of negative interest rates alone–“would leave the economy in continued danger of slow growth (with little room for error) and high unemployment in the short run."  
2. Rejection of high equity requirements for banks and other financial firms would lead to "the virtual certainty of another serious financial crisis a decade or two down the road." 

Outtakes: Here are two passages that I had to cut to tighten things up, but that you may find of some interest:

In brief, the Fed put itself in the position of getting bad results using unpopular methods. By July 2009, the Fed’s job approval rating in a Gallup poll was down to 30%, below the job approval rating for the IRS . By the time of the 2012 presidential election campaign, Republican crowds enthusiastically chanted the title of Republican candidate Ron Paul’s book End the Fed.

…in a 32-second exchange with Charlie Rose that is well worth watching for the nuances, President Obama said “He’s already stayed a lot longer than he wanted, or he was supposed to.” The praise for Bernanke in the Charlie Rose interview is so tepid and ungenerous that my interpretation is the same as US News and World Report editor-in-chief Mortimer Zuckerman’s in his July 25, 2013 Wall Street Journal op-ed “Mistreating Ben Bernanke, the Man Who Saved the Economy”: “This comment made it clear that Mr. Bernanke’s days were numbered.” 

David Byrne: De Gustibus Non Est Disputandum

David Byrne Fan Art

Economists use the Latin adage “De gustibus, non est disputandum”–“There is no disputing of tastes”–to express the idea that in assessing an individual’s welfare, economists should use that individual’s preferences, not their own. This doctrine of deference to the desires, likes and dislikes of those who are affected by a policy is also evident in the praise economists usually intend when they use the word “non-paternalistic." What this doctrine means in practice is that when economists are acting in their capacity as policy advisors, their self-appointed task is to arrange things so that people get more of what they want, whatever it is that they want. (Of course, economists also often act in the capacity of scientists, with the strict task of finding out the truth and  figuring out how the world works. Greg Mankiw highlights the two tasks of economists both in his Principles of Economics textbook in the title of his Journal of Economic Perspectives article "The Macroeconomist as Scientist and Engineer,”)  

One of the areas where tastes are disputed is in the arts. David Byrne argues that even there, people’s tastes should be respected.  in Chapter 9 of his book How Music Works he takes apart the view that the consumption of some types of art and music is superior to the consumption of other types: 

Is some music really better than other music? Who decides? What effect does music have on us that might make it good or not-so-good? …

… it is presumed that certain kinds of music have more beneficial effects than others. Some music can make you a “better” person, and by extension other kinds of music might even be detrimental (and they don’t mean it will damage your eardrums)–certainly it won’t be as morally uplifting. The assumption is that upon hearing “good” music, you will somehow become a more morally grounded person. How does that work?

The background of those defining what is good or bad goes a long way toward explaining this attitude. The use of music to make a connection between a love of high art and economic success and status isn’t always subtle. Canadian writer Colin Eatock points out that classical music has been piped into 7-Elevens, the London Underground, and the Toronto subways, and the result has been a decrease in robberies, assaults, and vandalism. Wow–powerful stuff. Music can alter behavior after all! This statistic is held up as proof that some music does indeed have magical, morally uplifting properties. What a marketing opportunity! But another view holds that this tactic is a way of making certain people feel unwelcome. They know it’s not “their” music, and they sense that the message is, as Eatock says, “Move along, this is not your cultural space.” Others have referred to this as “musical bug spray.” It’s a way of using music to create and manage social space.

The economist John Maynard Keynes even claimed that many kinds of amateur and popular music do in fact reduce one’s moral standing. In general, we are indoctrinated to believe that classical music, and maybe some kinds of jazz, possess a kind of moral medicine–whereas hip-hop, club music, and certainly heavy metal lack anything like a positive moral essence. It all sounds slightly ridiculous when i spell it out like this, but such presumptions continue to inform many decisions regarding the arts and the way they’re supported. 

