Capitalistic Musings
Capitalistic Musings
Capitalistic Musings
1st EDITION
Lidija Rangelovska
A Narcissus Publications Imprint, Skopje 2003
1
© 2002, 2003 Copyright Lidija Rangelovska.
All rights reserved. This book, or any part thereof, may not be used or reproduced in
any manner without written permission from:
Lidija Rangelovska – write to:
[email protected] or to
[email protected]
Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review":
http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html
Visit Sam Vaknin's United Press International (UPI) Article Archive – Click HERE!
ISBN: 9989-929-37-8
http://samvak.tripod.com/guide.html
http://economics.cjb.net
http://samvak.tripod.com/after.html
2
CONTENTS
3
XXXI. The Economics of Expectations
XXXII. Corruption and Transparency
XXXIII. Workaholism, Leisure, and Pleasure
XXXIV. Nation Branding and Place Marketing
XXXV. NGOs – The Self-appointed Altruists
XXXVI. The Wages of Science
XXXVII. The Lessons of Transition
XXXVIII. The Morality of Child Labor
XXXIX. Law and Technology
XL. The Author
4
Economics - Psychology's Neglected Branch
5
Still, many people are non-rational or only nearly rational
in certain situations. And the definition of "self-interest"
as the pursuit of the fulfillment of preferences is a
tautology.
6
Either one cannot design an experiment to rigorously and
validly test theorems and conjectures in economics - or
something is very flawed with the intellectual pillars and
models of this field.
7
Classic cost/benefit analyses fail to tackle very long term
investment horizons (i.e., periods). Their underlying
assumption - the opportunity cost of delayed consumption
- fails when applied beyond the investor's useful economic
life expectancy. People care less about their
grandchildren's future than about their own. This is
because predictions concerned with the far future are
highly uncertain and investors refuse to base current
decisions on fuzzy "what ifs".
8
These are symptoms of an all-pervasive malaise.
Economists are simply not sure what precisely constitutes
their subject matter. Is economics about the construction
and testing of models in accordance with certain basic
assumptions? Or should it revolve around the mining of
data for emerging patterns, rules, and "laws"?
9
c. Consistency – It must be self-consistent. Its sub-"units"
cannot contradict one another or go against the grain of
the main "theory". It must also be consistent with the
observed phenomena, both those related to economics and
those pertaining to non-economic human behaviour. It
must adequately cope with irrationality and cognitive
deficits.
10
j. Prescriptive Powers – The theory must yield policy
prescriptions, much like physics yields technology.
Economists must develop "economic technology" - a set
of tools, blueprints, rules of thumb, and mechanisms with
the power to change the " economic world".
11
a. Ethical – Experiments would have to involve human
subjects, ignorant of the reasons for the experiments and
their aims. Sometimes even the very existence of an
experiment will have to remain a secret (as with double
blind experiments). Some experiments may involve
unpleasant experiences. This is ethically unacceptable.
12
In a way, economics has an affinity with some private
languages. It is a form of art and, as such, it is self-
sufficient and self-contained. If certain structural, internal
constraints and requirements are met – a statement in
economics is deemed to be true even if it does not satisfy
external (scientific) requirements. Thus, the standard
theory of utility is considered valid in economics despite
overwhelming empirical evidence to the contrary - simply
because it is aesthetic and mathematically convenient.
13
The believer feels reassured by this explanation and by the
explicit affirmation that there is hope providing he follows
the prescriptions. His belief in the existence of linear
order and justice administered by some supreme,
transcendental principle is restored.
Return
14
The Misconception of Scarcity
By: Dr. Sam Vaknin
15
The classical concept of scarcity - unlimited wants vs.
limited resources - is lacking. Anticipating much-feared
scarcity encourages hoarding which engenders the very
evil it was meant to fend off. Ideas and knowledge -
inputs as important as land and water - are not subject to
scarcity, as work done by Nobel laureate Robert Solow
and, more importantly, by Paul Romer, an economist from
the University of California at Berkeley, clearly
demonstrates. Additionally, it is useful to distinguish
natural from synthetic resources.
16
Equally, it is true that manufactured goods, agricultural
produce, money, and services are scarce. The number of
industrialists, service providers, or farmers is limited - as
is their life span. The quantities of raw materials,
machinery and plant are constrained. Contrary to classic
economic teaching, human wants are limited - only so
many people exist at any given time and not all them
desire everything all the time. But, even so, the demand
for man-made goods and services far exceeds the supply.
17
Markets are supposed to regulate scarcity by storing
information about our wants and needs. Markets
harmonize supply and demand. They do so through the
price mechanism. Money is, thus, a unit of information
and a conveyor or conduit of the price signal - as well as a
store of value and a means of exchange.
18
Such ease of replication gives rise to network effects and
awards first movers with a monopolistic or oligopolistic
position. Oligopolies are better placed to invest excess
profits in expensive research and development in order to
achieve product differentiation. Indeed, such firms justify
charging money for their "new economy" products with
the huge sunken costs they incur - the initial expenditures
and investments in research and development, machine
tools, plant, and branding.
19
Not so. Even "new economists" admitted to temporary
shortages and "bottlenecks" on the way to their utopian
paradise of cost-free abundance. Demand always initially
exceeds supply. Internet backbone capacity, software
programmers, servers are all scarce to start with - in the
old economy sense.
20
One innovation the "new economy" has wrought is
"inverse scarcity" - unlimited resources (or products) vs.
limited wants. Asset exchanges the world over are now
adjusting to this harrowing realization - that cost free
goods are worth little in terms of revenues and that people
are badly disposed to react to zero marginal costs.
Return
21
The Roller Coaster Market
22
Call-writing has soared as punters, fund managers, and
institutional investors try to eke an extra return out of the
wild ride and to protect their dwindling equity portfolios.
Naked strategies - selling options contracts or buying
them in the absence of an investment portfolio of
underlying assets - translate into the trading of volatility
itself and, hence, of risk. Short-selling and spread-betting
funds join single stock futures in profiting from the
downside.
23
There is disagreement among scholars and traders whether
one should better use historical data or current market
prices - which include expectations - to estimate volatility
and to price options correctly.
24
The formula also unrealistically assumes that the market
dickers continuously, ignoring transaction costs and
institutional constraints. No wonder that traders use
Black-Scholes as a heuristic rather than a price-setting
formula.
25
His conclusion was that markets overshoot in response to
surprising changes in economic variables. A sudden
increase in the money supply, for instance, axes interest
rates and causes the currency to depreciate. The rational
outcome should have been a panic sale of obligations
denominated in the collapsing currency. But the
devaluation is so excessive that people reasonably expect
a rebound - i.e., an appreciation of the currency - and
purchase bonds rather than dispose of them.
26
Volatility is a form of market inefficiency. It is a reaction
to incomplete information (i.e., uncertainty). Excessive
volatility is irrational. The confluence of mass greed, mass
fears, and mass disagreement as to the preferred mode of
reaction to public and private information - yields price
fluctuations.
But most market players follow the trend. They sell when
the VIX is high and, thus, portends a declining market. A
bullish consensus is indicated by low volatility. Thus, low
VIX readings signal the time to buy. Whether this is more
than superstition or a mere gut reaction remains to be
seen.
27
It is the work of theoreticians of finance. Alas, they are
consumed by mutual rubbishing and dogmatic thinking.
The few that wander out of the ivory tower and actually
bother to ask economic players what they think and do -
and why - are much derided. It is a dismal scene, devoid
of volatile creativity.
Return
28
The Friendly Trend
By: Dr. Sam Vaknin
29
These hopeful inferences are supported by the work of
other scholars, such as Paul Weller of the Finance
Department of the university of Iowa. While he admits the
limitations of technical analysis - it is a-theoretic and data
intensive, pattern over-fitting can be a problem, its rules
are often difficult to interpret, and the statistical testing is
cumbersome - he insists that "trading rules are picking up
patterns in the data not accounted for by standard
statistical models" and that the excess returns thus
generated are not simply a risk premium.
30
"An approach to investment management based on the
belief that historical price series, trading volume, and
other market statistics exhibit regularities - often ... in the
form of geometric patterns ... that can be profitably
exploited to extrapolate future price movements."
31
The paradox is that technicians are more orthodox than
the most devout academic. They adhere to the strong
version of market efficiency. The market is so efficient,
they say, that nothing can be gleaned from fundamental
analysis. All fundamental insights, information, and
analyses are already reflected in the price. This is why one
can deduce future prices from past and present ones.
32
Not all markets are strongly efficient. Most of them sport
weak or "semi-strong" efficiency. In some markets, a filter
model - one that dictates the timing of sales and purchases
- could prove useful. This is especially true when the
equilibrium price of a share - or of the market as a whole -
changes as a result of externalities.
33
Studies cited in Edwin Elton and Martin Gruber's
"Modern Portfolio Theory and Investment Analysis" and
elsewhere show that a filter model - trading with technical
analysis - is preferable to a "buy and hold" strategy but
inferior to trading at random. Trading against
recommendations issued by a technical analysis model
and with them - yielded the same results. Fama-Blum
discovered that the advantage proffered by such models is
identical to transaction costs.
34
Still, even if we accept the rigorous version of market
efficiency - i.e., as Aswath Damodaran of the Stern
Business School at NYU puts it, that market prices are
"unbiased estimates of the true value of investments" -
prices do react to new information - and, more
importantly, to anticipated information. It takes them time
to do so. Their reaction constitutes a trend and identifying
this trend at its inception can generate excess yields. On
this both fundamental and technical analysis are agreed.
35
"The more creativity you bring to the investment process,
the more rewarding it will be. The only way to maintain
ongoing success, however, is to constantly innovate.
That's much the same in all endeavors. The only way to
continue making money, to continue growing and keeping
your profit margins healthy, is to constantly come up with
new ideas."
Return
36
The Merits of Inflation
By: Dr. Sam Vaknin
37
As economists are wont to point out time and again,
inflation is not the inevitable outcome of growth. It
merely reflects the output gap between actual and
potential GDP. As long as the gap is negative - i.e., whilst
the economy is drowning in spare capacity - inflation lies
dormant. The gap widens if growth is anemic and below
the economy's potential. Thus, growth can actually be
accompanied by deflation.
38
The intervention of central banks only hastened the
process and now it threatens to render benign structural
disinflation - malignantly deflationary.
39
These disparities among essentially similar economies
reflect pervasive disagreements over what is being
quantified by the rate of inflation and when and how it
should be managed.
40
Consider a deflationary environment in which stagnant
wages and zero interest rates can still have a - negative or
positive - inflationary effect. In real terms, in deflation,
both wages and interest rates increase relentlessly even if
they stay put. Yet it is hard to incorporate this "downward
stickiness" in present-day inflation measures.
41
The new consensus is that the price for a substantial
decrease in unemployment need not be a sizable rise in
inflation. The level of employment at which inflation does
not accelerate - the non-accelerating inflation rate of
unemployment or NAIRU - is susceptible to government
policies.
This has been the case in Japan in the last few years and is
now emerging as a problem in the USA. The Fed - having
cut rates 11 times in the past 14 months and unless it is
willing to expand the money supply aggressively - may be
at the end of its monetary tether. The Bank of Japan has
recently resorted to unvarnished and assertive monetary
expansion in line with what Paul Krugman calls "credible
promise to be irresponsible".
42
But the upshots of inflation are fiscal, not merely
monetary. In countries devoid of inflation accounting,
nominal gains are fully taxed - though they reflect the rise
in the general price level rather than any growth in
income. Even where inflation accounting is introduced,
inflationary profits are taxed.
43
The connection between inflation and asset bubbles is
unclear. On the one hand, some of the greatest fizz in
history occurred during periods of disinflation. One is
reminded of the global boom in technology shares and
real estate in the 1990's. On the other hand, soaring
inflation forces people to resort to hedges such as gold
and realty, inflating their prices in the process. Inflation -
coupled with low or negative interest rates - also tends to
exacerbate perilous imbalances by encouraging excess
borrowing, for instance.
Return
44
The Benefits of Oligopolies
By: Dr. Sam Vaknin
45
Market purists consider oligopolies - not to mention
cartels - to be as villainous as monopolies. Oligopolies,
they intone, restrict competition unfairly, retard
innovation, charge rent and price their products higher
than they could have in a perfect competition free market
with multiple participants. Worse still, oligopolies are
going global.
46
These - and other insights - were incorporated in a theory
of market contestability. Contrary to classical economic
thinking, monopolies and oligopolies rarely raise prices
for fear of attracting new competitors, went the new
school. This is especially true in a "contestable" market -
where entry is easy and cheap.
47
Moreover, if collusive strategies are implemented, and
oligopolists manage to raise prices significantly above
their competitive level, each oligopolist will be confronted
with a conflict between sticking to the tacitly agreed
behaviour and increasing its individual profits by
'cheating' on its competitors. Therefore, the question of
mutual monitoring and control is a key issue in collusive
oligopolies."
48
Victory is not guaranteed, losses loom constantly,
investors are forever edgy, customers are fickle, bankers
itchy, capital markets gloomy, suppliers beholden to the
competition. Barriers to entry are almost always
formidable and often insurmountable.
49
In his recently published tome "The Free-Market
Innovation Machine - Analysing the Growth Miracle of
Capitalism", William Baumol of Princeton University,
concurs. He daringly argues that productive innovation is
at its most prolific and qualitative in oligopolistic markets.
Because firms in an oligopoly characteristically charge
above-equilibrium (i.e., high) prices - the only way to
compete is through product differentiation. This is
achieved by constant innovation - and by incessant
advertising.
50
Cartels are conceived in order to cut members' costs of
sales. Small firms are motivated to pool their purchasing
and thus secure discounts. Dick draws attention to a
paradox: mergers provoke the competitors of the merging
firms to complain. Why do they act this way?
51
Competition used to be extraneous to the firm - now it is
commonly an internal affair among autonomous units
within a loose overall structure. This is how Jack
"neutron" Welsh deliberately structured General Electric.
AOL-Time Warner hosts many competing units, yet no
one ever instructs them either to curb this internecine
competition, to stop cannibalizing each other, or to start
collaborating synergistically. The few mammoth agencies
that rule the world of advertising now host a clutch of
creative boutiques comfortably ensconced behind Chinese
walls. Such outfits often manage the accounts of
competitors under the same corporate umbrella.
52
Competition does not necessarily translate either to
variety or to lower prices. Many consumers are turned off
by too much choice. Lower prices sometimes deter
competition and new entrants. A multiplicity of vendors,
retail outlets, producers, or suppliers does not always
foster competition. And many products have umpteen
substitutes. Consider films - cable TV, satellite, the
Internet, cinemas, video rental shops, all offer the same
service: visual content delivery.
53
Linux threatens Windows. Opera nibbles at Microsoft's
Internet Explorer. Amazon drubbed traditional
booksellers. eBay thrashes Amazon. Bell was forced by
Covad Communications to implement its own technology,
the DSL broadband phone line.
Return
54
Moral Hazard and the Survival Value of Risk
Also Read:
55
The reallocation and transfer of risk are booming
industries. Governments, capital markets, banks, and
insurance companies have all entered the fray with ever-
evolving financial instruments. Pundits praise the virtues
of the commodification and trading of risk. It allows
entrepreneurs to assume more of it, banks to get rid of it,
and traders to hedge against it. Modern risk exchanges
liberated Western economies from the tyranny of the
uncertain - they enthuse.
