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The Correct Level of Profits in an Economy

2014 April 22
by Ian Welsh

Sustained high profits, in free market economics, are considered the sign of an uncompetitive market.  De-fact if an industry or business makes high profits regularly, and certainly if they do so for more than a decade or so, the market is not competitive.

The response to that should be political: either make the market competitive, or if it’s the sort of market which can’t be or is too much trouble to be made competitive (most utilities, if you’re sane; certainly utility distribution; any insurance required of almost anyone; roads, etc…) then either make them government run, or heavily regulate them.

Cable companies in the US make 97% profit on their internet provision — they are an unregulated oligopoly which is also damaging America’s competitiveness with their lousy product.  Cell phone makers are another unregulated oligopoly because of the interlocking patents which make it very difficult for others to make almost the same smartphones for literally a tenth the price and are a strong argument for reducing the length of patents, getting rid of algorithim patents entirely, and for mandatory licensing at low prices.

Banks and financial firms, with their ability to create money out of thin air by lending, and to bounce various debt instruments back and forth to stack leverage, are the ultimate in abusive oligopolies.  They are granted the ability to literally make money, and should be expected, in exchange, to work in the public interest, not to enrich themselves, impoverish the public and go running to government for bailouts when they manage to mess up a sure thing.

The general level of profits in a society should, actually, be pretty low.  5% plus inflation is a good level to aim for.  If high profits are available in parts of the economy, every other business gets starved for cash, as money runs to the high profits.  Economics says that those opportunities should run out and there should be a regression to the mean, but in oligopolistic economies with strong protected works and vast amounts of government corruption, that doesn’t happen—until there is a crash, at which point the most profitable businesses are bailed out, because they used their profits to buy government.

Individual businesses want high profits, but societies want low profits, and should view sustained high profits as a sign of economic illness which requires intervention.

The problems of social sciences

2014 April 21
by Ian Welsh

Are far harder problems than most of the problems of the hard sciences.  Why people do what they do, under what circumstances is a problem of vast complexity, and we don’t have the necessary models.  The models we do have (such as evolotunary psychology, and our abysmal knowledge of neuroscience), while powerful, are incomplete, and overly simplistic at capturing emergent behaviour, especially in groups, let alone the effect of culture.

That’s not to say we don’t know a lot, I’m hardly a great expert and I could teach many years worth of courses just with what I know, but we do not have the level of predictability the hard sciences have.  It also hard to falsify social science due to problems setting up the experiments, and when you use real world data, it’s hard to isolate variables.

This problem is exacerbated by the fact that social sciences — and many humanities, are ideological enterprises which have an effect on the real world distribution of goods: who gets what.  They are used to justify distribution of goods: of the things people want.  When “hard” sciences, like biology, are used in this way, they too cross over into the ideological social science bucket and generally cease to be hard sciences.

This is because the “ought” is, so far, impossible to separate out of the humanities and social sciences. Ethics and morality are always lurking, and efforts like Skinnerian behaviouralism have all, so far, failed.  Humans are cussed, and complex, and reductionism only works in the most broad based and caveated sense, again, largely because of the effect of culture.  Say that all people are greedy, or selfish, or kind, or altruistic, or driven to pass on their genes, and the cultural anthropologist, or the pyschologist, will find you exceptions.  Humans biology imposes drives on humans, but the ways in which we satisfy those drives, or subliminate them, or even fight and deny them, is, if not infinite in theoretical terms, then infinite in practical ones.

All of this makes the problems of the social sciences vastly difficult, and far less progress has been made than most think.  Even neuroscience, which is not a social science, has teased out only a few mechanisms and has little understanding of how they mesh together.  In practical macro-terms, when dealing with problems of social organization that are province of sociology, economics, political science and mass psychology, we are not much more wise than the Ancient Greeks, and on certain issues, perhaps less so.

