Snidpets*: Essays in Economic Biography, Part I

The persistence of a traditional press corp still unable to do their fact checking on the Wikipedia has induced the 'Creditanstalt' to issue the following press release with more extensive details about the qualifications of the members of our Monetary Advisory Committee.

Distinguished Members of the 'Creditanstalt' Monetary Advisory Committee: Snidpet Biographies, Part I

Eugen von Böhm-Bawerk (1851 – 1914)

A recent resurrection from the grave to our committee, Böhm-Bawerk, like Schumpeter, was Austrian Finance Minister intermittently from 1895 until 1904. His legacy as finance minister is disputed: while economic historian Alexander Gerschenkron criticized his "penny pinching, 'not-one-heller-more-policies'," and lays much of the blame for Austria's economic backwardness on Böhm-Bawerk's unwillingness to spend heavily on public works projects, Joseph Schumpeter praised Böhm-Bawerk's efforts toward "the financial stability of the country." Thus his main claim to membership in the committee must remain the fact that his visage is the only one to have graced an actual banknote (the Austrian 100 Schilling):

Böhm-Bawerk has the distinction of being the only one of the committee members whose visage has graced an actual banknote, thus incontrovertibly establishing his position as an eminent monetary economist.

His theory of capital emphasized "roundaboutness" as a source of increasing wealth, and he was a fierce critic of the labor-theory-of-value foundations of Marxism. He has been called Austria's second greatest economist after von Mises by George Reisman, who also states that von Mises would have considered him the greatest (so much for the consistency of preferences).

Professor von Böhm-Bawerk demonstrating the superiority of roundabout methods of production at his Viennese Stammlokal Cafe Central, where he rubbed elbows with his Marxist nemeses Trotsky and Stalin.

Friedrich von Hayek (1899 – 1992)

Friedrich von Hayek was the greatest advocate of the liquidationist school of business cycle theory. He received the Nobel Prize in Economics in 1974. Building on his Viennese colleague Böhm-Bawerk's (see entry above) concept of the "average period of production," Hayek blamed the business cycle on excessive investment in the expansion phase due to the inflationary effect of too low interest rates set by the central bank, followed by a period of 'liquidation' to eliminate redundant business enterprises and capital. Until the natural purgative of liquidation had been completed, he argued, the economy could not revive. This strongly influenced policymaking at the time, particularly the US Treasury Secretary under Hoover, Andrew Mellon, and had strong connotations of self-flagellating penance for previous profligacy, an attitude well known in the Judeo-Christian moral tradition.

In contrast, his principle nemesis Keynes considered a deep depression to be simply analogous to a broken magneto in a car which should be repaired according to the best engineering practice and not moralized about and accepted as unavoidable fate. Thus in Hayek's view, presumably, the Great Depression of the 1930s was caused by excessive investment in railroads and vaudeville theaters in the 1920s, and could not be overcome until these had been driven into bankruptcy and scrapped by the depression to make way for automobiles, airplanes, radio, TV and the talkies (his fellow Austrian capital-theorist Schumpeter might have put the causality the other way around).

In the event, the railroads did not need to be scrapped (although the same could not be said of the vaudeville halls), and recovery in the 1930s was driven quite effectively by the ultimate inflationary liquidationist investment –  armaments (and to a lesser extent civilian infrastructure and housing).

Hayek has subsequently become the darling of both right-wing libertarian thinkers and naive believers in the self-organizational information processing capabilities of unfettered markets. 

Hayek's best-known book is The Autobahn to Sausagedom (1944; 1955 American edition: The Interstate to Obesity), where he denounced central planning (the "nanny state") as incompatible with individual freedom of waistlines. It was a major influence on Milton Friedman's 1980 bestseller Free to Lose (UK Margaret-Who? edition: Free to Gain, often erroneously cited as Free to Maim), who otherwise thought Hayek's Prices and Production a very flawed book and his Pure Theory of Capital unreadable. 

Irving Fisher (1867 – 1947)

Fisher has been called "the greatest economist the United States has ever produced" for his famous 1929 prediction just before Black Friday that the stock market had reached "a permanently high plateau" (which was undoubtedly much more accurate than Glassman and Hassett's similar 1999 prediction of "Dow 36,000" – the 'Creditanstalt' places a high value on the accuracy of economic forecasts!). In contrast to modern bonus-guaranteed bankers (and like Schumpeter, see below), he had skin in the game and subsequently lost most of his substantial personal wealth. He made amends with his 1933 theory of debt deflation, though this was eclipsed by Keynes' General Theory (which seems strangely fitting for a theory of deflation). He brought the quantity theory of money up to date, and made major contributions to general-equilibrium (including an innovative design for a nifty hydraulic analog app) and capital theory (e.g., contesting Böhm-Bawerk's theory of "roundaboutness," see above, a critique that later received support from Paul Samuelson).

Fisher's hydraulic computer for calculating equilibrium prices, which he actually built and used in lectures, from his 1891 Yale PhD thesis. Compare the elegance of this design with Böhm-Bawerk's contemporary 'roundaboutness' machine (above).

Fisher was also a strong believer in the "focal sepsis" theory of physician Henry Cotton (as well as eugenics, prohibition, and Kelogg's vegetarianism and fecal analysis – NSA-SWIFT take note!) and had numerous sections of his schizophrenic daughter Margaret's bowel and colon removed in Cotton's clinic, eventually resulting in her death (see Madhouse: A Tragic Tale of Megalomania and Modern Medicine by Andrew Scull) – another confirmation of Keynes' dictum that "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas."