56
Governments are willing to act imprudently, safe in the
knowledge that the IMF is a lender of last resort, which is
often steered by geopolitical considerations, rather than
merely economic ones. Creditors are more willing to lend
and at lower rates, reassured by the IMF's default-staving
safety net. Conversely, the IMF's refusal to assist Russia
in 1998 and Argentina this year - should reduce moral
hazard.
57
Moreover, charges of "moral hazard" are frequently ill-
informed and haphazard. Even the venerable Wall Street
Journal fell in this fashionable trap. It labeled the Long
Term Capital Management (LTCM) 1998 salvage - "$3.5
billion worth of moral hazard". Yet, no public money was
used to rescue the sinking hedge fund and investors lost
most of their capital when the new lenders took over 90
percent of LTCM's equity.
58
Moral hazard infringes upon both transparency and
accountability. It is never explicit or known in advance. It
is always arbitrary, or subject to political and geopolitical
considerations. Thus, it serves to increase uncertainty
rather than decrease it. And by protecting private investors
and creditors from the outcomes of their errors and
misjudgments - it undermines the concept of liability.
59
"I propose combining market signals of risk with the best
aspects of current regulation to help mitigate the moral
hazard problem that is most acute with our largest banks
... The actual regulatory and legal changes introduced over
the period-although positive steps-are inadequate to
address the safety net's perversion of the risk/return trade-
off."
60
"The ability of regulators to contain moral hazard directly
is limited. Moral hazard results when economic agents do
not bear the marginal costs of their actions. Regulatory
reforms can alter marginal costs but they accomplish this
task through very crude and often exploitable tactics.
There should be limited confidence that regulation and
supervision will lead to bank closures before institutions
become insolvent. In particular, reliance on lagging
regulatory measures, restrictive regulatory and legal
norms, and the ability of banks to quickly alter their risk
profile have often resulted in costly failures."
61
The defrauded depositors of BCCI are still chasing the
assets of the defunct bank as well as litigating against the
Bank of England for allegedly having failed to supervise
it. Discipline imposed by depositors and creditors often
results in a "run on the bank" - or in bankruptcy. The
presumed ability of stakeholders to discipline risky
enterprises, hazardous financial institutions, and profligate
sovereigns is fallacious.
62
Last but by no means least, as opposed to oft-reiterated
wisdom - the markets have no memory. Russia has
egregiously defaulted on its sovereign debt a few times in
the last 100 years. Only four years ago it thumbed its nose
with relish at tearful foreign funds, banks, and investors.
63
"Net flows (of World Bank lending) are higher prior to
elections ... It is shown that a country's rate of monetary
expansion and its government budget deficit (are) higher
the more loans it receives ... Moreover, the budget deficit
is shown to be larger the higher the interest rate subsidy
offered by the (World) Bank."
64
Depositors would like to know that their deposits are safe
or reimbursable. Investors would like to mitigate some of
the risk by shifting it to the state. The unemployed would
like to get their benefits regularly. Bankers would like to
lend more daringly. Governments would like to maintain
the stability of their financial systems.
65
A competitive insurance market will always produce a
contract that leaves consumers at least as well off under
lower prices as under higher prices. Thus, imperfect
competition in healthcare markets can not have efficiency
enhancing effects if the only distortion is due to moral
hazard."
66
The shareholders and employees of Enron may be entitled
to some kind of safety net - but not so its managers. Laws
- and social norms - that protect the latter at the expense
of the former, should be altered post haste. The
government of a country bankrupted by irresponsible
economic policies should be ousted - its hapless citizens
may deserve financial succor. This distinction between
perpetrator and prey is essential.
Return
67
The Business of Risk
By: Dr. Sam Vaknin
68
He analyzes hundreds of examples - from bankruptcy law
to income security, from flood mitigation to national
defense, and from consumer protection to deposit
insurance. The limited liability company shifted risk from
shareholders to creditors. Product liability laws shifted
risk from consumers to producers.
69
As Holbrook Working proved in his seminal work, hedges
fulfill other functions as well - but even he admitted that
speculators assume risks by buying the contracts. Many
financial players emphasize the risk reducing role of
derivatives. Banks, for instance, lend more - and more
easily - against hedged merchandise.
70
Greater inter-dependence, however, raises challenges for
market participants and the authorities: in tracking the
distribution of risks in the economy, managing associated
counterparty exposures, and ensuring that regulatory,
accounting, and tax differences do not distort behavior in
undesirable ways."
71
According to "The Economist", in the wake of the
atrocity, insurance companies slashed their coverage to
$50 million per airline per event. EU governments had to
step in and provide unlimited insurance for a month. The
total damage, now pegged at $60 billion - constitutes one
quarter of the capitalization of the entire global
reinsurance market.
72
But terrorism and war are, gratefully, still rarities. Even
before September 11, insurance companies were in the
throes of a frantic effort to reassert themselves in the face
of stiff competition offered by the capital markets as well
as by financial intermediaries - such as banks and
brokerage houses.
73
The funds yielded by an insurance policy, though, are
encumbered and contingent. It takes an insurance event to
"release" them. Equity capital is usually made
immediately and unconditionally available for any
business purpose. Insurance companies are moving
resolutely to erase this distinction between on and off
balance sheet types of capital. They want to transform
"contingent equity" to "real equity".
74
Companies - from manufacturers to insurance agents - are
willing to retain more risk than ever before. ART
constitutes less than one tenth the global insurance market
according to "The Economist" - but almost one third of
certain categories, such as the US property and casualty
market, according to an August 2000 article written by
Albert Beer of America Re. ART is also common in the
public and not for profit sectors.
75
The more reluctant the classical insurance companies are
to provide coverage - and the higher their rates - the
greater the allure of ART. According to "The Economist",
the number of captives established in Bermuda alone
doubled to 108 last year reaching a total of more than
4000. Felix Kloman of Risk Management Reports
estimated that $21 billion in total annual premiums were
paid to captives in 1999.
76
An additional twist comes in the form of Catastrophe
Equity Put Options which oblige their holder to purchase
the equity of the insured at a pre-determined price. Other
derivatives offer exposure to insurance risks. Options
bought by SPV's oblige investors to compensate the issuer
- an insurance or reinsurance company - if damages
exceed the strike price. Weather derivatives have taken off
during the recent volatility in gas and electricity prices in
the USA.
77
Yet, as the number of exotic assets increases, as financial
services converge, as the number of players climbs, as the
sophistication of everyone involved grows - the very
concept of risk is under attack. Value-at-Risk (VAR)
computer models - used mainly by banks and hedge funds
in "dynamic hedging" - merely compute correlations
between predicted volatilities of the components of an
investment portfolio.
Some risks and losses offset each others and are aptly
termed "natural hedges". Enron pioneered the use of such
computer applications in the late 1990's - to little gain it
would seem. There is no reason why insurance companies
wouldn't insure such risk portfolios - rather than one risk
at a time. "Multi-line" or "multi-trigger" policies are a first
step in this direction.
78
Guided by VAR models, a change in volatility allows a
bank or a hedge fund to increase or decrease assets with
the same risk level and thus exacerbate the overall hazard
of a portfolio. The collapse of the star-studded Long Term
Capital Management (LTCM) hedge fund in 1998 is
partly attributable to this misconception.
79
Moreover, Basle 2 demands extra equity capital against
operational risks such as rogue trading or bomb attacks.
There is no hint of the role insurance companies can play
("contingent equity"). There is no trace of the discipline
which financial markets can impose on lax or
dysfunctional banks - through their publicly traded
unsecured, subordinated debt.
Return
80
Global Differential Pricing
By: Dr. Sam Vaknin
Also Read:
81
The 80 experts, who attended the workshop, proposed to
reconcile these two, apparently contradictory, aspirations
by introducing different prices for drugs in low-income
and rich countries. This could be achieved bilaterally,
between companies and purchasers, patent holders and
manufacturers, global suppliers and countries - or through
a market mechanism.
82
Less likely, industrialized countries may also impose price
controls, using poor country prices as benchmarks. Other
participants, including dominant NGO's, such as Oxfam
and Medecins Sans Frontieres, rooted for a reform of the
TRIPS agreement - or the manufacturing of generic
alternatives to branded drugs.
83
But drug companies and other technology producers fear
that knowledge about such discounting could lead to a
demand for lower prices in rich countries as well. They
have tended to set global prices that are unaffordable for
the citizens of poor countries (as with many AIDS drugs).
84
The six participating publishers are Blackwell Synergy,
Elsevier Science Direct, Harcourt IDEAL, Springer Link,
Wiley Interscience, and Wolters Kluwer. The
subscriptions are given to universities and research
institutions, not to individuals. But they are identical in
scope to the subscriptions received by institutions paying
the full price."
85
Touchingly, the issue of the dispossessed within rich
country societies was raised by two African Special
Rapporteurs in a report submitted last year to the UN sub-
Commission on Human Rights and titled "Globalization
and its Impact on the Full Enjoyment of Human Rights".
It said:
86
This is usually done through auctions or requests for
quotes or tenders. Dynamic pricing is most often used in
the liquidation of surplus inventories and for e-sourcing.
87
Thus prices depend on the amount of the good purchased,
but not on who does the purchasing. A common example
of this sort of pricing is volume discounts.
88
The key issue is whether the output of goods and services
is increased or decreased by differential pricing."
89
According to the Paris-based International Chamber of
Commerce (ICC), differential pricing is also - perhaps
mostly - influenced by other considerations such as:
transportation costs, disparate tax and customs regimes,
cost of employment, differences in property rights and
royalties, local safety and health standards, price controls,
quality of internal distribution systems, the size of the
order, the size of the market, and so on.
90
This bifurcation - the huge fixed costs versus the
negligible marginal costs - vitiates the rule: "set price at
marginal cost". At which marginal cost? To compensate
for the sunk and fixed costs, the first "marginal units"
must carry a much higher price tag than the last ones.
91
Consumers are divided on the issue of multi-tiered pricing
tailored to fit the customer's purchasing power. Not
surprisingly, rich world buyers are apprehensive. They
feel that differential pricing is a form of hidden subsidy,
or a kind of "third world tax".
92
The interesting thing is that discrimination of pricing is
very common in the insurance industry - the basis for
actuarial work and in airlines - based on load factors. The
key is the pricing available to groups of customers with
similar profiles ... Simple supply and demand, competition
from other suppliers should offset ... A dangerous policy
to implement ... As a consumer I don't necessarily like it,
(unless I get a lower price!). However, economically
speaking, (think of a monopolist's MR curve) the ideal is
to have each person pay the maximum amount that they
are willing to pay."
Return
93
The Disruptive Engine
94
Governments - from the United Kingdom to New Zealand
- set up "innovation teams or units" to foster innovation
and support it. Canada's is more than two decades old.
95
It provokes resistance and unrest. If mismanaged - it can
spell doom rather than boom.
96
In non-capitalist societies, people are busy inventing ways
to survive or circumvent the system, create monopolies, or
engage in crime.
97
Governments - and, more particularly the defense
establishment - finance most of this brainstorming. the
Internet was invented by DARPA - a Department of
Defense agency - and not by libertarian intellectuals.
98
Robert Morris, an Amazon reviewer, sums up IDEO's
creative process:
99
"Three types of factors drive financial innovation:
demand, supply, and taxes and regulation. Demand driven
innovation occurs in response to the desire of companies
to protect themselves from market risks ... Supply side
factors ... include improvements in technology and
heightened competition among financial service firms.
Other financial innovation occurs as a rational response to
taxes and regulation, as firms seek to minimize the cost
that these impose."
100
2. In the second stage, volume in the new market expands
as financial intermediaries trade to hedge their market
exposures.
101
The OECD has just published a study titled "Productivity
and Innovation". It summarizes the orthodoxy, first
formulated by Nobel prizewinner Robert Solow from MIT
almost five decades ago:
102
Yet, innovation may be curbed by even more all-pervasive
and pernicious problems. "The Economist" posed a
question to its readers in the December 2001`issue of its
Technology Quarterly:
103
The more that happens, the more engineers closest to the
technology become incapable of contributing
improvements to it. And without such user input, a
technology can quickly ossify."
104
It reversed the trends of centralization and hierarchical
stratification wrought by the Industrial Revolution. From
microprocessor to micropower - an enormous centrifugal
shift is underway. Power percolates back to the people.
105
"The Economist" carried last December the story of the
agricultural technologist Richard Jefferson who helps
"local plant breeders and growers develop the foods they
think best ... CAMBIA (the institute he founded) has
resisted the lure of exclusive licences and shareholder
investment, because it wants its work to be freely
available and widely used." This may well foretell the
shape of things to come.
Return
106
Governments and Growth
By: Dr. Sam Vaknin
Also Read:
107
It is further anticipated that financial intermediaries -
pension funds, banks, mutual funds - will tread similarly.
If unable to invest the savings of their depositors in scarce
risk-free - i.e., government - securities - they will likely
alter their investment preferences and buy equity and debt
issued by firms.
108
It is universally agreed that governments have at least two
critical economic roles. The first is to provide a "level
playing field" for all economic players. It is supposed to
foster competition, enforce the rule of law and, in
particular, property rights, encourage free trade, avoid
distorting fiscal incentives and disincentives, and so on.
Its second role is to cope with market failures and the
provision of public goods. It is expected to step in when
markets fail to deliver goods and services, when asset
bubbles inflate, or when economic resources are blatantly
misallocated.
109
Often, the sole engine of growth and the exclusive
automatic stabilizer is public spending. Not all types of
public expenditures have the desired effect. Witness
Japan's pork barrel spending on "infrastructure projects".
But development-related and consumption-enhancing
spending is usually beneficial.
110
Rather than lend to businesses or households - banks
thrive on arbitrage. Investment horizons are limited.
Should the state refrain from stepping in to fill up the gap
- these countries are doomed to inexorable decline.
Return
111
The Distributive Justice of the Market
By: Dr. Sam Vaknin
Also Read
112
Entrepreneurs recombine natural and human resources in
novel ways. They do so to respond to forecasts of future
needs, or to observations of failures and shortcomings of
current products or services. Entrepreneurs are
professional - though usually intuitive - futurologists. This
is a valuable service and it is financed by systematic risk
takers, such as venture capitalists. Surely they all deserve
compensation for their efforts and the hazards they
assume?
113
Economic enterprise is subject to information asymmetry:
we know nothing about the future and everything about
the past. This asymmetry is known as "investment risk".
Society compensates the entrepreneur with one type of
asymmetry - exclusive ownership - for assuming another,
the investment risk.
114
"Distributive justice" deals with the just allocation of
scarce resources.
115
Communism - ostensibly a strict egalitarian idea -
foundered because it failed to reconcile strict equality
with economic and psychological realities within an
impatient timetable.
116
It is merely a medium of exchange and a store of value.
The index - as expressed in terms of money - is the
underlying agreement regarding the values of resources in
terms of other resources (i.e., their relative values).
117
This conflicts with basic rights like the freedom to make
economic choices.
118
Having thus acquired these resources, we are then
permitted to use them as we see fit. Obviously, we end up
with disparate economic results. But we cannot complain -
we were given the same purchasing power and the
freedom to bid for a bundle of our choice.
119
That the market is wiser than any of its participants is a
pillar of the philosophy of capitalism. In its pure form, the
theory claims that markets yield patterns of merited
distribution - i.e., reward and punish justly. Capitalism
generate just deserts. Market failures - for instance, in the
provision of public goods - should be tackled by
governments. But a just distribution of income and wealth
does not constitute a market failure and, therefore, should
not be tampered with.