John Carey, an English literary critic who writes for The Sunday Times, wrote a wonderful book called What Good are the Arts that illustrates how officiallly sanctioned art and music gets privileged. Carey cites the philosopher Immanuel Kant: “Now I say the beautiful is the symbol of the morally good, and that it is only in this respect that it gives pleasure…The mind is made conscious of a certain ennoblement and elevation above the mere sensibility to pleasure.” So, according to Kant, the reason we find a given work of art beautiful is because we sense–but how do we sense this, I wonder? that some innate, benevolent, moral essence is tucked in there, elevating us, and we like that. In this view, pleasure and more uplift are linked. Pleasure alone, without this beautiful entanglement, is not a good thing–but packaged with moral uplift, pleasure is, well, excusable. That might sound pretty mystical and a bit silly, especially if you concede that standards of beauty just might be relative. In Kant’s Protestant world, all forms of sensuality inevitably lead to loose morals and eternal damnation. Pleasures needs a moral note to be acceptable.

When Goethe visited the Dresden Gallery, he noted the “emotion experienced up entering a House of God.” He was referring to the positive and uplifting emotions, not fear and trembling at the prospect of encountering the Old Testament God. William Hazlitt, the brilliant nineteenth-centuray essayist, said that going to the National Gallery on Pall Mall was like making a pilgrimage to the “holy of holies… [an] act of devotion performed at the shrine of art.” Once again it would appear that this God of Art is a benevolent one who will not strike young William down with a bolt of lightning for an occasional aesthetic sin. If such a punishment sounds like an exaggeration, keep in mind that not too long before Hazlitt’s time, one could indeed be burned at the stake for small blasphemies. And if the appreciation of the finer realms of art and music is akin to praying at a shrine, then one must accept that artistic blasphemy also has its consequences.

A corollary to the idea that high art is good for you is that it can be prescribed like medicine. Like a kind of inoculation, it can arrest, and possibly even begin to reverse, our baser tendencies. The Romantic poet Samuel Taylor Coleridge wrote that the poor needed art “to purify their tastes and wean them from [their] polluting and debasing habits.” Charles Kingsley, a nineteenth-century English novelist, was even more explicit: “Pictures raise blessed thoughts in me–why not in you, my brother? Believe it, toil-worn worker, in spite of thy foul alley, they crowded lodging, thy thin, pale wife, believe it, thou too, and thine will some day have your share of beauty.” Galleries like Whitechapel in London were opened in working-class neighborhoods so that the downtrodden might have a taste of the finer things in life. Having done a little bit of manual labor myself, I can attest that sometimes beer, music, or TV might be all one is ready for after a long day of physically demanding work.

Across the ocean, the titans of American industry continued this trend. They founded the Metropolitan Museum of Art in New York in 1872, filling it with works drawn from their massive European art collections in the hope that the place would act as a unifying force for an increasingly diverse citizenry–a matter of some urgency, given the massive number of immigrants who were joining the nation. One of the Met’s founders, Joseph Hodges Chosate, wrote, “Knowledge of art in its higher forms of beauty would tend directly to humanize, to educate and to refine a practical and laborious people.

The late Thomas Hoving, who ran the Met in the sixties and seventies, and his rival J. Carter Brown, who headed the National Gallery in Washington DC, both felt that democratizing art meant getting everyone to like the things that they liked. It meant letting everyone know that here, in their museums, was the good stuff, the important stuff, the stuff with that mystical aura. [The book illustrates] a promotion the Met did in the sixties in LIFE magazine. The idea was that even reduced to the size of a postcard, reproductions of verified masterpieces could still enlighten the American masses. And so cheap!

Silvio Gesell's Plan for Negative Nominal Interest Rates

Link to the Wikipedia Article on Silvio Gesell

One of best known proposals for avoiding massive paper currency storage when nominal interest rates are negative is Silvio Gesell’s proposal for stamped currency. Although I think a crawling peg exchange rate between paper currency and electronic money (or what Robert Eisler, who initially proposed this plan, called bank money) is a much more convenient way to avoid massive paper currency storage, Silvio’s plan would get the job done of eliminating the zero lower bound. (See my own proposal in “How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation” and see  “More on the History of Thought for Negative Nominal Interest Rates” and “Marvin Goodfriend on Electronic Money” together with its links.) In Chapter 23, Section VI of The General Theory of Employment, Interest and Money, John Maynard Keynes gives this account of Silvio Gesell’s proposal, which means that no one who has read The General Theory carefully has any excuse for talking about the zero lower bound as if it were a law of nature, rather than a policy choice:

Gesell was a successful German merchant in Buenos Aires who was led to the study of monetary problems by the crisis of the late ’eighties, which was especially violent in the Argentine, his first work, Die Reformation im Münzwesen als Brücke zum socialen Staat, being published in Buenos Aires in 1891. His fundamental ideas on money were published in Buenos Aires in the same year under the title Nervus rerum, and many books and pamphlets followed until he retired to Switzerland in 1906 as a man of some means, able to devote the last decades of his life to the two most delightful occupations open to those who do not have to earn their living, authorship and experimental farming.