One should be wary of the experts.  It was not so long ago that pyschiatrists were mass lobotomizing people and treating them for homosexuality.  It is today that they are vastly overprescribing psychoactive prescription drugs to young children (and everyone else, especially upper middle class women.)  Following neo-liberal economists prescriptions has led to 40 years of stagnation, a financial crisis and a long depression for the developed world (yes, that’s what we’re in.)

The social sciences are still in the dark ages.  As with medicine in the dark ages, occasionally a gifted, wise or brilliant practitioner (usually applying souped up folk medicine) could do more good than harm.  You must look, carefully, at each individual social scientist, and decide if you trust him or her, because the degree and the discipline means little.  It is how the practitioner combines  the knowledge that matters, the knowledge is not currently in reliable, formulaic form, nor is there even a reliable method for creating formulas in the most cases (case studies and regression statistics have utility, but it is limited.)

So, ye who would enter the social sciences: know that you will be responsible for making it work, it doesn’t work as it’s given to  you.

And you who would consume it, be even more wary, for this is the dark age of social science, in which we pretend it is science, when it is still art.

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You want a good internet economy with lots of jobs? Here’s How.

2014 April 18
by Ian Welsh

I’ve been blogging for a long time, and I was managing editor of both the Agonist, and FDL.  While at both jobs, advertising income wasn’t my responsibility, except indirectly (I was responsible for traffic), I kept an oar in and an eye out.

Here’s the deal: advertising revenue collapsed.  In particular it collapsed in 2007/8, and it kept collapsing.  The reason it collapsed is that in the old days you sold your ads direct, or through brokers who offered good deals.  As time went by, however, the percentage offered dropped and dropped and dropped.  The brokers consolidated, and one broker took the lion’s share of the market: Google.

The reasons are simple enough: Google can offer the widest portfolio of websites to advertise on, and for all but the best branded websites, it determines more traffic than any single other factor.  For people with no brand, it determines almost all the traffic.

Google takes the value because Google takes the value of websites: content creators don’t matter for squat because without Google they don’t get read, or watched.  Oh, there are some exceptions, websites with a large enough community to provide their own traffic and push (Facebook, YouTube, etc…), but for the long tail and even the lower part of the fat end, Google is it.

I bring this up because of the extraordinary open letter from a German publisher about Google. 

“We are afraid of Google,” Dopfner wrote. “I must say this so clearly and honestly since scarcely one of my colleagues dares to do this publicly. And as the biggest of the small fry, we must perhaps be the first to speak plainly in this debate.

“The discussion about Google’s power is not a conspiracy theory propagated by people mired in yesteryear,” he added, noting that Springer is making a big digital play and now reaps 62 percent of its profits from digital business.

Attacking what Schmidt had characterized as Google’s willingness to compromise with the European Commission over a 4-year-old complaint about its practices, Dopfner declared: “This is not a compromise. This is the introduction, sanctioned by an E.U. authority, of that kind of business practice which in less honorable circles is called extortion.”

Google is remarkably similar in important ways to Walmart.  If it doesn’t carry your goods, or sticks them in a lousy place on the shelves, you aren’t going to sell much.  The information problem in economics has absolutely not been solved, people cannot find what they would actually want to read or buy, but only what a few key companies show them (see Apple’s App Store for another example, or Steam, both of which take 30% in exchange for giving people a lottery ticket to make some money.)

This is pure rent-seeking, pure skimming off of other people’s work, and while it makes a few companies obscenely profitable (Apple doesn’t even know what to do with all the money it’s sitting on) it destroys businesses. If you have to pay 30% to someone simply as the price of getting your product before consumers in theory (often not in practice), a lot of businesses simply become unviable, and the jobs at Apple or Facebook or Google do  not make up for all the jobs they kill.  If Google doesn’t serve your website in the first few pages, it’s not going to be read.  You will make a deal with Google (if you’re big enough for them to care) and you will create your content to pander to Google’s preferences as embodied by their algorithims, or you won’t get traffic, and even if you do get traffic, well your ads don’t pay squat, because Google takes almost all the profit.