Return
120
The Myth of the Earnings Yield
Also Read:
121
1. That the fair "value" of a share is closely
correlated to its market price;
122
The rationale is that retained earnings, once re-invested,
generate additional earnings. Such a virtuous cycle
increases the likelihood and size of future dividends. Even
undistributed earnings, goes the refrain, provide a rate of
return, or a yield - known as the earnings yield. The
original meaning of the word "yield" - income realized by
an investor - was undermined by this Newspeak.
123
Even the most gullible novice knows that dividends are a
mere apologue, a relic of the past. So why do investors
buy shares? Because they hope to sell them to other
investors later at a higher price.
But, if so, why the volatility in share prices, i.e., why are
share prices distributed? Surely, since, in liquid markets,
there are always buyers - the price should stabilize around
an equilibrium point.
124
Earnings serve merely as a yardstick, a calibrator, a
benchmark figure. Capital gains are, by definition, an
increase in the market price of a security. Such an increase
is more often than not correlated with the future stream of
income to the firm - though not necessarily to the
shareholder. Correlation does not always imply causation.
Stronger earnings may not be the cause of the increase in
the share price and the resulting capital gain. But
whatever the relationship, there is no doubt that earnings
are a good proxy to capital gains.
125
The distribution of gains and losses in the long term is
pretty even, i.e., random. The price level revolves around
an anchor, supposedly the fair value.
Return
126
Immortality and Mortality in the
Economic Sciences
By: Dr. Sam Vaknin
127
As technology evolved, training periods have lengthened,
and human capital came to outweigh the physical or
monetary kinds. This led to an ongoing revolution in
economic relations. Ironically, dehumanizing totalitarian
regimes, such as fascism and communism, were the first
to grasp the emerging prominence of scarce and expensive
human capital among other means of production. What
makes humans a scarce natural resource is their mortality.
128
Even in the current bear market, the average multiple of
the p/e - price to earnings - ratio is 45. This means that the
average investor is willing to wait more than 60 years to
recoup his investment (assuming capital gains tax of 35
percent).
129
"Suppose a long-term discount rate of 7 percent (after
inflation) is used, as it typically is in cost-benefit analysis.
Suppose also that the project's benefits arrive 200 years
from now, rather than in 30 years or less. If global GDP
grew by 3 percent during those two centuries, the value of
the world's output in 2200 will be $8 quadrillion ... But in
present value terms, that stupendous sum would be worth
just $10 billion. In other words, it would not make sense
... to spend any more than $10 billion ... today on a
measure that would prevent the loss of the planet's entire
output 200 years from now."
130
They value the present and near future more than they do
the far future. In other words, they take their mortality
into account.
131
Parents gift their off-spring unequally. The richer the
child, the larger his or her share of such largesse. The
older the parent, the more pronounced the asymmetry.
Post-mortem bequests, on the other hand, are usually
divided equally among one's progeny.
Return
132
The Agent-Principal Conundrum
By: Dr. Sam Vaknin
133
Another myth has to do with the role of managers. They
are supposed to generate higher returns to shareholders by
increasing the value of the firm's assets and, therefore, of
the firm. If they fail to do so, goes the moral tale, they are
booted out mercilessly. This is one manifestation of the
"Principal-Agent Problem". It is defined thus by the
Oxford Dictionary of Economics:
134
In an important Chicago Law Review article whose
preprint was posted to the Web a few weeks ago - titled
"Managerial Power and Rent Extraction in the Design of
Executive Compensation" - the authors demonstrate how
the typical stock option granted to managers as part of
their remuneration rewards mediocrity rather than
encourages excellence.
135
They tolerate corruption in high places, cronyism,
nepotism, inaptitude and worse - on condition that the
government and the legislature redistribute the wealth
they confiscate. Such redistribution often comes in the
form of pork barrel projects and benefits to the middle-
class.
136
Nothing happens by accident or by coercion. Shareholders
aided and abetted the current crop of corporate executives
enthusiastically. They knew well what was happening.
They may not have been aware of the exact nature and
extent of the rot - but they witnessed approvingly the
public relations antics, insider trading, stock option
resetting , unwinding, and unloading, share price
manipulation, opaque transactions, and outlandish pay
packages. Investors remained mum throughout the
corruption of corporate America. It is time for the
hangover.
Return
137
The Green-Eyed Capitalist
By: Dr. Sam Vaknin
138
The New Oxford Dictionary of English defines envy as:
139
4. They experience cognitive dissonance. These people
devalue the source of their frustration and envy by finding
faults in everything they most desire and in everyone they
envy.
140
Hitler, who fancied himself an artist, labeled the British a
"nation of shopkeepers" in one of his bouts of raging
envy. Ralph Reiland, the Kenneth Simon professor of free
enterprise at Robert Morris University, quotes David
Brooks of the "weekly Standard", who christened this
phenomenon "bourgeoisophobia":
141
He tries to persuade himself that he failed through no fault
of his own. He was too decent to resort to the base tricks
to which his successful rivals owe their ascendancy. The
nefarious social order does not accord the prizes to the
most meritorious men; it crowns the dishonest,
unscrupulous scoundrel, the swindler, the exploiter, the
`rugged individualist.'"
142
But jealousy is premised on the twin beliefs of equality
and a level playing field. "I am as good, as skilled, and as
talented as the object of my jealousy." - goes the subtext -
"Given equal opportunities, equitable treatment, and a bit
of luck, I can accomplish the same or more."
Return
143
The Case of the Compressed Image
By: Sam Vaknin, Ph.D.
Also Read:
144
BT Group sued Prodigy, a unit of SBC Communications,
in a US federal court, for infringement of its patent of the
hypertext link, or hyperlink - a ubiquitous and critical
element of the Web. Dell Computer has agreed with the
FTC to refrain from enforcing a graphics patent having
failed to disclose it to the standards committee in its
deliberations of the VL-bus graphics standard.
Amazon sued Barnes and Noble - and has since settled out
of court in March - for emulating its patented "one click
purchasing" business process. A Web browser command
to purchase an item generates a "cookie" - a text file
replete with the buyer's essential details which is then
lodged in Amazon's server. This allows the transaction to
be completed without a further confirmation step.
145
In a recently published discourse of innovation and
property rights, titled "The Free-Market Innovation
Machine", William Baumol of Princeton University
claims that only capitalism guarantees growth through a
steady flow of innovation. According to popular lore,
capitalism makes sure that innovators are rewarded for
their time and skills since property rights are enshrined in
enforceable contracts.
146
Both managers and court-appointed receivers strive to
monetize these properties and patent-portfolios by either
selling them or enforcing the rights against infringing
third parties.
147
The myth of intellectual property postulates that
entrepreneurs assume the risks associated with publishing
books, recording records, and inventing only because -
and where - the rights to intellectual property are well
defined and enforced. In the absence of such rights,
creative people are unlikely to make their works
accessible to the public. Ultimately, it is the public which
pays the price of piracy and other violations of intellectual
property rights, goes the refrain.
148
The advent of the Industrial Revolution - and the imagery
of the romantic lone inventor toiling on his brainchild in a
basement or, later, a garage - gave rise to the patent. The
more massive the markets became, the more sophisticated
the sales and marketing techniques, the bigger the
financial stakes - the larger loomed the issue of
intellectual property.
149
Electronic publishing poses a threat - however distant - to
print publishing. Napster-like peer to peer networks
undermine the foundations of the music and film
industries. Open source software is encroaching on the
turf of proprietary applications. It is very easy and cheap
to publish and distribute content on the Internet, the
barriers to entry are virtually nil.
150
Various business models are emerging or reasserting
themselves - from ad sponsored content to packaged open
source software.
151
This intimate relationship between creative person and
consumer is the way it has always been. We may yet look
back on the 20th century and note with amazement the
transient and aberrant phase of intermediation - the
Sony's, Microsoft's, and Forgent's of this world.
Return
152
The Fabric of Economic Trust
By: Dr. Sam Vaknin
153
Some forms of trust are akin to a public good and are
closely related to governmental action or inaction, the
reputation of the state and its institutions, and its
pronounced agenda. Other types of trust are the outcomes
of kinship, ethnic origin, personal standing and goodwill,
corporate brands and other data generated by individuals,
households, and firms.
154
Market players take for granted the existence and
continuous operation of institutions - financial
intermediaries, law enforcement agencies, courts. It is
important to note that market players prefer continuity and
certainty to evolution, however gradual and ultimately
beneficial. A venal bureaucrat is a known quantity and
can be tackled effectively. A period of transition to good
and equitable governance can be more stifling than any
level of corruption and malfeasance. This is why
economic activity drops sharply whenever institutions are
reformed.
155
This implicitly presupposes that all other market players
are physically, mentally, legally and financially able and
willing to act their parts as stipulated, for instance, in
contracts they sign.
156
Cognitive dissonance ("I really choose to be poor rather
than heartless"), pathological envy (seeks to deprive
others and thus gain emotional reward), rigidity ("I am
like that, my family or ethnic group has been like that for
generations, there is nothing I can do"), passive-
aggressive behavior (obstructing the work flow,
absenteeism, stealing from the employer, adhering strictly
to arcane regulations) - are all reactions to a breakdown in
one or more of the four aforementioned types of trust.
Furthermore, people in a trust crisis are unable to
postpone gratification. They often become frustrated,
aggressive, and deceitful if denied. They resort to reckless
behavior and stopgap economic activities.
157
Scavenger Economies,
Predator Economies
By: Dr. Sam Vaknin
158
They benefit economically by violating both international
and domestic laws and by providing international outcasts
and rogues with alternative routes of supply, and with
goods and services.
159
Free zones, off shore havens, off shore banking and
transshipment ports proliferate, from Macedonia to
Archangelsk.
160
Copycat Economies - These are economies that are based
on legal or (more often) illegal copying and emulation of
intellectual property: patents, brandnames, designs,
industrial processes, other forms of innovation,
copyrighted material, etc. The prime example is Japan,
which constructed its whole mega-economy on these
bases. Both Bulgaria and Russia are Meccas of piracy.
Though prosperous for a time, these economies are
dependent on and subject to the vicissitudes of business
cycles. They are capital sensitive, inherently unstable and
with no real long term prospects if they fail to generate
their own intellectual property. They reflect the volatility
of the markets for their goods and are overly exposed to
trade risks, international legislation and imports. Usually,
they specialize in narrow segments of manufacturing
which only increases the precariousness of their situation.
161
Industrial Bases - These are economies that make use of
the intellectual property generated by the former type
within industrial processes. They do not copy the
intellectual property as it is. Rather, they add to it
important elements of adaptation to niche markets, image
creation, market positioning, packaging, technical
literature, combining it with other products or services,
designing and implementing the whole production
process, market (demand) creation, improvement upon the
originals and value added services. These contributions
are so extensive that the end products, or services can no
longer to be identified with the originals, which serve as
mere triggers. Again, Poland, Hungary, Slovenia (and to a
lesser extent, Croatia) come to mind.
162
The Trader Economies - These economies are equivalent
to the cardiovascular system. They provide the channels
through which goods and services are exchanged. They do
this by trading or assuming risks, by providing physical
transportation and telecommunications, and by
maintaining an appropriately educated manpower to
support all these activities. These economies are highly
dependent on the general health of international trade.
Many of the CEE economies are Trader economies. The
openness ratio (trade divided by GDP) of most CEE
countries is higher than the G7 countries'. Macedonia, for
instance, has a GDP of 3.6 Billion US dollars and exports
and imports of c. 2 billion US dollars. These are the
official figures. Probably, another 0.5 billion Us dollars in
trade go unreported. additionally, it has one of the lowest
weighted customs rate in the world. Openness to trade is
an official policy, actively pursued.
Return
163
Notes on the Economics of Game Theory
By: Dr. Sam Vaknin
Consider this:
164
The very allocation of options or shares will be interpreted
as a sign of weakness, dependence and need, to be
exploited. Hierarchy is equated with slavery and
employees will rather harm their long term interests than
follow instructions or be subjected to criticism – never
mind how constructive. The employees in CEE regard the
corporate environment as a conflict zone, a zero sum
game (in which the gains by some equal the losses to
others). In the West, the employees participate in the
increase in the firm's value. The difference between these
attitudes is irreconcilable.
165
The entrepreneurs feel that they are "strangled",
"shackled", "held back" by bureaucracy and they "rebel".
They oust the management, or undermine it, turning it into
an ineffective representative relic. They assume real,
though informal, control of the firm. They do so by
defining a new set of strategic goals for the firm, which
call for the institution of an entrepreneurial rather than a
bureaucratic type of management. These cycles of
initiative-consolidation-new initiative-revolution-
consolidation are the dynamos of company growth.
Growth leads to maximization of value. However, the
players don't know or do not fully believe that they are in
the process of maximizing the company's worth. On the
contrary, consciously, the managers say: "let's maximize
the benefits that we derive from this company, as long as
we are still here." The entrepreneurs-owners say: "we
cannot tolerate this stifling bureaucracy any longer. We
prefer to have a smaller company – but all ours." The
growth cycles forces the entrepreneurs to dilute their
holdings (in order to raise the capital necessary to finance
their initiatives). This dilution (the fracturing of the
ownership structure) is what brings the last cycle to its
end. The holdings of the entrepreneurs are too small to
materialize a coup against the management. The
management then prevails and the entrepreneurs are
neutralized and move on to establish another start-up. The
only thing that they leave behind them is their names and
their heirs.
166
Wherever we have economic players bargaining for the
allocation of scarce resources in order to attain their utility
functions, to secure the outcomes and consequences (the
value, the preference, that the player attaches to his
outcomes) which are right for them – we can use Game
Theory (GT).
167
The Consequence to the agent is the value of a function
that assigns real numbers to each of the outcomes. The
consequence represents a list of outcomes, prioritized,
ranked. It is also known as an ordinal utility function. If
the function includes relative numerical importance
measures (not only real numbers) – we call it a Cardinal
Utility Function.
168
The behaviour of the players reveals to us their order of
preferences. This is called "Preference Ordering" or
"Revealed Preference Theory". Agents are faced with sets
of possible states of the world (=allocations of resources,
to be more economically inclined). These are called
"Bundles". In certain cases they can trade their bundles,
swap them with others. The evidence of these swaps will
inevitably reveal to us the order of priorities of the agent.
All the bundles that enjoy the same ranking by a given
agent – are this agent's "Indifference Sets". The
construction of an Ordinal Utility Function is, thus, made
simple. The indifference sets are numbered from 1 to n.
These ordinals do not reveal the INTENSITY or the
RELATIVE INTENSITY of a preference – merely its
location in a list. However, techniques are available to
transform the ordinal utility function – into a cardinal one.
169
These strategies guarantee that the loser will not lose more
than the value of the game and that the winner will gain at
least this value. The solution is the "Saddle Point".
170
Von Neumann proved that there is a solution for every
ZSG with 2 players, though it might require the
implementation of mixed strategies (strategies with
probabilities attached to every move and outcome).
Together with the economist Morgenstern, he developed
an approach to coalitions (cooperative efforts of one or
more players – a coalition of one player is possible).