The first section of his standard work was published in 1906 at Les Hauts Geneveys, Switzerland, under the title Die Verwirklichung des Rechtes auf dem vollen Arbeitsertrag, and the second section in 1911 at Berlin under the title Die neue Lehre vom Zins. The two together were published in Berlin and in Switzerland during the war (1916) and reached a sixth edition during his lifetime under the title Die natürliche Wirtschaftsordnung durch Freiland und Freigeld, the English version (translated by Mr. Philip Pye) being called The Natural Economic Order….

The incompleteness of [Silvio Gesell’s] theory is doubtless the explanation of his work having suffered neglect at the hands of the academic world. Nevertheless he had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed, though it is not feasible in the form in which he proposed it. He argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of “stamped” money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retaintheir value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure. According to my theory it should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per month, equivalent to 5.4 per cent. per annum. This would be too high in existing conditions, but the correct figure, which would have to be changed from time to time, could only be reached by trial and error.

The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale. But there are many difficulties which Gesell did not face. In particular, he was unaware that money was not unique in having a liquidity-premium attached to it, but differed only in degree from many other articles, deriving its importance from having a greater liquidity-premium than any other article. Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth. As I have mentioned above, there have been times when it was probably the craving for the ownership of land, independently of its yield, which served to keep up the rate of interest; — though under Gesell’s system this possibility would have been eliminated by land nationalisation.

A version of stamped money was briefly tried in the town of Woergl, in 1932. See the Wikipedia article on Woergl and the reinventingmoney.com article “The Woergl Experiment with Depreciating Money.”  (The title “The Woergl Experiment with Depreciating Money” refers to the fact that unstamped paper money would gradually be valued less and less over time, relative to all other forms of money.) 

I recommend the Wikipedia Article on Silvio Gesell. I love its selection of quotations about Silvio, which I will take the liberty to reproduce here:

Free money may turn out to be the best regulator of the velocity of circulation of money, which is the most confusing element in the stabilization of the price level. Applied correctly it could in fact haul us out of the crisis in a few weeks … I am a humble servant of the merchant Gesell.

—Prof. Dr. Irving Fisher, economist at Yale University New Haven/USA[3]

Gesell’s chiefwork is written in cool and scientific terms, although it is run through by a more passionate and charged devotion to social justice than many think fit for a scholar. I believe that the future will learn more from Gesell’s than from Marx’s spirit.

—John Maynard Keynes, Economist, Fellow of King’s College, University of Cambridge/England[4]

Gesell’s standpoint is both anticlassical and antimarxist… The uniqueness of Gesell’s theory lies in his attitude to social reform. His theory can only be understood considering his general point of view as a reformer … His analysis is not completely developed in several important points, but all in all his model shows no fault.

—Prof. Dr. Dudley Dillard, economist at the University of Maryland /USA [5]

We would especially like to certify our great esteem for pioneers such as Proudhon, Walras, and Silvio Gesell, who accomplished the great reconciliation of individualism and collectivism that the economic order we are striving for must rest upon.

—Prof. Dr. Maurice Allais, economist at the University of Paris/France[6]

Academic economists are ready to ignore the ‘crackpots’, especially the monetary reformers. Johannsen, Foster and Catchings, Hobson and Gesell all had brilliant contributions to make in our day, but could receive no audience. It is hoped, that in the future economists will give a sympathetic ear to those who possess great economic intuition.

—Prof. Dr. Lawrence Klein, economist at the University of Pennsylvania/USA[7]

Economic science owes Silvio Gesell profound insights into the nature of money and interest, but Silvio Gesell has always been considered a queer fellow by economic circles. To be sure, he was no professor, which already raises suspicion… The decisive fact is that Silvio Gesell’s fundamental ideas with regard to an economic order are correct and exemplary. Exemplary is furthermore, that in the creation of a functional monetary order he should see the ‘nervus rerum’ of a functional economic and social order.