Companies like Google, the key App stores, Walmart and so on must be heavily regulated, and the amount of commission they can take must be fixed by law.  If it isn’t, well, you get to read all sorts of articles wondering where the tech jobs are, asking why Instagram has so few employees, while Kodak had tons.  The reason is that tons of people are providing value to Instagram, or Google, or Apple, or Facebook, and they either aren’t getting paid, or are getting peanuts: they create content, that content has value, but because someone stands between them and the people who pay, they aren’t rewarded for the value they create.

You want a good economy again?  You want an internet economy that lives up to the early hype and which provides even more jobs than the old economy?  Break or regulate Google, Apple, Facebook and all the other gatekeepers, scrapers and information brokers.

(Oh, and reduce patents to only a few years, and enforce mandatory licensing, and a million (ok hundreds) of cell phone companies will blossom, driving smartphone prices down to a tenth of what they are today, or more.  It’s called a competitive market, and it doesn’t work in a strict protected works world.)

You can have an economy that works, or you can have a few oligopolist companies which make obscene profits and create oligarchs: your choice.

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Clown College as the Ukrainian military effort “sputters”

2014 April 16
by Ian Welsh

The Ukrainian military clearly doesn’t care enough to actually fight:

The day began inauspiciously for Ukrainian forces as they sought to establish an operating base in the city of Kramatorsk, moving in units from a nearby military air base. According to Ukraine’s Defense Ministry and a witness who spoke by phone, a column of six armored vehicles was stopped by a mob of civilians and then commandeered by heavily armed men wearing military-style uniforms.

Not willing to kill civilians: that actually speaks well of the Ukrainian military.

The East is Putin’s if he wants it.  Also, take note of the sheer competence of Russian actions, both direct and through proxy forces, in both Crimea and Eastern Ukraine.  The Russians have a plan, and are executing it more than competently right down the line.  I would say that NATO and everyone else should take note.

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Democracy and Size? Can a populous democracy work?

2014 April 15
by Ian Welsh

I, and others, have noted a number of times that the only nation which handled the financial crisis correctly was Iceland: they bailed out ordinary people, let the banks go bankrupt, and jailed bankers who had broken the law.

The only one.

Iceland’s population is tiny, but it isn’t size, exactly, that matters, what matters is that politicians and bankers can’t live in a bubble in Iceland.

You live in a bubble when you don’t have to deal with ordinary people: you take a helicopter everywhere; fly on a private jet, your kids go to private school, you stay in hotels ordinary people can’t afford, and you live in enclaves far away from the hoi polloi. You are surrounded at all times by people who work for you or someone who is dependent on you: your daily interaction is with other people like you, or with retainers.

Iceland is too small for the bubble to work.  Politicians in Iceland could not avoid the Icelanders they would have been impoverishing if they bailed out bankers, and let ordinary people go bankrupt.  The people who taught their kids, prepared their food, whom they say on the street every day would be people they had fucked over.  Their lives would be living hell, even without violence (Iceland being a very peaceful society), they would have been social pariahs.  Everyone knew them, and given the population size, would recognize them, and in that small a country, would probably eventually see them and be able to treat them as they deserved.

Now in Iceland’s case this is related to population size, but in larger countries it is related to the absolute rule for prosperous and egalitarian societies: elites must not be able to opt out of their own society.  They must go to the same schools, eat the same food, travel on the same planes, buses and roads, and so on.  If the economy does badly, they too much suffer.

Under no circumstances, in a democratic society which wishes to not turn into an oligarchy, can a bubble be allowed to form.  Under no circumstances can elites be allowed to prosper if the rest of the population is not.

This does not guarantee a wonderful society: if the mass of the population are bigots or racists or unpleasant, that will be reflected in public policies and government.  The government will be no better than the people, but it won’t be a lot worse, either.