Every coalition has a value – a minimal amount that the
coalition can secure using solely its own efforts and
resources. The function describing this value is super-
additive (the value of a coalition which is comprised of
two sub-coalitions equals, at least, the sum of the values
of the two sub-coalitions). Coalitions can be
epiphenomenal: their value can be higher than the
combined values of their constituents. The amounts paid
to the players equal the value of the coalition and each
player stands to get an amount no smaller than any
amount that he would have made on his own. A set of
payments to the players, describing the division of the
coalition's value amongst them, is the "imputation", a
single outcome of a strategy. A strategy is, therefore,
dominant, if: (1) each player is getting more under the
strategy than under any other strategy and (2) the players
in the coalition receive a total payment that does not
exceed the value of the coalition. Rational players are
likely to prefer the dominant strategy and to enforce it.
Thus, the solution to an n-players game is a set of
imputations. No single imputation in the solution must be
dominant (=better). They should all lead to equally
desirable results. On the other hand, all the imputations
outside the solution should be dominated. Some games are
without solution (Lucas, 1967).
171
Auman and Maschler tried to establish what is the right
payoff to the members of a coalition. They went about it
by enlarging upon the concept of bargaining (threats,
bluffs, offers and counter-offers). Every imputation was
examined, separately, whether it belongs in the solution
(=yields the highest ranked outcome) or not, regardless of
the other imputations in the solution. But in their theory,
every member had the right to "object" to the inclusion of
other members in the coalition by suggesting a different,
exclusionary, coalition in which the members stand to
gain a larger payoff. The player about to be excluded can
"counter-argue" by demonstrating the existence of yet
another coalition in which the members will get at least as
much as in the first coalition and in the coalition proposed
by his adversary, the "objector". Each coalition has, at
least, one solution.
172
This, however, is only a tendency. Some of the time,
players select the wrong moves. It would have been much
wiser to assume that there are no pure strategies, that all
of them are mixed. Game Theory would have done well to
borrow mathematical techniques from quantum
mechanics. For instance: strategies could have been
described as wave functions with probability distributions.
The same treatment could be accorded to the cardinal
utility function. Obviously, the highest ranking (smallest
ordinal) preference should have had the biggest
probability attached to it – or could be treated as the
collapse event. But these are more or less known, even
trivial, objections. Some of them cannot be overcome. We
must idealize the world in order to be able to relate to it
scientifically at all. The idealization process entails the
incorporation of gross inaccuracies into the model and the
ignorance of other elements. The surprise is that the
approximation yields results, which tally closely with
reality – in view of its mutilation, affected by the model.
173
Nash proved that there is an allocation of possible utility
functions to these agents so that the equilibrium strategy
for each one of them will be this kind of threat. This is a
clear social Hobbesian dilemma: the equilibrium is
absolute egoism despite the fact that all the players are
altruists. This implies that we can learn very little about
the outcomes of competitive situations from acquainting
ourselves with the psychological facts pertaining to the
players. The agents, in this example, are not selfish or
irrational – and, still, they deteriorate in their behaviour,
to utter egotism. A complete set of utility functions –
including details regarding how much they know about
one another's utility functions – defines the available
equilibrium strategies. The altruists in our example are
prisoners of the logic of the game. Only an "outside"
power can release them from their predicament and permit
them to materialize their true nature. Gauthier said that
morally-constrained agents are more likely to evade
Paretto-dominated outcomes in competitive games – than
agents who are constrained only rationally. But this is
unconvincing without the existence of an Hobesian
enforcement mechanism (a state is the most common
one). Players would do better to avoid Paretto dominated
outcomes by imposing the constraints of such a
mechanism upon their available strategies. Paretto
optimality is defined as efficiency, when there is no state
of things (a different distribution of resources) in which at
least one player is better off – with all the other no worse
off. "Better off" read: "with his preference satisfied". This
definitely could lead to cooperation (to avoid a bad
outcome) – but it cannot be shown to lead to the formation
of morality, however basic. Criminals can achieve their
goals in splendid cooperation and be content, but that does
not make it more moral.
174
Game theory is agent neutral, it is utilitarianism at its
apex. It does not prescribe to the agent what is "good" –
only what is "right". It is the ultimate proof that effort at
reconciling utilitarianism with more deontological, agent
relative, approaches are dubious, in the best of cases.
Teleology, in other words, in no guarantee of morality.
175
Additionally, Game Theory is mired in an internal
contradiction: on the one hand it solemnly teaches us that
the psychology of the players is absolutely of no
consequence. On the other, it hastens to explicitly and
axiomatically postulate their rationality and implicitly
(and no less axiomatically) their benefit-seeking
behaviour (though this aspect is much more muted). This
leads to absolutely outlandish results: irrational behaviour
leads to total cooperation, bounded rationality leads to
more realistic patterns of cooperation and competition
(coopetition) and an unmitigated rational behaviour leads
to disaster (also known as Paretto dominated outcomes).
176
There is no logical or mathematical reason to exclude the
latter possibility. The ability to thus influence the game is
a legitimate part of any real life strategy. Game Theory
assumes that the game is a given – and the players have to
optimize their results within it. It should open itself to the
inclusion of game altering or redefining moves by the
players as an integral part of their strategies. After all,
games entail the existence of some agreement to play and
this means that the players accept some rules (this is the
role of the prosecutor in the Prisoners' Dilemma). If some
outside rules (of the game) are permissible – why not
allow the "risk" that all the players will agree to form an
outside, lawfully binding, arbitration and enforcement
agency – as part of the game? Such an agency will be
nothing if not the embodiment, the materialization of one
of the rules, a move in the players' strategies, leading them
to more optimal or superior outcomes as far as their utility
functions are concerned. Bargaining inevitably leads to an
agreement regarding a decision making procedure. An
outside agency, which enforces cooperation and some
moral code, is such a decision making procedure. It is not
an "outside" agency in the true, physical, sense. It does
not "alter" the game (not to mention its rules). It IS the
game, it is a procedure, a way to resolve conflicts, an
integral part of any solution and imputation, the herald of
cooperation, a representative of some of the will of all the
players and, therefore, a part both of their utility functions
and of their strategies to obtain their preferred outcomes.
Really, these outside agencies ARE the desired outcomes.
177
Once Game Theory digests this observation, it could
tackle reality rather than its own idealized contraptions.
Return
178
Knowledge and Power
By: Dr. Sam Vaknin
179
2. Content – This incorporates both ontological and
epistemological elements. In other words: both
"hard" data, which should, in principle, be
verifiable through the employment of objective,
scientific, methods – and "soft" data, the
interpretation offered with the hard data. The soft
data is a derivative of a "message", in the broader
sense of the term. A message comprises both
world-view (theory) and an action and direction-
inducing element.
180
The Government intervenes to correct market failures, or
to influence the allocation of resources in favour or
against the interests of a defined group of people. The
more transparent and accountable the actions of the
Government, the less distortion in the allocation of
resources and the less resulting inefficiency. The
Government should declare its intentions and actions in
advance whenever possible, then it should act through
public, open tenders, report often to regulatory and
legislative bodies and to the public and so on. The more
information provided by this major economic player (the
most dominant in most countries) – the more smoothly
and efficaciously the Market will operate. The converse,
unfortunately, is also true. The less open the government,
the more latent its intents, the more shadowy its
operations – the more cumbersome the bureaucracy, the
less functioning the market.
181
3. From Government to the World – The "World"
here being multilateral institutions, foreign
governments, foreign investors, foreign
competitors and the economic players in general
providing that they are outside the territory of the
information disseminating Government. Again,
any delay, or abstention in the dissemination of
information as well as its distortion
(disinformation and misinformation) will result in
economic outcomes worse that could have been
achieved by a free, prompt, precise and equitable
(=equally available) dissemination of said
information. This is true even where commercial
secrets are involved! It has been proven time and
again that when commercial information is kept
secret – the firm (or Government) that keeps it
hidden is HARMED. The most famous examples
are Apple (which kept its operating system a well-
guarded secret) and IBM (which did not),
Microsoft (which kept its operating system open to
developers of software) and other software
companies (which did not). Recently, Netscape
has decided to provide its source code (the most
important commercial secret of any software
company) free of charge to application developers.
Synergy based on openness seemed to have won
over old habits. A free, unhampered, unbiased
flow of information is a major point of attraction
to foreign investors and a brawny point with the
likes of the IMF and the World Bank. The former,
for instance, lends money more easily to countries,
which maintain a reasonably reliable outflow of
national statistics.
182
4. From Firms to the World – The virtues of
corporate transparency and of the application of
the properly revealing International Accounting
Standards (IAS, GAAP, or others) need no
evidencing. Today, it is virtually impossible to
raise money, to export, to import, to form joint
ventures, to obtain credits, or to otherwise
collaborate internationally without the existence of
full, unmitigated disclosure. The modern firm (if it
wishes to interact globally) must open itself up
completely and provide timely, full and accurate
information to all. This is a legal must for public
and listed firms the world over (though standards
vary). Transparent accounting practices, clear
ownership structure, available track record and
historical performance records – are sine qua non
in today's financing world.
183
Positive information is characterized by four qualities:
184
People say: "This sounds true" and the word "sounds"
should be emphasized.
185
Information cannot be understood in the absence
of such a worldview. Such a worldview can be
scientific, or religious – but it can also be
ideological (Capitalism, Socialism), or related to
an image which an entity wishes to project. An
image is a theory about a person or a group of
people. It is both supported by information – and
supports it. It is a shorthand version of all the
pertinent data, a stereotype in reverse.
186
Actors are often mistaken for their roles, wars are fought
on television, fictitious TV celebrities become real. That
which has no information presence might as well have no
real life existence. An entity – person, group of people, a
nation – which does not engage in structuring content,
providing and disseminating it – actively engages,
therefore, in its own, slow, disappearance.
Return
187
Market Impeders and
Market Inefficiencies
By: Dr. Sam Vaknin
188
off its very inefficiencies and imperfections and, by their
very actions, enhance them.
189
3. The "not serious" operators. These are people too
hesitant, or phobic to commit themselves to the
assumption of any kind of risk. Risk is the coal in
the various locomotives of the economy, whether
local, national, or global. Risk is being assumed,
traded, diversified out of, avoided, insured against.
It gives rise to visions and hopes and it is the most
efficient "economic natural selection" mechanism.
To be a market participant one must assume risk, it
in an inseparable part of economic activity.
Without it the wheels of commerce and finance,
investments and technological innovation will
immediately grind to a halt. But many operators
are so risk averse that, in effect, they increase the
inefficiency of the market in order to avoid it.
They act as though they are resolute, risk assuming
operators. They make all the right moves, utter all
the right sentences and emit the perfect noises. But
when push comes to shove – they recoil, retreat,
defeated before staging a fight. Thus, they waste
the collective resources of all that the operators
that they get involved with. They are known to
endlessly review projects, often change their
minds, act in fits and starts, have the wrong
priorities (for an efficient economic functioning,
that is), behave in a self defeating manner, be
horrified by any hint of risk, saddled and
surrounded by every conceivable consultant,
glutted by information. They are the stick in the
spinning wheel of the modern marketplace.
190
4. The former kind of operators obviously has a
character problem. Yet, there is a more
problematic species: those suffering from serious
psychological problems, personality disorders,
clinical phobias, psychoneuroses and the like. This
human aspect of the economic realm has, to the
best of my knowledge, been neglected before.
Enormous amounts of time, efforts, money and
energy are expended by the more "normal" –
because of the "less normal" and the "eccentric".
These operators are likely to regard the
maintaining of their internal emotional balance as
paramount, far over-riding economic
considerations. They will sacrifice economic
advantages and benefits and adversely affect their
utility outcome in the name of principles, to quell
psychological tensions and pressures, as part of
obsessive-compulsive rituals, to maintain a false
grandiose image, to go on living in a land of
fantasy, to resolve a psychodynamic conflict and,
generally, to cope with personal problems which
have nothing to do with the idealized rational
economic player of the theories. If quantified, the
amounts of resources wasted in these coping
manoeuvres is, probably, mind numbing. Many
deals clinched are revoked, many businesses
started end, many detrimental policy decisions
adopted and many potentially beneficial situations
avoided because of these personal upheavals.
191
The first kind engages in arbitrage (differences in
pricing in two markets of an identical good – the result
of inefficient dissemination of information) and in
gambling. These are important and blessed functions
in an imperfect world because they make it more
perfect. The speculative activity equates prices and,
therefore, sends the right signals to market operators
as to how and where to most efficiently allocate their
resources. But this is the passive speculator. The
"active" speculator is really a market rigger. He
corners the market by the dubious virtue of his
reputation and size. He influences the market (even
creates it) rather than merely exploit its imperfections.
Soros and Buffet have such an influence though their
effect is likely to be considered beneficial by unbiased
observers. Middlemen are a different story because
most of them belong to the active subcategory. This
means that they, on purpose, generate market
inconsistencies, inefficiencies and problems – only to
solve them later at a cost extracted and paid to them,
the perpetrators of the problem. Leaving ethical
questions aside, this is a highly wasteful process.
Middlemen use privileged information and access –
whereas speculators use information of a more public
nature. Speculators normally work within closely
monitored, full disclosure, transparent markets.
Middlemen thrive of disinformation, misinformation
and lack of information. Middlemen monopolize their
information – speculators share it, willingly or not.
The more information becomes available to more
users – the greater the deterioration in the resources
consumed by brokers of information. The same
process will likely apply to middlemen of goods and
services.
192
We are likely to witness the death of the car dealer,
the classical retail outlet, the music records shop. For
that matter, inventions like the internet is likely to
short-circuit the whole distribution process in a matter
of a few years.
193
The less political involvement in the workings of the
market and, in general, in what consenting adults conspire
to do that is not harmful to others – the more efficient and
flowing the economic ambience is likely to become.
This still does not deal with the "not serious" and the
"personality disordered". What about the inefficient havoc
that they wreak? This, after all, is part of what is known,
in legal parlance as: "force majeure".
Note
194
Other economists have succeeded to demonstrate
irrational behaviours of economic actors (heuristics,
dissonances, biases, magical thinking and so on).
195
That economics is a branch of psychology is becoming
more evident by the day. It would do well to lose its
mathematical pretensions and adopt the statistical
methods of its humbler relative.
Return
196
Financial Crises, Global Capital Flows
and
The International Financial Architecture
By: Dr. Sam Vaknin
What are the lessons that we can derive from the last crisis
to avoid the next?
The first lesson, it would seem, is that short term and long
term capital flows are two disparate phenomena with very
little in common. The former is speculative and technical
in nature and has very little to do with fundamental
realities. The latter is investment oriented and committed
to the increasing of the welfare and wealth of its new
domicile. It is, therefore, wrong to talk about "global
capital flows". There are investments (including even long
term portfolio investments and venture capital) – and
there is speculative, "hot" money.
197
While "hot money" is very useful as a lubricant on the
wheels of liquid capital markets in rich countries – it can
be destructive in less liquid, immature economies or in
economies in transition.
198
Expansive monetary policies, well timed signals in the
interest rates markets, liquidity injections, currency
interventions, international salvage operations – are all co-
ordinated by central banks and by other central or
international institutions. Official INACTION is as
conducive to the inflation of financial bubbles as is
official ACTION. By refusing to restructure the banking
system, to introduce appropriate bankruptcy procedures,
corporate transparency and good corporate governance, by
engaging in protectionism and isolationism, by avoiding
the implementation of anti competition legislation – many
countries have fostered the vacuum within which financial
crises breed.
199
In broad outline, there are two types of emerging
solutions. One type is market oriented – and the other,
interventionist. The first type calls for free markets,
specially designed financial instruments (see the example
of the Brady bonds) and a global "laissez faire"
environment to solve the issue of financial crises. The
second approach regards the free markets as the SOURCE
of the problem, rather than its solution. It calls for
domestic and where necessary international intervention
and assistance in resolving financial crises.