—Prof. Dr. Joachim Starbatty, economist at the University of Tübingen/Germany[8]

Silvio Gesell managed to write clearly and make himself understood, a gift that most pure theorists and reformers as well as many practical experts of today lack. The Natural Economic Order makes worthwhile reading even in our days… Gesell developed brilliant concepts and was forgotten, while his less brilliant contemporaries … dazzled several generations before the realization of their falseness could break through.

—Prof. Dr. Oswald Hahn, economist at the University of Erlangen-Nuremberg/Germany[9]

Gesell is a smart outsider, who … treated the subjects of money and interest, the right to full proceeds from labor and suggestions for remedies, in a very original way… The ideas he conceived regarding his problems and what he deemed appropriate for the crises of his times are worth considering with respect to a fundamental improvement of monetary conditions in general.

—Prof. Dr. Dieter Suhr, jurist at the University of Augsburg/Germany[10]

Gesell is the founder of the free economy, an economic outsider who nevertheless was recognized by Keynes, in a certain sense, as his forerunner. He is therefore still considered to be above all a Keynesian economist, even a kind of hyper-Keynesian, that is to say, an advocate of a school that propagates the lowest (nominal) interest rate possible as a means of avoiding crises. Gesell, however, also recognized that the problem of a crisis cannot be solved solely by reducing the rates of interest… Gesell suggests, therefore, as the necessary correlative to the introduction of ‘free money’ … the introduction of ‘free land’… Gesell’s chief work thus carries the title ‘A Natural Economic Order Through Free Land (!) and Free Money’. It proves that the real aspects of an economy – that is to say, the claim on land or resources – must never be lost from view, even if primary importance is attached to monetary factors. This was recognized more clearly by Gesell than by Keynes.

—Prof. Dr. Hans C. Binswanger, economist at the College of Economic and Social Sciences Academy at St. Gallen/Switzerland[11]

Godless Religion

Pete Hautman’s Young Adult Novel Godless

This is an updated version of my June 10, 2007 sermon to the Community Unitarian Universalists in Brighton. I wanted to post this sermon sooner rather than later because of the importance I feel for the project it lays out of securing all the benefits of religion to unbelievers in the supernatural–even those benefits that seem most intimately tied to supernatural beliefs. (See my post “What Do You Mean by ‘Supernatural’?” for my best attempt at defining what I mean by “supernatural.”)

Although this sermon was originally addressed to Unitarian Universalists, I think it has a worthy message for anyone who is largely secular in beliefs, but aware of the evidence that religion seems to help people in many ways.

Note—Here are links to other sermons posted on supplysideliberal.com:

• UU Visions
• Teleotheism and the Purpose of Life (video here)
• The Egocentric Illusion (video here)
• The Message of Mormonism for Atheists Who Want to Stay Atheists (video here)
• So You Want to Save the World (video here)
• The Mystery of Consciousness
• The Message of Jesus for Non-Supernaturalists (video here)
• Live: The Egocentric Illusion

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Abstract: Religion serves many critical functions for individuals and for societies. Many religions see a belief in God as essential for serving those functions. Unitarian-Universalism aims to serve the critical functions of religion without insisting on a belief in God. This sermon argues that figuring out how to make “godless” or “agnostic” religion work in the fullest sense is a world-historic task for which Unitarian-Universalism plays an important role.

To explain what I mean by my title “Godless Religion,” let me quote the Episcopal Bishop John Shelby Spong’s book, Why Christianity Must Change or Die:

In this postmodern world, those who still claim allegiance to the Christian religion find themselves, I believe, living in a similar kind of exile. Our God has also been taken away from us.  For us, however, that removal of God did not occur in a single moment of violent defeat. It rather happened over a period of centuries as the steady and relentless advances in knowledge altered forever our ability to believe in the God content that stood at the heart of our sacred tradition.

To see his point:

• Imagine in your mind’s eye what the Copernican Revolution putting the Sun at the center rather than the Earth did to the Biblical worldview.
• Think of modern discoveries about the Big Bang and the size of the Universe.
• Think of what modern advances in neuroscience mean about the connection between the material and the spiritual (an area explored in depth by my erudite Harvard classmate and friend Anne Harrington). 
• Think of the discoveries of anthropology about the wide range of often very firm religious beliefs different cultures hold (see for example Pascal Boyer’s wonderful book Religion Explained).
• Think of Darwin’s theory of evolution and modern advances in understanding genes, with the lengthening of the history of the Earth from a few thousand years to billions of years, the idea that human beings could have arisen through evolution, and the idea that genes determine a large fraction of the way we are.