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The Rapid Destructon of Countries

2014 April 14
by Ian Welsh

My regular readers have no doubt noticed by near-obsession with the Ukrainian crisis.  Part of it is the risk of real war, but most of it is that the Ukraine is yet another country being destroyed.  Even if it had been kept together, even if the Russians had taken the Maidan coup sitting down, the coup signaled the Ukraine’s destruction, because it meant that IMF austerity, meaning slashing pensions 50%, increasing gas prices by 50%, selling off the industries worth selling and the agricultural land which is the most valuable thing the Ukraine has, would occur.  Massive debt would be piled onto Ukraine, at higher rates than Russia was offering, and the economy would be looted.

Since 9/11 we have been destroying countries at a ferocious rate: Iraq, Iran (sanctions there are brutal), Libya (far better off under Qaddafi), Syria, Southern Lebanon (their industry destroyed by Israel in 2006).  After the financial crisis Portugal, Spain, Greece, Ireland, Italy, Cyprus to a lesser or greater degree. Even core economies like Britain and the US, while not technically in recession, are gripped by what is a long Depression, with real standards of living for median individuals dropping, health metrics dropping and employment and wages never recovering to pre-crisis levels.  Egypt has been turned into an even worse despotism than under Mubarak, Turkey is sliding down the road to an elected kleptocratic dictatorship, Thailand is in permanent turmoil.

To be sure, some have been destroyed militarily, some by internal political strife and others by austerity but the collapse or decline is clear in all cases.  The so-called Arab Spring was to a large extent caused by the financial crisis and the soaring food prices which came in its wake.  Syria was deliberately destabilized by the West, and as bad as Assad is (he appears to just love torture), the situation is worse under him than before. Qaddafi, likewise no Saint, ran Libya better than the current near anarchy.

Though not as bad, the austerity driven destruction of countries has been even more common.  Austerity is crazy, it says “take on vastly more debt and cut spending”, but what happens is that the economy contracts due to the reduced spending, so that the debt becomes even more injurious, and the country then has to borrow even more money.  Greece is more in debt, with a smaller economy, than when the Troika started “helping” them.

This destruction is done for the benefit of various elites: the south of Europe has been shoved into poverty so that financial elites didn’t lose their money, and so that they can make even more money off loans effectively guaranteed by the IMF, ECB and northern European governments.

The correct thing to do, of course, was to force financial elites to take their losses, toss those who had engaged in fraud in jail (which is to say almost all of the executive class), and bail out ordinary workers.  The ONLY country to do this was Iceland.

Our current world system destroys countries.  And it is destroying more and more.  It drives their populations into penury, it takes whatever they have and distributes it to oligarchs, and if a country irritates our Lords and Masters too much, it will be destroyed by economic sanctions or direct or indirect military force.

This is all of a piece: the reason food prices are so high is because of financialization: because all the money has flooded to the top, and there is no money to properly oversea expansion of agriculture and to subsidize food (which is far cheaper to do than the bailouts were, so it’s not a case of being “unaffordable.”

Understand this: if you are not a member of the oligarchy, the financial elite, or a senior member of the security state, your well-being is of little interest to our Lords and Masters.  Oh, they might prefer that you don’t die, or go hungry (they might not), but if your well-being conflicts with the desires of the oligarchy, as it did during the bailouts, they will not hesitate to cut you dead.

If you’re unfortunate enough to live in a non-core country, well, even your ability eat, or not have a nasty militia beat you, rape your daughter, and put drill holes in your son, let alone have a good job or be able to live with dignity, is of little interest to them.  This is not hyperbole, it is an exact description of how those who live in non-core countries have been treated, repeatedly.

And remember, the core is shrinking. Greeks and Italians and Cypriots and Spaniards and Irish—they thought they were members of core countries; that they were Europeans, that Germany and France and the ECB and the IMF wouldn’t destroy their countries.