Return
200
I. War and the Business Cycle
Also Read
201
I. War and the Business Cycle
202
In the wake of September 11, US military spending is
already up one tenth and poised to continue its uptrend.
Defense contractors and service industries, concentrated
across the southern USA stand to undoubtedly benefit
after a lean decade following the unwinding of the Cold
War. GDP may grow by 0.6 percent this year based on
$50 billion in war-related expenditures, project DRI-
WEFA for MSN's Money Central.
203
Yet, that war impacts the timing and intensity of the
business cycle is by no means universally accepted.
204
Andolfatto then proceeds to demolish this conspiratorial
edifice. Military spending per adult in the USA has
remained constant at $2000 between 1947-2000. It
actually declined precipitously from 15 percent of gross
domestic product during the Korea War to 4-5 percent
today. Military buildups - with the exception of the Gulf
War - mostly happen during peacetime.
205
In any case, war, or a commensurate military buildup, do
cause expansionary deficit-financed government
purchases, employment, output and nonresidential
investment to rise while real wages, residential investment
and consumption fall. This is compatible with the
predictions of neo-classical business cycle models.
206
After the first victorious day in Operation Desert Storm,
stocks surged by 4.6 percent on Jan. 17, 1991, by another
7 percent in the following 30 days and by a total of 25
percent in the next 2 years. According to Ned Davis
Research, quoted by USA Today, the Dow has risen on
average by c. 15 percent in the year after every triumphant
excursion by America's military. Messier conflict, though
- like the Vietnam War - induce no exuberance, it seems.
207
So, is war good for business?
Consider inflation.
208
Central bankers - particularly Alan Greenspan the
mythical Chairman of the Federal Reserve - are castigated
for adhering to outmoded schools of thought and for
fighting the last war (against inflation), or the wrong one
(artificially perking up the stock markets).
209
The cycle is still susceptible, though, to exogenous
shocks, such as war, or an abrupt increase in the price of
oil. Bursting asset bubbles, if they become more frequent
in the future due to financial liberalization, globalization
and unbridled credit growth, may restore past volatility,
though.
210
The waxing and waning of credit made available by
alternately over-optimistic and over-cautious financial
intermediaries plays a crucial part. Fiscal policy - which
affects investment and employment - also matters as do
foreign trade, monetary policies and the reaction of the
financial markets.
211
When too much money chases few products, the general
price level rises. But this constant and ubiquitous increase
(known as "inflation") is also the outcome of mass
psychology. Households and firms compensate for the
aforementioned high degree of uncertainty (that is, of risk)
by raising the prices they charge. Market signals are thus
garbled by psychological noise and uncertainty increases.
It is a vicious cycle: inflation brought on by uncertainty
only serves to enhance it.
212
Inflation leads to technological and economic stagnation.
Pecuniary aspects are emphasized while industrial and
operational ones are neglected. Financial assets are
preferred to investments in machinery, infrastructure,
research and development, or marketing. This often yields
stagflation – zero or negative growth, coupled with
inflation.
213
These conflicting influences allow inflation to remain
within a sustainable "band". This transitory phase - from
hyperinflation or high inflation to a more supportable
plateau - is known as "disinflation". It usually lasts one or
two decades.
214
Assets store expectations regarding future values. An
assets bubble is created when the current value (i.e. price)
of money is low compared to its certain future value. This
is the case when prices are stable or decreasing. Stock
exchanges and real estate then balloon in irrational
exuberance out of proportion to their intrinsic (or book)
value.
All asset bubbles burst in the end. This is the fifth phase.
It signifies the termination of the bull part of the cycle.
Asset prices collapse precipitously. There are no buyers –
only sellers. Firms find it impossible to raise money
because their obligations (commercial paper and bonds)
are not in demand. A credit crunch ensues. Investment
halts.
215
If not countered by monetary and fiscal means – a
lowering of interest rates, a fiscal Keynesian stimulus, an
increase in money supply targets – a monetary deflation
might set in.
216
The market's failure, at this stage, is so rampant that all
the mechanisms of self-balancing and allocation are
rendered dysfunctional. State intervention is needed in
order to restart the economy. The authorities need to inject
money through a fiscal stimulus, to embark on a monetary
expansion, to lower interest rates, to firmly support the
financial system and to provide tax and other incentives to
consume and to import.
But the various phases of the cycle are not only affected
by psychology – they affect it.
217
Paradoxically, the inflationary segment of the business
cycle is an interval of certainty. That inflation will persist
is a safe bet. People tend to adhere to doctrinaire schools
of economics. Based on the underlying and undeniable
certainty of ever-worsening conditions, the intellectual
elite and decision-makers resort to peremptory, radical,
rigid and sometimes coercive solutions backed by
ideologies disguised as "scientific knowledge".
218
O'Neill's Free Dinner
Only four months ago, the IMF revised its global growth
figures upward. It has since recanted but at the time its
upbeat Managing Director, Horst Koehler, conceded
defeat in a bet he made with America's outspoken and
ever-exuberant Treasury Secretary, Paul O'Neill. He
promised to treat him to a free dinner.
219
"Because the world is on a dollar standard, the United
States is unique in having a virtually unlimited
international line of credit which is largely denominated
in its own currency, i.e., dollars. In contrast, foreign
debtor countries must learn to live with currency
mismatches where their banks’ and other corporate
international liabilities are dollar denominated but their
assets are denominated in the domestic currency. As these
mismatches cumulate, any foreign country is ultimately
forced to repay its debts in order to avoid a run on its
currency. But however precarious and over-leveraged the
financing of individual American borrowers—including
American banks, which intermediate such borrowing
internationally—might be, they are invulnerable to dollar
devaluation. In effect, America’s collective current-
account deficits are sustainable indefinitely."
220
Savers - and governments - prefer to channel their funds
to acquire US government obligations - dollar bills, T-
bills, T-notes, equities, corporate bonds, and government
bonds - rather than invest in their precarious domestic
private sector. The current account deficit - at well over 4
percent of American GDP - absorbs 6 percent of global
gross savings and a whopping three quarters of the world's
non-domestic savings flows. By the end of last year,
foreign investors held $1.7 trillion in US stocks, $1.2
trillion each in corporate debt and treasury obligations -
12 percent, 24 percent, and 42 percent of the outstanding
quantities of these securities, respectively.
221
A less sanguine Kenneth Rogoff, the IMF's new Chief
Economist wrote in "The Economist" in April: "When
countries run sustained current-account deficits up in the
range of 4 and 5% of GDP, they eventually reverse, and
the consequences, particularly in terms of the real
exchange rate, can be quite significant."
222
Such a disorientating swing has been experienced only by
Britain following the Great War. In five years, US net
obligations to the rest of the world will grow from one
eighth of its GDP in 1997 to two fifths of a much larger
product, according to Goldman Sachs. By 2006, a sum of
$2 billion dollars per day would be required to cover this
yawning shortfall.
But are the twin - budget and current account - deficits the
inevitable outcomes of American fiscal dissipation and
imports run amok - or a simple reflection of America's
unrivalled attractiveness to investors, traders, and
businessmen the world over?
223
This is somewhat disingenuous. In the last three years,
most of the net inflows of foreign capital into the
spendthrift US are in the form of debt to be repaid. This
mounting indebtedness did not increase the stock of
income-producing capital. Instead, it was shortsightedly
and irresponsibly expended in an orgy of unbridled
consumption.
Luckily for the US - and the rest of the world - its fiscal
stance during the Clinton years has been impeccable and
far stronger than Europe's, let alone Japan's. The
government's positive net savings - the budget surplus -
nicely balanced the inexorable demand by households and
firms for foreign goods and capital. This is why this fiscal
year's looming budget deficit - c. $200 billion - provokes
such heated debate and anxiety.
224
This would be a pity and a blessing. On the one hand,
only a flagging dollar can narrow the trade deficit by
rendering American exports more competitive in world
markets - and imports to the USA more expensive than
their domestic imperfect substitutes. But, as the late Rudi
Dornbusch pointed out in August 2001:
225
American manufacturers shifted production to countries
with more competitive terms of trade - cheaper manpower
and local inputs. The mighty currency encouraged
additional - mostly speculative- capital flows into dollar-
denominated assets, exacerbating the current account
deficit.
226
"All the interventions that have been modeled would do
damage to the U.S. economy if we decided to reduce the
size of the current account deficit. And so I don't find it
very appealing to say that we are going to cut off our arm
because some day we might get a disease in it."
227
Another embarrassing truth is that a strong recovery in
Europe or Japan may deplete the pool of foreign capital
available to the USA. German and Japanese Investors may
prefer to plough their money into a re-emergent Germany,
or a re-awakening Japan - especially if the dollar were to
plunge. America requires more than $1 billion a day to
maintain its current levels of government spending,
consumption, and investment.
228
Governments ran surpluses. As the IMF puts it: "To err is
human and this is as true of private sector investors as
anyone else."
Return
229
Anarchy as an Organizing Principle
230
It is a minor step from this idealized worldview back to
the Physiocrats, who preceded Adam Smith, and who
propounded the doctrine of "laissez faire, laissez passer" -
the hands-off battle cry. Theirs was a natural religion. The
market, as an agglomeration of individuals, they
thundered, was surely entitled to enjoy the rights and
freedoms accorded to each and every person. John Stuart
Mill weighed against the state's involvement in the
economy in his influential and exquisitely-timed
"Principles of Political Economy", published in 1848.
231
In both the UK and the USA, the government is much
more heavily and pervasively involved in the minutia of
accountancy, stock dealing, and banking than it was only
two years ago.
But the ethos and myth of "order out of chaos" - with its
proponents in the exact sciences as well - ran deeper than
that. The very culture of commerce was thoroughly
permeated and transformed. It is not surprising that the
Internet - a chaotic network with an anarchic modus
operandi - flourished at these times.
232
The simultaneous crumbling of these urban legends - the
liberating power of the Net, the self-regulating markets,
the unbridled merits of privatization - inevitably gave rise
to a backlash.
Return
233
Narcissism in the Boardroom
By: Dr. Sam Vaknin
Part I
Part II
234
The narcissist is preoccupied with ideal love, the
construction of brilliant, revolutionary scientific theories,
the composition or authoring or painting of the greatest
work of art, the founding of a new school of thought, the
attainment of fabulous wealth, the reshaping of a nation or
a conglomerate, and so on. The narcissist never sets
realistic goals to himself. He is forever preoccupied with
fantasies of uniqueness, record breaking, or breathtaking
achievements. His verbosity reflects this propensity.
235
This makes the narcissist perniciously exploitative. He
uses, abuses, devalues, and discards even his nearest and
dearest in the most chilling manner. The narcissist is
utility- driven, obsessed with his overwhelming need to
reduce his anxiety and regulate his labile sense of self-
worth by securing a constant supply of his drug -
attention. American executives acted without
compunction when they raided their employees' pension
funds - as did Robert Maxwell a generation earlier in
Britain.
236
It also makes him feel immune to mortal laws and
somehow divinely protected and insulated from the
inevitable consequences of his deeds and misdeeds.
237
The narcissist does not victimise, plunder, terrorise and
abuse others in a cold, calculating manner. He does so
offhandedly, as a manifestation of his genuine character.
To be truly "guilty" one needs to intend, to deliberate, to
contemplate one's choices and then to choose one's acts.
The narcissist does none of these.
238
To some extent, they feel omnipresent because they are
either famous or about to become famous or because their
product is selling or is being manufactured globally.
Deeply immersed in their delusions of grandeur, they
firmly believe that their acts have - or will have - a great
influence not only on their firm, but on their country, or
even on Mankind. Having mastered the manipulation of
their human environment - they are convinced that they
will always "get away with it". They develop hubris and a
false sense of immunity.
239
The child reacts by constructing false self that is
possessed of everything it needs in order to prevail:
unlimited and instantaneously available Harry Potter-like
powers and wisdom. The false self, this Superman, is
indifferent to abuse and punishment. This way, the child's
true self is shielded from the toddler's harsh reality.
240
The narcissist is entitled to a "special treatment": high
living standards, constant and immediate catering to his
needs, the eradication of any friction with the humdrum
and the routine, an all-engulfing absolution of his sins,
fast track privileges (to higher education, or in his
encounters with bureaucracies, for instance). Punishment,
trusts the narcissist, is for ordinary people, where no great
loss to humanity is involved.
241
To the narcissist, his life is unreal, like watching an
autonomously unfolding movie. The narcissist is a mere
spectator, mildly interested, greatly entertained at times.
He does not "own" his actions. He, therefore, cannot
understand why he should be punished and when he is, he
feels grossly wronged.
242
Cooked books, corporate fraud, bending the (GAAP or
other) rules, sweeping problems under the carpet, over-
promising, making grandiose claims (the "vision thing") -
are hallmarks of a narcissist in action. When social cues
and norms encourage such behavior rather than inhibit it -
in other words, when such behavior elicits abundant
narcissistic supply - the pattern is reinforced and become
entrenched and rigid. Even when circumstances change,
the narcissist finds it difficult to adapt, shed his routines,
and replace them with new ones. He is trapped in his past
success. He becomes a swindler.
243
Consumerism is built on this common and communal lie
of "I can do anything I want and possess everything I
desire if I only apply myself to it" and on the pathological
envy it fosters.
244
They assert that the disorder is more prevalent among
certain professions with "star power" or respect. "In an
individualistic culture, the narcissist is 'God's gift to the
world'. In a collectivist society, the narcissist is 'God's gift
to the collective'".
245
Yet, can families, organizations, ethnic groups, churches,
and even whole nations be safely described as
"narcissistic" or "pathologically self-absorbed"? Can we
talk about a "corporate culture of narcissism"?
Return
246
Is Education a Public Good?
247
III. Externalities - public goods impose costs or benefits
on others - individuals or firms - outside the marketplace
and their effects are only partially reflected in prices and
the market transactions. As Musgrave pointed out (1969),
externalities are the other face of nonrivalry.
248
"... Many - though not all - of the realistic cases of
government activity can be fruitfully analyzed as some
kind of a blend of these two extreme polar cases" (p.
350) - mixtures of private and public goods. (Education,
the courts, public defense, highway programs, police and
fire protection have an) "element of variability in the
benefit that can go to one citizen at the expense of some
other citizen" (p. 356).
249
"The preceding discussion has dealt with the case of a
pure social good, i.e. a good the benefits of which are
wholly non-rival. This approach has been subject to the
criticism that this case does not exist, or, if at all, applies
to defence only; and in fact most goods which give rise
to private benefits also involve externalities in varying
degrees and hence combine both social and private good
characteristics' ".
250
Consider highways - hitherto quintessential public goods.
The introduction of advanced "on the fly" identification
and billing (toll) systems reduced transaction costs so
dramatically that privately-owned and operated highways
are now common in many Western countries. This is an
example of a public good gradually going private.
251
Yet, all forms of education are exclusionary, at least in
principle. It is impossible to exclude a citizen from the
benefits of his country's national defense, or those of his
county's dam. It is perfectly feasible to exclude would be
students from access to education - both online and
offline.
252
Nonrivalry and nonexcludability are ideals - not realities.
They apply strictly only to the sunlight. As
environmentalists keep warning us, even the air is a scarce
commodity. Technology gradually helps render many
goods and services - books and education, to name two -
asymptotically nonrivalrous and nonexcludable.