These scientific advances, let alone all the scientific advances now being discovered and yet to come, have shaken old religious interpretations to the core wherever people have taken the implications of that science seriously. In his book Darwin’s Dangerous Idea, the philosopher Daniel Dennett has compared the idea of evolution to a universal acid that changes everything it touches. Among scientific ideas, it is not the only universal acid. 

Think of what will become of religion in the next fifty years as these scientific ideas take even greater hold on the imaginations of the people of the world. Traditional religion will face a crisis–forcing it either to turn away from science or from a literal interpretation of its traditions.  Liberal religions like Unitarian-Universalism hold the key to giving people the benefits of religion while honestly facing up to the implications of modern science. Today I want to argue that in order to give people the benefits of religion while honestly facing up to the implications of modern science, we need to explicitly sift through to identify the truly valuable things that godly religions do, and figure out how to accomplish these tasks without requiring a belief in God or the supernatural.

One piece of jujutsu that may help is the paradoxical concept of worshiping a nonexistent God. When the apostle Paul visited Athens, he stood in the middle of the marketplace and said,

You men of Athens, I perceive that you are very religious in all things. For as I passed along, and observed the objects of your worship, I found also an altar with this inscription: ‘TO AN UNKNOWN GOD.’ What therefore you worship in ignorance, this I announce to you.

When my son Jordan was younger, I drove him to his Taekwondo class several times a week, and while he was in class, got some exercise by walking as fast as I could in one direction for 20 minutes and then turned around to get back by the time Jordan’s karate class was over. One day, I passed a street preacher on the corner of State Street and North University in Ann Arbor. Annoyed at some of the things he was saying, I thought about how I could answer him in a way that would begin to express my own beliefs without getting into a long discussion. So as I passed him on the way back, without slowing down, I raised my arms and called out “All hail the nonexistent God.” To his credit, the street preacher continued on without losing a beat: “Yes, God is nonexistent in people’s lives and people’s hearts….”  Of course, what I meant was the exact opposite: there is a god of sorts alive in people’s lives and hearts that–according to my belief–does not correspond to any supernatural being out there in the Universe or beyond the Universe. This is the nonexistent god that I preach to you.

In thinking of a nonexistent God, I am motivated by a rejection of the so-called ontological argument for the existence of God. The ontological argument for the existence of God goes something like this summary of Millard Erickson’s:

God is the greatest of all conceivable beings. Now a being which does not exist cannot be the greatest of all conceivable beings (for the nonexistent being of our conceptions would be greater if it had the attribute of existence). Therefore, by definition, God must exist.

The trouble with this argument is that actual existence is not an ordinary attribute like “blueness” or “bigness” or “goodness.”  And existence in the imagination is not the same thing as existence in the real world.  Nevertheless, for some purposes, existence in the imagination is quite powerful.  

Think of the question “What Would Jesus Do?”  There are many cases where there is no textual evidence about what the historical Jesus would have done. Still, most people have no problem telling you what they think Jesus would do. For many Christians of a generous spirit, the conception of Jesus’ personality is a synthesis of all the best human traits: love, justice, mercy, wisdom, strength, compassion, commitment to truth, and so on. This is a Jesus I can worship even if it happens that it is a Jesus who never existed. If the Western Tradition has distilled a vision of an ideal human, I should sit up and take notice, even if that vision of an ideal human has been falsely attributed to a particular historical individual. 

This is an example of a larger point: so much of humanity’s best efforts have been expressed in religious terms, that to throw out religion lock, stock and barrel is to throw out the gold along with the dross. This is obvious to those who love classical music. But religious texts and religious institutions also have valuable lessons. Because they are less likely to duplicate examples you know already, I would like to give some examples from Mormonism, in which I clocked 40 years worth of participant observation. 