The core is shrinking: the moment elites neither need nor fear you, you are disposable.  Are you willing to do anything, absolutely anything, to stay on the inside? If you are, and you can claw your way over the bodies of the others competing for the shrinking spots, well, you may live a good life as a retainer.  Otherwise one day you too will be surplus to needs.

One day sooner than you think.

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Ukraine Counterattacks

2014 April 13
by Ian Welsh

Pro-Russian “militias” seized the city of Slovyansk, now Ukraine is attacking to take it back.

This is a profoundly dangerous situation.  On the one hand, if the Ukrainian government had done nothing, Russia would have de-facto control over the East.  But Putin has repeatedly warned Ukraine not to attack pro-Russian militias.

And, if these pro-Russian militias include Russian troops, well Russia really can’t afford to have any captured, can they?  “On a leave of absence” explanations only go so far.

If Putin gives the word, a very large Russian army will overrun Ukraine’s East.  If Ukraine does not immediately back down in such a situation, Russia is more than capable of overrunning the entire country.

NATO can then either do nothing but mouth impotent threats or can itself intervene militarily.  NATO does not have enough forces in position to win the initial clash, but would certainly win a longer conventional war.  Victory by either side, however, risks a nuclear war, as generations of Cold War planners understood.

Ukraine’s orientation to Europe, and the opening of its economy to destruction by the IMF and looting by Westerners, is not a cause worth risking nuclear war over.

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“Pro-Russian Militias” Seize Police Stations and a City

2014 April 12
by Ian Welsh

I guess Vladimir Putin really objects to the current Ukrainian regime:

Pro-Russian activists carrying automatic weapons seized government buildings in Slaviansk and set up barricades on the outskirts of the city. Official buildings in several neighboring towns were also attacked.

Imagine that.  I’m sure that some of them are activists.  The rest are very likely “activists”.

Ukraine is blustering about using armed force to kick them out, but if they do, they’ll kill some, and that will give the large army on their border a pretext to march in to “protect” Russians in the Ukraine.

Meanwhile, the Ukraine refuses to pay higher prices for natural gas, is 2 billion in arrears anyway, and the Russians are saying “well, the contact says that if you don’t make payments in time, we can raise the price.”

Sub voce, of course, the message is “we offered you subsidized gas, and you decided to make nice with the IMF, Europe and America.  Get them to pay for your gas, we don’t subsidize countries hostile to us.”

Now all this could be prelude to invasion, but it could also be prelude to negotiations.  Russia wants a Federal Ukraine with regions having great autonomy.  Going to the table with the message “we already OWN the Eastern Ukraine, it’s federalization or we officially annex it” is a strong bargaining position.

Possession is, as they say, 90% of the “law”.

The West can either accept what Russia is offering, or it can ramp up sanctions.  Be clear, sanctions could really hurt Russia, but they will hurt the EU as well, both those countries that rely on Russia for natural gas, and those who launder Russian money (London, in particular.)

Of course, the US probably doesn’t mind if Europe gets hurt, and American commercial interests are pushing to be allowed to sell natural gas to Europe.  The fracking boom isn’t going as well as its propaganda, and a bigger market would be nice.

Hard sanctions, though, will push Russia hard into China’s orbit, ensuring that when the real confrontation between the West and China occurse, that Russia, which is still a powerful nation, rich with natural resources China needs, back China, not the West.

In geopolitical terms, the West has acted like idiots.  The status quo of a Ukraine which was somewhat more in Moscow’s pocket than Brussels or DC was not harmful to the West, they will lose much to gain part of the Ukraine than it is worth.

Again, the real threat to American hegemony is no longer Russia, it is China.  American foreign policy which does not orient around this fact is jejeune and idiotic.

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Markets and Competitive Markets

2014 April 11
by Ian Welsh

Markets are almost entirely a product of government regulation and enforcement, and cannot be anything but. This is not just about the common observation that government must enforce contracts, but about the how it enforces contracts because contract law changes over time, and is differs from country to country.