Bibliography
253
Musgrave, R.A. - Provision for Social Goods, in:
Margolis, J./Guitton, H. (eds.), Public Economics -
London, McMillan, 1969, pp. 124-44.
Also Read
254
The Demise of the Work Ethic
255
independent thought and speech, and avoidance of
initiative and innovation. Many offices and shop floors
now resemble prisons.
256
client - contributed a lot to the indifference and alienation
of the common industrial worker, the veritable
"anonymous cog in the machine".
Not only was the link between worker and product broken
- but the bond between artisan and client was severed as
well. Few employees know their customers or patrons first
hand. It is hard to empathize with and care about a
statistic, a buyer whom you have never met and never
likely to encounter. It is easy in such circumstances to feel
immune to the consequences of one's negligence and
apathy at work. It is impossible to be proud of what you
do and to be committed to your work - if you never set
eyes on either the final product or the customer! Charlie
Chaplin's masterpiece, "Modern Times" captured this
estrangement brilliantly.
257
8. The decline of the professional guilds on the one hand
and the trade unions on the other hand greatly reduced
worker self-discipline, pride, and peer-regulated quality
control. Quality is monitored by third parties or
compromised by being subjected to Procrustean financial
constraints and concerns.
258
This uncertainty is further exacerbated by the pandemic
eruption of mental health disorders - 15% of the
population are severely pathologized according to the
latest studies. Antisocial behaviors - from outright crime
to pernicious passive-aggressive sabotage - once rare in
the workplace, are now abundant.
259
dissipation. No one seems to care about anything. Why
should the client or employer expect a different treatment?
Also Read
260
The Labour Divide - IV. The Unions after Communism
261
Foreign Direct Investments (FDI) - Pros and Cons
262
exclusively catering to the needs of the less risky
segments of the business scene (read: foreign investors).
All more or less true. Yet, the proponents of FDI get their
causes and effects in a tangle. FDI does not foster growth
and stability. It follows both. Foreign investors are
attracted to success stories, they are drawn to countries
263
already growing, politically stable, and with a sizable
purchasing power.
264
Alphabetical Bibliography
265
Growth? - M Carkovic, R Levine - University of
Minnesota, Working Paper, 2002
266
Investment - N Pain, K Wakelin - The Manchester School,
1998
267
Foreign Direct Investment as an Engine of Growth - VN
Balasubramanyam, M Salisu, D Sapsford - Journal of
International Trade and Economic Development, 1999
268
Regional Labour Markets in Hungary - K Fazekas -
SOCO Project Paper 77c, 2000
269
employment - W Elberfeld, G Gotz, F Stahler - Topics in
Economic Analysis and Policy, 2005
270
The Economics of Expectations
271
introduced. A financial infrastructure emerged, replete
with highly specialized institutions (e.g., central banks)
and businesses (for instance, investment banks, jobbers,
and private equity funds).
272
witness the bartering of agreements that have nothing to
do with real world objects or values.
273
Corruption and Transparency
I. The Facts
274
His defense team accuses the US authorities of "selective
prosecution".
275
tenuous trust between citizen and state. It casts civil and
government institutions in doubt, tarnishes the entire
political class, and, thus, endangers the democratic system
and the rule of law, property rights included.
276
At the request of member-governments (such as Bosnia-
Herzegovina and Romania) it has prepared detailed
country corruption surveys covering both the public and
the private sectors. Together with the EBRD, it publishes
a corruption survey of 3000 firms in 22 transition
countries (BEEPS - Business Environment and Enterprise
Performance Survey). It has even set up a multilingual
hotline for whistleblowers.
277
In his address to the Inter-American Development Bank
on March 14, President Bush promised to "reward nations
that root out corruption" within the framework of the
Millennium Challenge Account initiative. The USA has
pioneered global anti-corruption campaigns and is a
signatory to the 1996 IAS Inter-American Convention
against Corruption, the Council of Europe's Criminal Law
Convention on Corruption, and the OECD's 1997 anti-
bribery convention. The USA has had a comprehensive
"Foreign Corrupt Practices Act" since 1977.
278
its banking system alone. The figure may be 5 to 10 times
higher in the tax havens of the United Kingdom.
279
b. The provision of a service, information, or goods
that, by law, and by right, should not have been
provided or divulged.
280
We can classify corrupt and venal behaviors according to
their outcomes:
281
History shows that all effective programs shared these
common elements:
282
the tax authorities - under time limited foreign
management and supervision.
283
Corruption can never be entirely eliminated - but it can be
restrained and its effects confined. The cooperation of
good people with trustworthy institutions is indispensable.
Corruption can be defeated only from the inside, though
with plenty of outside help. It is a process of self-
redemption and self-transformation. It is the real
transition.
284
intermittent at best, his was a curious choice. He used to
sit among these relics of his cupidity, fondling and
counting them insatiably.
285
proceeds to say that " ... (T)he individual may hoard the
stolen objects ...".
Also Read:
286
Workaholism, Leisure and Pleasure
287
A host of other shifts in the character of the work and
domestic environments of humans converged to produce
this momentous change.
288
These trends converged with an increase of mobility of
people, goods and data (voice, visual, textual and
other). The twin revolutions of transportation and of
telecommunications really reduced the world to a global
village. Phenomena like commuting to work and
multinationals were first made possible. Facsimile
messages, electronic mail, other modem data transfers, the
Internet broke not only physical barriers – but also
temporal ones. Today, virtual offices are not only spatially
virtual – but also temporally so. This means that workers
can collaborate not only across continents but also across
time zones. They can leave their work for someone else to
continue in an electronic mailbox, for instance.
289
This trend was coupled with – and enhanced by – the
unprecedented successive annual rises in productivity and
increases in world trade. These trends were brought about
by new management techniques, new production
technology, innovative inventory control methods,
automatization, robotization, plant modernization,
telecommunications (which facilitates more efficient
transfers of information), even new design concepts. But
productivity gains made humans redundant. No amount of
retraining could cope with the incredible rate of
technological change. The more technologically advanced
the country – the higher its structural unemployment
(attributable to changes in the very structure of the
market) went.
290
"pleasure". Now, both were pleasure – or torture – or
mixture. Some people began to enjoy their work so much
that it fulfilled for them the functions normally reserved to
leisure time. They are the workaholics. Others continued
to hate work – but felt disoriented in the new, leisure
enriched environment. They were not qualified or trained
to deal with excess time, lack of framework, no clear
instructions what to do, when, with whom and to what.
291
money. It is a symbol of shrewdness, wit, foresight and
insight.
292
Nation Branding and Place Marketing
293
To cast countries in the role of brands implies that they act
as "producers" to some "consumers" out there. But what
do countries - as distinct from firms - produce? And who
are the consumers enticed by said statal brand placement
and regional location marketing? And how does the
process of exchange take place - who gives what to whom
and where?
294
on the development and cultivation of long-term
relationships with their "clients".
295
III. Position the country in relation to its competitors,
emphasizing its natural and human endowments and its
relative advantages. The process of positioning aims to
identify the nation with an image, perception, concept, or
trait which capture its essence and further its appeal to the
clients it had identified in stage I above (investors, other
countries, diplomats, scientists, and so on). Great care
should be taken to align the positioning messages with
realities on the ground. Anything perceived by the
preference groups as being a lie or an exaggeration will
backfire.
296
Price - Demonstrate a relative or absolute advantage in
terms of return on investment
297
The marketer communicates to statal decision-makers
what features and benefits does each of these disparate
groups desire and suggests how to reconcile their
competing and often contradictory needs, interests,
preferences, priorities, and wishes.
1. Natural Endowments
3. Risk Mitigation
298
International standing and the resolution of extant
conflicts (political risk), the country's laws, regulations,
and favorable international treaties, its credit history,
insurance available to investors and exporters
4. Economic Prowess
299
Exactly like commercial outfits, political entities seek to
extract a price for their offerings and products.
Increasingly, the price they can obtain is settled by highly
efficient global markets in perceptions, goods, and
services. As competition stiffens and the number of state-
players increases, the barriers to entry become more
formidable.
300
measured, for instance, by fluctuations in the prices of its
financial assets and obligations), quality of governance,
transparency or lack thereof, dysfunctional institutions,
stability of policies and legislation, and other hazards.
301
An example of negative marketing would be to point to a
neighboring country's uneducated and expensive labor as
a reason not to do business there. An example of discount
pricing is to offer tax holidays and rent-free facilities to a
relocating multinational.
302
In classical microeconomics, the element of "place" in the
marketing plan used to refer to the locus of delivery of the
product or service. Well into the 19th century, the "place"
was identical to the region where the product was
manufactured or the service rendered. In other words,
textiles weaved in India were rarely sold in Britain.
American accountants were unlikely to practice in Russia.
Distribution was a local affair and networks of
dissemination and marketing were geographically
confined.
303
public good (for instance, nonrivalry) - coupled with all
the incentives of a private good (e.g., profit-making).
304
Advantages have to be communicated to potential
customers if they are not to remain unrealized potentials.
Moreover, communication alone - the exchange of
information - is not enough. Clients have to be influenced
and motivated to visit a country, invest in it, or trade with
it.
305
An interesting and related question is whether countries
constitute similar or dissimilar brands. In other words, are
countries interchangeable (fungible) as investment,
tourism, and trade destinations? Is cost the only
determining factor? If countries are, indeed, mere variants
on given themes, acquiring and sustaining permanent
market shares (inducing a market shift) may prove to be a
problem.
Why is that?
306
As the name implies, public relations is about follow-up
(monitoring) and relationships. This is especially true in
the country's dealings with the news media and with
specialized publications. Press conferences, presentations,
contests, road shows, one-on-one meetings or briefings,
seminars, lobbying, and community events - are all tools
of the twin trades of marketing public relations and image
management.
307
promotion efforts. They tailor to individual listeners
(potential customers) the message the country wishes to
convey about itself, its advantages, and its prospects.
308
the country's branding and advertising consultants and
agents, its sales force - and collaborating marketing
intermediaries.
309
Marketing requires constant fine tuning and adjustments
to reflect and respond to the kaleidoscopic environment of
our times.
310
also compare its own sales to the total sales in the global
market and to sales within its "market segment"
(neighboring countries, countries which share its political
ambience, same-size countries, etc.).
2. Profitability control
311
recognition. Sales, profits, and expenditures should count
prominently in any evaluation (and re-evaluation) of on-
going campaigns. The country needs to get rid of
prejudices, biases, and misconceptions and clearly
identify what products and consumer groups yield the
most profits (have the highest relative earnings-capacity).
Money, time, and manpower should be allocated to cater
to the needs and desires of these top-earners.
3. Efficiency control
4. Strategic control
312
adequacy and efficiency of the country's marketing
information, operations, strengths, strategies, and
integration (of various marketing, branding, and sales
tactics).
5. Marketing audit
313
value of a company's current marketing plan is in
question; they must be done periodically in order to
isolate and solve problems before they arise."
314
Consumer customers purchase goods and services from
the country for their own consumption. Tourists are
consumer customers.
315
factors are more salient among business customers,
because the participants in the buying process—perhaps
representing several departments within a company—
often have different interests, authority, and
persuasiveness. Furthermore, the factors that affect an
individual in the business buying process are related to
the participant's role in the organization. These factors
include job position, risk attitudes, and income."
316
NGOs - The Self-Appointed Altruists
317
Western, rich, countries including the USA, Canada,
Germany, and Belgium.
318
of NGO's - including the fiercely "independent" Global
Witness - in troubled spots, such as Angola. Many host
governments accuse NGO's of - unwittingly or knowingly
- serving as hotbeds of espionage.
319
businesses. In this respect, NGO's are more like cults than
like civic organizations.
320
This affair elicited the following wry commentary from
economists Drusilla Brown, Alan Deardorif, and Robert
Stern:
321
Children at work may be harshly treated by their
supervisors but at least they are kept off the far more
menacing streets. Some kids even end up with a skill and
are rendered employable.
322
Local businessmen, politicians, academics, and even
journalists form NGO's to plug into the avalanche of
Western largesse. In the process, they award themselves
and their relatives with salaries, perks, and preferred
access to Western goods and credits. NGO's have evolved
into vast networks of patronage in Africa, Latin America,
and Asia.
323
the Association for Social Advancement mushroomed
even as their agendas have been fully implemented and
their goals exceeded. It now owns and operates 30,000
schools.
324
positive changes to people's lives". In a poor attempt at
emulation, the WHO published an inanely titled document
- "A Human Rights Approach to Tuberculosis".
325
NGO's have orchestrated the violent showdown during the
trade talks in Seattle in 1999 and its repeat performances
throughout the world. The World Bank was so intimidated
by the riotous invasion of its premises in the NGO-
choreographed "Fifty Years is Enough" campaign of
1994, that it now employs dozens of NGO activists and let
NGO's determine many of its policies.
326
natives. This is a misperception driven by envy and
avarice.
327
They are powerful, rich, and care less about the welfare of
the indigenous population than about "universal"
principles of ethical conduct.
328
Even critics of NGOs are often interviewed by the media
(laughing).
329
7. Does the NGO own or run commercial enterprises? If it
does, it is a corrupt and compromised NGO involved in
conflicts of interest.
330
NGOs. NGO finances should be made completely
transparent and publicly accessible. New accounting
standards should be developed and introduced to cope
with the current pecuniary opacity and operational double-
speak of NGOs.
331
The Wages of Science
332
the hi-tech sector. Three million people are employed in
these firms. Investments surged by 36 percent in 2001 to
$18 billion.
333
This friction is inevitable because the interaction between
technology and science is complex and ill-understood.
Some technological advances spawn new scientific fields
- the steel industry gave birth to metallurgy, computers to
computer science and the transistor to solid state physics.
The discoveries of science also lead, though usually
circuitously, to technological breakthroughs - consider the
examples of semiconductors and biotechnology.
334
The majority of 501 corporations surveyed by the
Department of Finance and Revenue Canada in 1995-6
reported that government funding improved their internal
cash flow - an important consideration in the decision to
undertake research and development. Most beneficiaries
claimed the tax incentives for seven years and recorded
employment growth.
335
extra years of schooling and wider access to university do
not necessarily translate to enhanced growth (though
technological innovation clearly does).
336
Still, all forms of science funding - both public and private
- are lacking.
337
This would be the corporate equivalent of the Bayh-Dole
Act of 1980. The statute made both academic institutions
and researchers the owners of inventions or discoveries
financed by government agencies. This unleashed a wave
of unprecedented self-financing entrepreneurship.
338
public purse enrich entrepreneurs? On the other hand,
profit-driven investors seek temporary monopolies in the
form of intellectual property rights. Why would they share
this cornucopia with others, as pure scientists are
compelled to do?
Also Read:
Leapfrogging to Cellular
339
Transition in Context
340
When communism crumbled, all of Europe - east and
west - experienced a protracted and agonizing transition.
Privatization, deregulation, competition and liberalization
swept across both parts of the continent. The irony is that
central and east Europe's adaptation was more farfetched
and alacritous than the west's.
341
criminality, private property ownership, entrepreneurship,
privatization, income distribution, employment, inflation
and social welfare.
342
The dangers of transition were flippantly ignored and the
peoples of central and eastern Europe were treated as
mere guinea pigs by eager Western economists on fat
retainers. Crime was allowed to hijack important parts of
the post-communist economic agenda, such as the
privatization of state assets. Kleptocracies subsumed the
newborn states. Social safety nets crumbled.