1. Like many people, I can be a bit stubborn. So the following passage from the Book of Mormon moved me: “And now I would that ye should be humble, and be submissive and gentle; easy to be entreated; full of patience and long-suffering; …”  (Alma 7:23). 
2. One of the worst aspects of Mormonism is its insistent emphasis on following church leaders, without any second-guessing.  Fortunately, within the tradition are countervailing ideas.  Joseph Smith wrote: “No power or influence can or ought to be maintained by virtue of the priesthood, only by persuasion, by long-suffering, by gentleness and meekness and by love unfeigned; …” (D&C 121:41).  
3. An even more powerful counterweight to the notion of blind obedience is the story in Mormon texts of how at the beginning of the world, Satan offered to act as savior, and promised that he would make sure everyone behaved. God then rejected Satan’s plan because it would have destroyed human freedom. This story helped me stay convinced of the value of critical thinking. (See my post “The Mormon View of Jesus.”)
4. Institutionally, there are many things one can learn from Mormonism.  First, although Mormonism is highly centralized, and is suffused by patriarchy, at the local level, it has a certain democratic aspect. Everyone has a church position and the pulpit is fully shared, with almost everyone taking a turn giving sermons. Even the position of bishop, at the head of the congregation, is rotated at every five years or so. 
5. Besides trying to make everyone feel like a minor officer of the church, one of the secrets to the strong sense of community in Mormon congregations is the simple strategy the Mormon Church follows of keeping each congregation relatively small. Whenever a congregation grows beyond a few hundred people, it is split into two separate congregations that often share the same building, but operate with a separate organizational structure. 
6. For those interested in social engineering, Mormonism provides some clues:  

• The reason Mormonism grows fast is very simple: it has a massive proselyting effort.  The trick is how a majority of Mormon young men can be convinced to spend two years of their lives persuading other people to become Mormons.  Subjective spiritual experiences work as motivation for some, and parental pressure works for others. But for many others, the key motivating factor is that most believing Mormon women will not marry a man who has not served a two-year Mormon mission. Of course, in the terms economists use, this is a perfectly good equilibrium that makes sense for the Mormon women as well. If not completing a mission is a sign of failure for a Mormon man, then a man who does not serve a mission will not look like attractive marriage material. (It is still unclear what the October 2012 reduction in the age at which Mormon women can go on missions to 19 from 21 and the reduction of the minimum age for Mormon men from 19 to 18 will do to this equilibrium.)  
• During their time on a mission, Mormon young men are motivated partly by altruistic motives, but also in many cases by desire to gain the honor of moving up in the ranks from junior companion to senior companion to district leader to zone leader to assistant to the mission president. The (usually middle-aged) mission president can seem like a godlike figure who regularly interviews all of the missionaries and every month decides which missionaries will move from one station and rank to another station and rank. (I am speaking from my own experience as a missionary in the Tokyo North Mission from 1979 to 1981 under a very good mission president.)
• The same kind of desire to become (sociologically speaking) a minor local godling by gaining church rank helps to motivate people to take on the job of bishop, which, while totally unpaid, involves most of the counseling and leadership responsibilities that a minister in another church would have. That is not so say that these considerations of honor and rank are the main motivation for the onerous unpaid service one takes on as a Mormon bishop, but that the motivations of honor and rank sometimes fill in where more idealistic motivations fall short.  

The lesson I draw from all of this is that, for better or worse, it really is possible to motivate people to do a lot by the assignment of honor and rank instead of the payment of money. None of this is terribly inspiring (to me at least) when the end is simply to make more Mormons, but imagine a world in which the same kinds of motivational tools were used to achieve a more worthy goal, such as the utopian Book of Mormon goal of an end to poverty. (See my post “Will Mitt’s Mormonism Make Him a Supply-Side Liberal,” which is about the strong Book of Mormon message of social justice in the sense of making sure the poor are taken care of.) 

I suspect that the ideal among feasible societies would involve such an inequality of honor and rank.  People have to be motivated somehow, but it is better for those at the bottom to be dealing with low rank than too little money to buy the necessities of life. Low rank is particularly easy to deal with if there are customs of treating everyone with basic respect and dignity as a human being. (I remember my Dad telling me based on the book Kabloonathat among many of the Inuit, those who don’t bring in food still get fed, but enjoy much less honor in the community.)