Even more fundamentally, what property is, government determines. For example, most land could not be sold through most of history. Patents and copyrights are not universal in human existence and they radically undermine the argument for markets because for competition to work people must be able to enter any business which has high profits. If patents or copyright make it impossible to produce products that others are, then competition does not drive down prices.

Competition in many products is hard, in any case. Take cable and phone companies and the internet access they offer. In 90s America government forced phone companies to let other companies sell internet over their phone lines. When they stopped, internet prices soared because competition is impractical. A new company cannot drive new phone lines to every house, or new cable, and we don’t want them to: it would be an insane misuse of resources.

Property, from ownership of land, to the right to broadcast over the airwaves, to the right to make something and deny other people the right to make it as embedded in patents and copyrights is entirely a social choice, enacted through government. What property is, what may be sold, and what may not be sold: what is a market good, what is tradeable, is a matter of law and convention.

Markets are a way of distributing goods and services through the profit motive. A competitive market is a market where it is easy for new businesses to enter markets and in which no competitor has a sustained advantage other than their people.

Every grant of monopoly, such as copyright and patent, every natural monopoly such as water and sewage and power and phone and internet and cable; every oligopolistic grant such as auctions of spectrum to telecom companies; every grant of money-creation to a few; every network-effect or first-mover advantage; every inherited fortune or oligopoly engaged in non-competitive pricing makes a market less competitive.

Markets which are not competitive do not produce the benefits of competitive markets. They are, however, still markets. They still distribute goods and profits according to what is most profitable.

As Egypt Continues its hard slide to Despotism

2014 April 10
by Ian Welsh

Here are the numbers:

Since Mr Morsi’s overthrow his Muslim Brotherhood group has been the target of a fierce crackdown by the military-backed authorities. More than a thousand Brotherhood members have been killed and more than 16,000 people, many of them Islamists, have been arrested.

Then, of course, there was the death sentence for 529 protestors for the death of one policeman.

Al-sis, the General who overthrow Morsi in a coup is now “running for President.”  He has also kept the Gaza crossing closed more often than not.

Meanwhile, the resistance has, actually, gone out of its way to attack targets like police stations, which are, frankly, legitimate targets.

The Muslim Brotherhood, and anyone else, in my view, has an entirely legitimate right, in this case, to violent revolution.  A democratically elected government was overthrown in a military coup.  The Brotherhood claims not to be behind the violence, but whoever is, is not in the wrong, unless you believe that political violence is never justified.  (In which case, Americans, please start paying your taxes to the Crown.)

More to the point, the Brotherhood was legitimately the most popular party in Egypt. They did win the election fairly, after having their preferred candidates disqualified by judges appointed by the old government. They did run the clinics, distribute food and so on in much of the country.  The outlawing of the Brotherhood and seizure of all their property was a huge blow for ordinary people, even as it enriched the government.  Note that, as in Iran, the Egyptian military is a huge economic power in Egypt, owning many businesses.

The entire situation stinks to high heaven, suggesting that the original demonstrations were allowed to succeed by the military so that they might later undertake a coup.  The deep state also, clearly, deliberately sabotaged Morsi at every step, in particular power supplies suddenly became unreliable right after he was elected.  Contrary to the army’s propaganda, that’s not something Morsi could have caused, and that it was so is indicated by the fact that right after the coup, the power suddenly became much more reliable again.

The original demonstrations succeeded when the army decided they wouldn’t support the government, remember.  Let this be a reminder to you that if you do not have control, physical or ideological, over those who have the ability to inflict violence in your society, you do not actually rule: you are only in charge as long as they want you to be.

Meanwhile, with the largest and most popular party in the country outlawed and 16,000 of its supporters in jail (imagine 16,000 Democrats or Republicans in jail for protesting), I’m sure al-Sisi will cruise to victory and become “President”.