343
fair play, classes of stakeholders, checks and balances and
good governance on all levels.
344
The denizens of the nether regions of central and eastern
Europe have been the victims of successive economic
utopias. They fear and suspect ideological purity. They
have been conditioned by the authoritarian breed of
socialism they endured, really little more than an
overblown conspiracy theory, a persecutory delusion
which invariably led to Stalinesque paranoid backlashes.
Indeed, Stalin was more representative of communism
than any other leader before or after him.
345
Predators everywhere - Russian oligarchs, central
European cronies, Balkan kleptocrats, east European
managers - find this gratifying. All others regard
capitalism as yet another rigid and unforgiving creed, this
time imposed from Washington by the IMF and
multinationals rather as communism was enjoined from
Moscow by the Kremlin.
346
For some countries - notably Estonia - joining the EU has
translated into a de-liberalized and re-regulated future.
Others find the EU's brand of the market a comfortable
and dimly familiar middle ground between America's
harsh prescriptions and communism's delusional model.
The EU's faceless and Kafkaesque bureaucracy in
Brussels - Moscow revisited - should prove to be a relief
compared to the IMF's ruffians.
347
position and proximity to markets and culture and
mentality.
Short term and long term capital flows are two disparate
phenomena with very little in common. The former is
speculative and technical in nature and has very little to
do with fundamental realities. The latter is investment
oriented and committed to the increasing of the welfare
and wealth of its new domicile. It is, therefore, wrong to
talk about "global capital flows". There are investments
(including even long term portfolio investments and
venture capital) – and there is speculative, "hot" money.
While "hot money" is very useful as a lubricant on the
wheels of liquid capital markets in rich countries – it can
be destructive in less liquid, immature economies or in
economies in transition.
348
The two phenomena should be accorded a different
treatment. While long term capital flows should be
completely liberalized, encouraged and welcomed – the
short term, "hot money" type should be controlled and
even discouraged. The introduction of fiscally-oriented
capital controls (as Chile has implemented) is one
possibility. The less attractive Malaysian model springs to
mind. It is less attractive because it penalizes both the
short term and the long term financial players. But it is
clear that an important and integral part of the new
International Financial Architecture MUST be the control
of speculative money in pursuit of ever higher yields.
There is nothing inherently wrong with high yields – but
the capital markets provide yields connected to economic
depression and to price collapses through the mechanism
of short selling and through the usage of certain
derivatives. This aspect of things must be neutered or at
least countered.
349
Question: How might collective action problems among
numerous and dispersed small and medium entrepreneurs
best be dealt with?
350
Germany and so on). Investment and venture capital funds
became the second most important source quantitatively.
They not only funded budding entrepreneurs but also
coached them and saw them through the excruciating and
dangerous research and development phases.
351
The Morality of Child Labor
352
This is especially galling since the sanctimonious West
has amassed its wealth on the broken backs of slaves and
kids. The 1900 census in the USA found that 18 percent
of all children - almost two million in all - were gainfully
employed. The Supreme Court ruled unconstitutional laws
banning child labor as late as 1916. This decision was
overturned only in 1941.
353
"Regional Review", second quarter of 2000, it depends on
"family income, education policy, production
technologies, and cultural norms." About a quarter of
children under-14 throughout the world are regular
workers. This statistic masks vast disparities between
regions like Africa (42 percent) and Latin America (17
percent).
354
"While Baden Sports can quite credibly claim that their
soccer balls are not sewn by children, the relocation of
their production facility undoubtedly did nothing for their
former child workers and their families."
355
especially true in rural areas where child labor is a
widespread blight. Education - especially for women - is
considered an unaffordable luxury by many hard-pressed
parents. In many cultures, work is still considered to be
indispensable in shaping the child's morality and strength
of character and in teaching him or her a trade.
356
alone. Unemployment is rife and reaches, in certain
countries - such as Macedonia - more than one third of the
workforce. Children at work may be harshly treated by
their supervisors but at least they are kept off the far more
menacing streets. Some kids even end up with a skill and
are rendered employable.
357
The Technology of Law
The Law of Technology
358
that our organism has stored-up reserves of energy that are
ordinarily not called upon - deeper and deeper strata of
explosible material, ready for use by anyone who probes
so deep. The human individual usually lives far within his
limits."
William James
Hi, Sam
359
From another angle, we should study not only the legal
questions but the real possibilities. It is evident that
normal persons will always have legal problems
(remember that prisons and madhouses are usually
inhabited by the poor). But to the cyber-elites things are
quite different for they know the THE SECRET ART OF
POWER of the internet. The problem to an elite of
hackers lies not in legal impediments but in divining its
proper real name.
360
- just like the Romans observed very well. This won´t be a
problem to our study because economics is, since the 70s,
under the complete dominion of technology and its new
race of techno-economic engineers and their financial
computing.
361
The eruption of a enormous amount of lawyers which
almost form a new class.
best regards
roberto
Dear RCM,
362
Before I explore to your various points (probably in my
next letter, not to render this one too long) - let me be the
nitpicker and set up the framework for our intellectual
Christmas adventure.
363
2. Technology itself contains embedded laws of all kinds.
Consider internet protocols. These are laws which form
part and parcel of the process of decentralized data
exchange so central to the internet. Even the language
used by the technicians implies the legal origin of these
protocols: "handshake", "negotiating", "protocol",
"agreement" are all legal terms. Standards, protocols,
behavioural codes - whether voluntarily adopted or not -
are all form of Law. Thus, internet addresses are allocated
by a central authority. Netiquette is enforced universally.
Special chips and software prevent render certain content
inaccessible. The scientific method (a codex) is part of
every technological advance. Microchips incorporate in
silicone agreements regarding standards. The law
becomes a part of the technology and can be deduced
simply by studying it in a process known as "reverse
engineering". In stating this, I am making a distinction
between lex naturalis and lex populi. All technologies
obey the laws of nature - but we, in this discussion, I
believe, wish to discuss only the laws of Man.
364
policies (not to mention the laws related to air travel and
aviation). The list is interminable.
365
implementation. The best examples are the
breaking up of AT&T in 1984 and the current anti-
trust case against Microsoft. Such structural
transformations of monopolists release hitherto
monopolized information (for instance, the source
codes of software) to the public and increases
competition - the mother of invention.
366
Technology plays an indispensable role in both the
dissemination of information and in enforcement efforts.
In other words, technology helps teach the citizens what
are the laws and how are they likely to be applied (for
instance, through the courts, their decisions and
precedents). More importantly, technology enhances the
efficacy of law enforcement and, thus, renders the law
applicable. Police cars, court tape recorders, DNA
imprints, fingerprinting, phone tapping, electronic
surveillance, satellites - are all instruments of more
effective law enforcement. In a broader sense, ALL
technology is at the disposal of this or that law. Take
defibrillators. They are used to resuscitate patients
suffering from severe cardiac arrhythmia's. But such
resuscitation is MANDATORY by LAW. So, the
defibrillator - a technological medical instrument - is, in a
way, a law enforcement device.
367
a. All-inclusive (anamnetic) – It must encompass,
integrate and incorporate all the facts known about
the subject.
368
f. Aesthetic – The structure of the law and the
processes embedded in it must be both plausible
and "right", beautiful, not cumbersome, not
awkward, not discontinuous, smooth and so on.
369
l. Elastic – The law or the technology must possess
the intrinsic abilities to self organize, reorganize,
give room to emerging order, accommodate new
data comfortably, avoid rigidity in its modes of
reaction to attacks from within and from without.
370
3. Uniqueness – Psychological experiments are,
therefore, bound to be unique, unrepeatable,
cannot be replicated elsewhere and at other times
even if they deal with the SAME subjects. The
subjects are never the same due to the
psychological uncertainty principle. Repeating the
experiments with other subjects adversely affects
the scientific value of the results.
Ciao,
Sam
371
Hi, Sam
372
covered with a technological mantle, and not only the
earth but the universe, the cosmos, is being cloaked by
machines.
373
the XIXth century the automaton is the glorified steam
motor, that burns combustible fuel instead the glycogen of
human muscles. The contemporary automaton opens
doors with photoelectric cells, points nuclear weapons or
solves differential equations."
374
with) demonstrates the profundity of his thought. We are
faced with a serious, first class, thinker. At the centre of
Cybernetics is one, at first view, simple mechanism: the
feedback loop. In fact, this mechanism was known as
early as the XVIII century. Watts' steam engine used a
centrifugal regulator based on feedback. Also it has its
roots in Hegel's and Fichte's (dialectic) thought and its
refined version by the (hallucinatory) mathematical mind
of C.S.Pierce. This mechanism is at the heart of all new
systems of control and, by extension, of the new social
organizations. It is what fashionable intellectuals
(Giddens) call "reflexivity" and others "government at
distance" or "tele-government" - as per the consumer's
taste:-)
375
best regards
roberto
My dear RCM,
376
the "alphabet" buried under hundreds of layers of graphics
and imagery and accessible only to the machine itself.
377
technology and laws deal with INFORMATION now.
This is the convergence of the real and the abstract, the
Platonic ideal and its inferior shadow, matter and energy.
It is no less revolutionary than E=MC2.
378
unexpected enormous complexity of biological organisms
and even automata. Gradually, cybernetics was subsumed
under computing (rather, vice versa) and computers were
considered to be a class of cybernetic systems. I
recommend to you to read "Cybernetics and the
Philosophy of Mind" by Sayre published in London in
1976).
379
The clash between these two models was and is
unavoidable. The internet, for instance, regulates itself
imposing a set of unwritten rules vaguely called the
"Netiquette". Part mores and part habits, it is amorphic
and always debatable. Yet it functions much better than
drug-related laws in formal law systems (like modern
states). With no effective enforcement mechanisms, no
netiquette-enforcement agencies to speak of - the
netiquette maintains an iron grip over netizens. There are
other examples outside the internet: the self regulating
financial industry in Britain has a better record of
compliance that the heavily regulated, SEC-threatened
financial community in the USA. Efforts top tax the
Internet and to regulate the City are examples of turf wars
between formal law systems and informal law systems.
380
Asimov robots and programmable computers (universal
Turing machines, to be precise).
381
Many have noticed the lack of consistency and the virtual
inapplicability of these laws put together. First, they are
not the derivative of any coherent worldview and
background. To be properly implemented and to avoid a
potentially dangerous interpretation of them – the robots
in which they are embedded must be also equipped with a
reasonably full model of the physical and of the human
spheres of existence. Devoid of such a context, these laws
soon lead to intractable paradoxes (experiences as a
nervous breakdown by one of Asimov's robots). Conflicts
are ruinous in automata based on recursive functions
(Turing machines) as all robots must be. Godel pointed at
one such self destructive paradox in the "Principia
Mathematica" ostensibly comprehensive and self
consistent logical system. It was enough to discredit the
whole magnificent edifice constructed by Russel and
Whitehead over a decade.
Some will argue against this and say that robots need not
be automata in the classical, Church-Turing, sense. That
they could act according to heuristic, probabilistic rules of
decision making. There are many other types of functions
(non-recursive) that can be incorporated in a robot. True,
but then, how can one guarantee full predictability of
behaviour? How can one be certain that the robots will
fully and always implement the three laws? Only
recursive systems are predictable in principle (their
complexity makes even this sometimes not feasible).
382
to endow the robot with the ability to conduct a Converse
Turing Test, the other is to somehow "bar-code" all the
robots by implanting some signalling device inside them.
Both present additional difficulties.
383
recognize another, it takes one to know one, the saying
(rightly) goes.
384
in case he is an invalid – where does the responsibility and
obeisance buck stop?
385
(however wise and intelligent) to make this selection for
us? Should abide by their judgement – which injury is
more serious than the other and warrants their
intervention?
386
Mathematics (and logic): computability or recursive
functions (later to be developed into Automata Theory).
387
theory itself) were not recursive, meaning that they could
not be solved by a Turing Machine.
388
maybe they are not. We do not know enough about them
and about their future.
389
really predict what will exactly happen to every single
particle. However, we can foresee (with a great measure
of accuracy) what will happen if to a large population of
particles (where will they be found, for instance)."
390
Perhaps a "boundary" or a "catastrophic" automaton will
do the trick.
The problem starts with the fact that the electric field is
unknown. It depends on the charge distribution of the
electrons which, in turn, can be learnt from the wave
functions. But the solutions of the wave functions require
a proper knowledge of the field itself!
391
computers can do – TMs can do. Therefore, the Hartree-
Fok method is effective and mechanical. There is no
reason, in principle, why a Quantum Turing Machine
could not be constructed to solve SEs or the resulting
wave functions. Its special nature will set it apart from a
classical TM: it will be a probabilistic automaton with
catastrophic behaviour or very strong boundary conditions
(akin, perhaps, to the mathematics of phase transitions).
392
Sam
Dear Sam,
393
The two are great myths, one of functionality and the
other of purity.
394
Technicians, extremely focused as they are on pure
functionality, always fail to consider these questions.
Quantum Mechanics:
395
built for mutations, for the auto-propagation of "micro-
changes" into "macro-effects"? The real question is: what
does it mean, and what do we understand by the words
SURPASSING, OVER-COMING? Oh, divine, immortal
Zarathustra! How little did you suspect the form in which
your strange prophecies would come to be! Ah, if you
would have known....! but the oracle is always ambiguous.
best regards
roberto
Dear Roberto,
I fully share your view that both the Law and Technology
(as I told you, I regard them as two manifestations of one
and the same thing) - are concerned with the preservation
and propagation of identity.
396
The Law (religious and secular alike) is chiefly concerned
with the protection of what IS, of the prevailing social and
economic order, with the maintenance of social structure
and of social function (or, at the least, of their
appearance). Put differently, the Law - a mechanism of
social control - is designed mainly to preserve and
conserve an ideal of structural immutability coupled with
functional flexibility. As immutability and flexibility are
contradictory traits - the Law embodies a great tension
between its dynamic aspects and its conservative ones.
This tension is resolved by the introduction of the idea of
identity. It is an abstraction put to good use by individuals
as well as by nations and states. It is the belief that as long
as an entity invariably succumbs to the same set of laws
which dictate both its structure and its processes (the
space of its permitted changes) - it is one and the same
over time.
397
vinyl record) as it incorporates changes: the quality of
sound, the deciphering mechanism, the material from
which the record is made. The internet is a vastly changed
network, the likes of which existed before (for instance,
the telegraph).
398
We want to be able to identify chairness whenever and
wherever we come across it. But chairness cannot be
captured without somehow tackling and including the uses
of a chair – what is it made for, what does it do or help to
do. In other words, a definition must include an operative
part, a function. In many cases the function of the
Definiendum (the term defined) constitutes its meaning.
The function of a vinyl record is its meaning. It has no
meaning outside its function. The Definiens (the
expression supplying the definition) of a vinyl record both
encompasses and consists of its function or use.
399
First, a definition must reveal the meaning of the term or
concept defined. By "meaning" I mean the independent
and invariant meaning – not the culturally dependent,
narrative derived, type. The invariant meaning has to do
with a function, or a use. A term or a concept can have
several uses or functions, even conflicting ones. But all of
the uses and functions must be universally recognized.
Think about Marijuana or tobacco. They have medical
uses and recreational uses. These uses are expressly
contradictory. But both are universally acknowledged, so
both define the meaning of marijuana or tobacco and form
a part of their definitions.
400
looking for physical characteristics, of course. Otherwise,
we will be looking for more ephemeral traits.