Besides Mormonism and Unitarian-Universalism, my religious quest led me through many other religions and quasi-religions.  I have been in psychotherapy, with all the values of gentle respect for individual differences and calmly solving problems that fosters. I try to do Transcendental Meditation every morning as my main replacement for prayer. And I take my views on the meaning of life from the existentialist teachings of the Landmark Forum: life is inherently empty and meaningless, but that is OK, it just means that we need to choose our own meaning.  Each person needs to choose what he or she wants to stand for. The simple fill-in-the-blank procedure of completing the sentence “I am the possibility of all people ….” enforces the Kantian categorical imperative of transcending self-centeredness.  Mine is “I am the possibility of all people being joined together in discovery and wonder.” (On Landmark, see also my post “So You Want to Save the World.”) Even my profession of economics contains some religious wisdom: gains from trade arising from diversity, letting bygones be bygones, and a nonjudgmental approach to our flawed humanity. 

Finally, to the bemusement of my wife, Gail, I often listen to Contemporary Christian Music. Besides the general treatment of the ups and downs of life, even the Christian beliefs that I reject as a literal reality, often have a psychological charge for me.

I don’t believe in Jesus as a savior, but Susan Ashton’s song “In Amazing Grace Land” provides some salve for my irrational fear that I am fundamentally bad.  The chorus goes like this: 

Without your love, there’d be no healing.  There’d be no blood, raining down to cover me.  I once was lost, but you found me and brought me here.  Now there’s a halo over me, in amazing grace land. (Lyrics; Youtube audio.)

And in her song “Hold the Intangible,” in words whose literal meaning I think is disgraceful, is an expression of the desire that leads me to embrace the paradox of worshiping the nonexistent God: 

There is a chamber, in the soul of the believer, it holds reason in defiance, the demanding hand of science may not enter. (Lyrics; MySpace audio.) 

I will resolutely hold to reason and to the demanding hand of science.  Nevertheless, there is wisdom and food for the soul in the fictions of traditional religions, that we can safely enjoy if we retain our critical faculties along with the same capacity for the temporary suspension of disbelief that we use to appreciate a novel, a movie or an opera. 

Back when I was a Mormon, I made a list of three criteria by which a religion could be judged: the degree to which a religion 

1. fosters joyfully living an ethical, responsible life,
2. fosters community, and
3. fosters intellectual, emotional and spiritual discovery.

Spiritual discovery, in particular, involves aspects of our psyches that we do not understand very well. And unfortunately, much of what has been discovered about the spiritual side of life has been framed in terms of a God who I believe does not exist. Thus, until our understanding is much deeper than it is now, godless religion that feeds the soul will require some fancy footwork. I hope that over time we can gain a greater understanding of how religion works, so that we can design an ever better godless religion that matches all of the benefits of traditional religion while allowing us to fully appreciate the scientific wonders of the actual Universe all around us.

How big are various global markets? →

isomorphismes:

Asset class — Market Size

• Bonds — $93T
• Loans — $64T
• Equities — $54T
• OTC Derivatives — $27T

via supervenes

How big is OTC? Using gross market value rather than notional for OTCs. blog.rivast.com/?p=7032

— Simon Hinrichsen (@simonhinrichsen) March 23, 2013

Miles on HuffPost Live: Barack Obama Talks about the Long Run, While We Wonder about His Pick for Fed Chief

Link to HuffPost Live segment “Back to the Economy”: Mark Gongloff, Edward G. Luce and Miles Kimball, hosted by Mike Sacks

It was a little odd having two fairly disparate topics in this HuffPost Live segment: long-run issues and who the new Fed Chief should be. Here is what I talked about:

• my public contribution proposal in “No Tax Increase Without Recompense”  and “Yes, There is an Alternative to Austerity Versus Spending: Reinvigorate America’s Nonprofits,”
• education reform,
• raising bank equity requirements (see this post and bankersnewclothes.com),
• Larry Summers vs. Janet Yellen (sorry, I waffle, but I hope in an interesting way),
• negative interest rates (see “How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation" and my electronic money sub-blog),
• the minimum wage (see ”Isaac Sorkin: Don’t Be Too Reassured by Small Short-Run Effects    of the Minimum Wage“ and ”Jonathan Meer and Jeremy West: Effects of the Minimum Wage on Employment Dynamics“), 
• breaking the state-sponsored doctor and lawyer cartels to help the middle middle class, 
• a mention of bringing down higher education costs–I was thinking of massively open online courses, combined with community college tending of students (see also Brad DeLong’s post on how the tenure system makes colleges surprisingly positive about massively open online courses).