401
bound to reflect reality and reality is hierarchical and
inclusive ("The Matriushka Doll Principle").
402
adopt the broad view that a definition is the explanation of
meaning by other words, how can we define "blue"? Only
by pointing out examples of blue. Thus, names of
elementary ideas (colours, for instance) cannot be defined
by words. They require an "ostensive definition"
(definition by pointing out examples). This is because
elementary concepts apply to our experiences (emotions,
sensations, or impressions) and to sensa (sense data).
These are usually words in a private language, our private
language. How does one communicate (let alone define)
the emotions one experiences during an epiphany? On the
contrary: dictionary definitions suffer from gross
inaccuracies precisely because they are confined to
established meanings. They usually include in the
definition things that they should have excluded, exclude
things that they should have included or get it altogether
wrong. Stipulative or ostensive definitions cannot be
wrong (by definition). They may conflict with the lexical
(dictionary) definition and diverge from established
meanings. This may prove to be both confusing and costly
(for instance, in legal matters). But this has nothing to do
with their accuracy or truthfulness. Additionally, both
types of definition may be insufficiently explanatory.
They may be circular, or obscure, leaving more than one
possibility open (ambiguous or equivocal).
403
"Chair" – Artificial (context) solid structure Intended for
sitting (genus). Makes use of at least one bodily axis of
the sitter (differentia). Without the context, the definition
can well fit an appropriately shaped rock.
404
definitions, are stars in a galaxy of alternative modes of
explanation.
405
While the former presents a disjunction, the latter is a
continuum, Death being nothing but a corridor into
another plane of existence (the hereafter).
406
better and longer preserved once dead? No one would
agree with this. Death is tantamount to a loss of identity -
not to its preservation.
407
Still, the computer analogy seems to indicate that our
identity resides not in our learning, knowledge, or
memories. It is an epiphenomenon. It emerges when a
certain level of hardware complexity is attained. Yet, it is
not so simple. If we were to eliminate someone's entire
store of learning and memories (without affecting his
brain) - would he still be the same person (=would he still
retain the same identity)? Probably not.
408
Around this seemingly faultless test revolved many of the
debates which characterized the first decade of the new
discipline of Artificial Intelligence (AI).
409
absence of physical effects exerted by the dead object, a
singularity, a discontinuity. It is not an inert state of
things.
410
Memory divorces Death from the physical world. As long
as we (or our products) are remembered - we continue to
have a physical effect on future physical systems. And as
long as this happens - we are not technically (or, at least,
fully) dead. Our Death will be fully accomplished only
after our memory will have been wiped out completely,
not even having the potential of being reconstructed in the
future. Only then will we cease to have any dimension of
existence (=effect on other physical systems).
411
It is conceivable that, in the future, we will be able to
preserve a three-dimensional likeness (a hologram),
replete with smells, temperature and tactile effects. Why
should the flesh and blood version be judged superior to
such a likeness?
412
not only the organic originals but also anything that
emanates from them. It characterizes human works of art
and science, for instance, or the very memory of humans.
All these tend to increase information (indeed, they are, in
themselves, information packets).
413
LIFE is the potential, possessed by organic originals, to
create (=to fight entropy by increasing information and
order), using their own software. Such software can be
coded into hardware - e.g., the DNA - and then the
creative act involves the replication of the organic original
or parts thereof.
414
mechanisms. The comparison may be superficial and
misleading - or may open a new vista: the individual as a
cell in the large organism of humanity. Memory has a role
in this new form of socio-political evolution which
superseded Biological Evolution, as an instrument of
adaptation.
I hope I made my point clear and that you can see the
forest from the (too many) woods. Both the Law and
Technology deal with identities and definitions - in other
words, both are manipulations of language.
Sam
Hi Sam,
415
remain clear. Indeed, your disgression on linguistics
provides us with a beautiful example of the contradictions
and tensions implied in the couplet "identity and
velocity". It would seem that the Law (as does Art) has its
own rules of "tempo" and "weight". Indeed, your
digression offers a great example of what I call "the
inclined enclosing frame", that is to say, all is in motion,
even the frame of mind. This is not yet a revolution,
however great, this is a change, a metamorphosis.
416
pinnacle of nature, its more powerful tool, this "ever-
present" drive to perfection?
417
fights are there for him? The individual should know, in
the first place, that his position is, more than ever, ad hoc.
418
A study of other cultures is essential (a full, real-time
adaptation to any place and any time). "Umheilicht" must
be overcome with two movements of extreme tension: a
deep study in history (natural, universal, human, religious,
philosophical, etc.) and the diary observation of the
technological breaking point (what the old historians
called: the "short time" and the "long time"). To combine
these two fields is the mark of the cultivated future man.
As Goethe beautifully stated: our feet firmly on earth
(reality), our minds always connected to the stars. That is
our destiny and also our pleasure.
Well, thats all for now. In my next letter, I'll talk about the
king: the technician and his politics. It is essential for the
unique person to know who and how rules. Your turn.
Best regards
roberto
Dear Roberto,
419
I also think that the age of information will see the
revolutionizing of the very process of evolution, its speed,
its ends, its means, its distribution (all-pervasiveness). I
am not sure that we have a choice (between Man and
Superman, for instance). I think the phase transition will
occur when a new principle of selection is introduced, as
you have suggested. It will be a principle of selection
between competing models of civilization. In this, its
nature will be no different to its predecessors. But it will
employ different criteria. For the first time, technology
per se, as DISTINCT from humanity - will have a say.
From now on - and ever more so in the future - we are
TWO equal partners: the Man and the Machine. The
increasing complexity of the latter will render it intelligent
and the equal of Man himself.
420
accordance with their approach towards "humanness", the
experience of being human.
421
They are followed by phases of a diametrically opposed
character:
422
These are the things that distinguish one individual from
another.
423
These cultures are, inevitably, more abstract (living in an
eternal Gedankenexperiment), more imaginative, more
creative (having to design multiple scenarios just to
survive). They are also more likely to have a youth cult: to
prefer the young, the new, the revolutionary, the fresh – to
the old, the habitual, the predictable. They are be risk-
centered and risk-assuming cultures.
424
Exogenic-Extrinsic Meaning Cultures versus
Endogenic-Intrinsic Meaning Cultures
425
These phases are transitory and, therefore, revolutionary
in nature.
426
This is the dividing line:
Consuming Distinguishing
Consensual Conflictive
Exogenic-Extrinsic Endogenic-Intrinsic
427
cultures – but only when they have become part of the
past. Alternatively, they assimilate and adopt some of the
attributes of the past of normal cultures. This is why a
traveller who visits a neurotic culture (and is coming from
a normal one) often has the feeling that he has been thrust
to the past, that he is experiencing a time travel.
Sam
Hi Sam,
428
I am not worried at all about being in full agreement with
you - it is you who should be worried indeed:-)
429
ask you again: can humans be surpassed? What does it
mean, philosophically and existentially, OVERCOMING?
Best regards
roberto
Dear RCM,
430
individuals. I think the new technologies will spawn a
host of new cultures (or, more like it, a global new
culture).
BUT
431
intended to enhance their survivability in a
technological universe.
So, I went and had a look at history and came up with the
conclusion that ALL cultures that I reviewed (by no
means a complete survey), present and future, fall into the
taxonomic framework that I suggested to you. I believe
that the NEW CULTURE, the reaction to the new
technologies, will fall into one of the taxonomic rubrics
that I suggested and that it will co-exist with other, older,
different cultures. That is why I went into this elaborate
classification of cultures.
Sam
432
Hi Sam
Well, let us get off these speculations and take off into the
land of the Technicians, these new mandarins of the
Empire(R). But, before starting our "graphic adventure" in
the techno-jungle of our Play-SuperStation(TM) thou
should know the rules of the game and the tools at thou
service.
433
Third: To play this game everyone has to pay a price (and
you know what it is).
434
world, playing his electrifying symphony of work and
vengeance. All, young and old alike, awoke and heard the
enchantment. The hammer hit the anvil, the sickle
harvested flowers and heads, the propeller triturated meat.
Flames twisted in revolt, the earth opened its abyss
wherefrom the demons entered, but nothing of this
affected our young boy, who looked fascinated by his map
and his time-clocks and pushed the buttons of his
switchboard. When the tempest ended, he was the director
of the factory. But, now he needed money,, so he went
with his machines to Eldorado(TM), he invented
RiskGames (TM) to win in the roulette of the Casino of
the Isle(R). Now he was the the director of Starve, Mooty
and Poors(TM) and wore Armani(TM). But his thirst was
infinite, he wanted all the prize. He wanted girls: the
Romans ravished the Sabines(TM). He became an artist,
clad in leather, he started a heavy-metal band called The
Garage(TM). It was then that he discovered TV, so he
contracted a band from Seattle(TM) and invented the
grunge. He was now the director of a EFE(TM)
(Entertainment For Ever), the megacorp of
communications, and wore Burton(TM) shirts. He has all
the channels: sports, porno, music, surgery, religion, even
one of horoscopes, it was called Acuarium(TM) TV and
the TV spot went: "we sell future 24 hours a day, only 5$
per hour". Now he had already discovered the most cruel
and sublime pleasure: to control other people's minds. So
he bought the various parts of AT&T and made the world
over a Net of titanium and silicon - satellites were marked
with his trademarked name. Then, he created a new
company of software games with the best techno-artists he
found. He also bought the biggest chemical/genetic
corporation: SupremArtis(TM). Finally he merged all
them up and created the Ultimate Super-Megacorp, which
435
sold mega-consoles whose games were more real than
Reality(TM), and he called it The Dream(TM).
Game Over
Insert Coin
Goethe
best regards
roberto
436
THE AUTHOR
Curriculum Vitae
437
1982 to 1985
Senior positions with the Nessim D. Gaon Group of
Companies in Geneva, Paris and New-York (NOGA and
APROFIM SA):
– Chief Analyst of Edible Commodities in the Group's
Headquarters in Switzerland
– Manager of the Research and Analysis Division
– Manager of the Data Processing Division
– Project Manager of the Nigerian Computerized Census
– Vice President in charge of RND and Advanced
Technologies
– Vice President in charge of Sovereign Debt Financing
1985 to 1986
Represented Canadian Venture Capital Funds in Israel.
1986 to 1987
General Manager of IPE Ltd. in London. The firm
financed international multi-lateral countertrade and
leasing transactions.
1988 to 1990
Co-founder and Director of "Mikbats-Tesuah", a portfolio
management firm based in Tel-Aviv.
Activities included large-scale portfolio management,
underwriting, forex trading and general financial advisory
services.
438
1990 to Present
Freelance consultant to many of Israel's Blue-Chip firms,
mainly on issues related to the capital markets in Israel,
Canada, the UK and the USA.
Consultant to foreign RND ventures and to governments
on macro-economic matters.
Freelance journalist and analyst for various media in the
USA.
1990 to 1995
President of the Israel chapter of the Professors World
Peace Academy (PWPA) and (briefly) Israel
representative of the "Washington Times".
1993 to 1994
Co-owner and Director of many business enterprises:
– The Omega and Energy Air-Conditioning Concern
– AVP Financial Consultants
– Handiman Legal Services – Total annual turnover of the
group: 10 million USD.
Co-owner, Director and Finance Manager of COSTI Ltd.
– Israel's largest computerized information vendor and
developer. Raised funds through a series of private
placements locally in the USA, Canada and London.
1993 to 1996
Publisher and Editor of a Capital Markets Newsletter
distributed by subscription only to dozens of subscribers
countrywide.
439
In a legal precedent in 1995 – studied in business schools
and law faculties across Israel – was tried for his role in
an attempted takeover of Israel's Agriculture Bank.
Was interned in the State School of Prison Wardens.
Managed the Central School Library, wrote, published
and lectured on various occasions.
Managed the Internet and International News Department
of an Israeli mass media group, "Ha-Tikshoret and
Namer".
Assistant in the Law Faculty in Tel-Aviv University (to
Prof. S.G. Shoham).
1996 to 1999
Financial consultant to leading businesses in Macedonia,
Russia and the Czech Republic.
Economic commentator in "Nova Makedonija",
"Dnevnik", "Makedonija Denes", "Izvestia", "Argumenti i
Fakti", "The Middle East Times", "The New Presence",
"Central Europe Review", and other periodicals, and in
the economic programs on various channels of
Macedonian Television.
Chief Lecturer in Macedonia in courses organized by the
Agency of Privatization, by the Stock Exchange, and by
the Ministry of Trade.
1999 to 2002
Economic Advisor to the Government of the Republic of
Macedonia and to the Ministry of Finance.
440
2001 to 2003
Senior Business Correspondent for United Press
International (UPI).
Web and Journalistic Activities
Author of extensive Web sites in:
– Psychology ("Malignant Self Love") – An Open
Directory Cool Site,
– Philosophy ("Philosophical Musings"),
– Economics and Geopolitics ("World in Conflict and
Transition").
Owner of the Narcissistic Abuse Study List and the
Abusive Relationships Newsletter (more than 6000
members).
Owner of the Economies in Conflict and Transition Study
List, the Toxic Relationships Study List, and the Link and
Factoid Study List.
Editor of mental health disorders and Central and Eastern
Europe categories in various Web directories (Open
Directory, Search Europe, Mentalhelp.net).
Editor of the Personality Disorders, Narcissistic
Personality Disorder, the Verbal and Emotional Abuse,
and the Spousal (Domestic) Abuse and Violence topics on
Suite 101 and Bellaonline.
Columnist and commentator in "The New Presence",
United Press International (UPI), InternetContent,
eBookWeb, PopMatters, "Global Politician", eBookNet,
and "Central Europe Review".
441
Publications and Awards
"Managing Investment Portfolios in States of
Uncertainty", Limon Publishers, Tel-Aviv, 1988
"The Gambling Industry", Limon Publishers, Tel-Aviv,
1990
"Requesting My Loved One – Short Stories", Yedioth
Aharonot, Tel-Aviv, 1997
"The Suffering of Being Kafka" (electronic book of
Hebrew and English Short Fiction), Prague and Skopje,
1998-2004
"The Macedonian Economy at a Crossroads – On the Way
to a Healthier Economy" (dialogues with Nikola
Gruevski), Skopje, 1998
"The Exporters' Pocketbook", Ministry of Trade, Republic
of Macedonia, Skopje, 1999
"Malignant Self Love – Narcissism Revisited", Narcissus
Publications, Prague and Skopje, 1999-2007
The Narcissism Series (e-books regarding relationships
with abusive narcissists), Skopje, 1999-2007
"After the Rain – How the West Lost the East", Narcissus
Publications in association with Central Europe
Review/CEENMI, Prague and Skopje, 2000
Winner of numerous awards, among them Israel's Council
of Culture and Art Prize for Maiden Prose (1997), The
Rotary Club Award for Social Studies (1976), and the
Bilateral Relations Studies Award of the American
Embassy in Israel (1978).
442
Hundreds of professional articles in all fields of finances
and the economy, and numerous articles dealing with
geopolitical and political economic issues published in
both print and Web periodicals in many countries.
Many appearances in the electronic media on subjects in
philosophy and the sciences, and concerning economic
matters.
Write to Me:
[email protected]
[email protected]
My Web Sites:
Economy/Politics: http://ceeandbalkan.tripod.com/
Psychology: http://www.narcissistic-abuse.com/
Philosophy: http://philosophos.tripod.com/
Poetry: http://samvak.tripod.com/contents.html
Fiction: http://samvak.tripod.com/sipurim.html
443