Joseph Schumpeter (1883 – 1950)

 Schumpeter established his monetary credentials during a brief stint as Austrian Finance Minister in 1919 at the onset of the hyperinflation, and as president of the private Biedermann Bank, whose bankruptcy in 1924 also ruined him personally, forcing him to take day jobs at such provincial universities as Bonn and Harvard. His great ambition in life was to be the world's best economist, best horseman, and best lover, but to this day there is still no consensus about which if any he achieved. He turned the liquidationist school (see Hayek entry) on its head by declaring "creative destruction" to be the paramount disequilibrium virtue of capitalism. He was highly influenced by and a secret admirer of Marx (whether Groucho, Chico or Karl is unclear) and Charlie Chaplin in The Great Dictator. But he was also a great detractor of Keynes, whom he never forgave for overshadowing him as a lover (at least according to Niall Ferguson) and financial speculator (horsemanship was apparently no contest).

Part II of Snidpets of Economic Biography will appear shortly and cover the remaining members of the 'Creditanstalt' Monetary Advisory Committee:

Michael Kalecki (1899 – 1970)
John Maynard Keynes (1883 – 1946)
Carl Menger (1840 – 1921)
Ludwig von Mises (1881 – 1973)
Oscar Morgenstern (1902 – 1977)
John von Neumann (1903 – 1957)

*The word "snidpet" is a neologism amalgamating the two words "snide" and "snippet" (Snidpet = Snide + Snippet), and is hereby copylefted © by the 'Creditanstalt,' Anstalt des öffentlichen Aborts.

Who Are Those Masked Men on the 'Creditanstalt' Monetary Advisory Committee?

I have been repeatedly asked about who serves on the 'Creditanstalt' Monetary Advisory Committee (MAC) that recently supported the nomination of Janet Yellen over Larry Summers for the chairmanship of the Board of Governors of the US Federal Reserve, and what are their credentials?

At the 'Creditanstalt' we have a strict policy of only inviting dead economists of the highest international standing to serve on our committees, in accordance with the recommendations of Representative Paul Ryan, US Congress, who has recently been promoting Milton Friedman (†2006) for the Fed chairmanship (even though he is not an Austrian but still very much dead).

Currently, the members of the MAC are drawn from the greater Vienna community as well as leading foreign economists:

Irving Fisher (1867 – 1947)
Friedrich von Hayek (1899 – 1992)
Michael Kalecki (1899 – 1970)
John Maynard Keynes (1883 – 1946)
Carl Menger (1840 – 1921)
Ludwig von Mises (1881 – 1973)
Oscar Morgenstern (1902 – 1977)
John von Neumann (1903 – 1957)
Joseph Schumpeter (1883 – 1950)

It has been our experience that these distinguished economists have a much easier time reaching a consensus in the afterlife than they ever did during their often highly contentious lifetimes.

Meetings of the 'Creditanstalt' Monetary Advisory Committee take place at the Vienna Central Cemetery and are occasions for high pomp and circumstance. Shown here is the quantity theory of money being taken to its ultimate resting place (in the long run burial plot for defunct theories).

What Does Germany Want, Revisited

Timothy Garton Ash has a very conciliatory piece in the New York Review of Books on The New German Question. This gave me an opportunity to revisit my December 20, 2011 blog What does Germany want (and why she can’t have it)? in a letter to the editors I wrote last Sunday:

To the editors:

Timothy Garton Ash (NYR,  August 15, 2013) has given a very judicious and balanced account of Germany’s dilemma at the eye of the Euro storm. And as a non-economist he should be especially commended for touching all of the relevant economic bases.

In the end, however, he stops just short of connecting all of the dots, preferring to concentrate on the admittedly important governance issues, and fails to draw the inevitable conclusion, namely, that the two cornerstones of Germany’s highly successful economic model are incompatible with the survival of the Eurozone and the welfare of its other members.

These cornerstones are, first, Germany’s well-known principled refusal, or shall we say, grudging and last-minute minimal capitulation, to a certain amount of mutualization of risk (Eurobonds, banking union) necessary to overcome the centrifugal tendencies inherent in an incomplete currency zone such as the Euro (see the work of the London School of Economics’ Paul de Grauwe for an exposition of this self-destructive tendency, as well as George Soros in these pages). The European Central Bank’s President Mario Draghi has had to unilaterally (although probably with Merkel’s implicit acquiescence) step into the breach with his OMT “whatever it takes” program to effect a “perils of Pauline” rescue. While Draghi plugged the rapidly eroding dike of Euro collapse last summer with the use of only his thumb, so to speak (expending no funds whatsoever in support of peripheral creditworthiness), the Bundesbank, spearheaded by its resolute President Jens Weidmann, in the venerable German tradition of Heinrich von Kleist’s overrighteous avenger Michael Kohlhaas, has still seen fit to take the ECB to the German Constitutional Court to challenge the compatibility of OMT with the ECB’s mandate. As Garton Ash rightfully point out, many Germans are still obsessed with the 1923 hyperinflation rather than the much more relevant 1931/2 Brüning austerity episode of their own tragic history.

Even more important, it seems to me, is Germany’s attachment to the second cornerstone – running 6% current account surpluses year after year in the name of “competitiveness.” Everyone is in favor of “competitiveness,” whatever that means, but current accounts are globally a zero sum game. If the rest of the Eurozone becoming more like Germany means that the entire Eurozone should run 6% current account surpluses with the rest of the world, we are in real trouble. Not only will the other major trading partners (US, UK, China, Japan, the developing world) never accept this, it is really a form of beggar-thy-neighbor policy because it pushes the necessity of generating effective demand for full employment unto the shoulders of others. Remember, Germany re-attained its much admired “competitiveness” since 2000 for the most part (though not exclusively) by forcing its real wages to grow more slowly than its productivity, lowering its consumption share to a level incompatible with long-term macroeconomic stability. This is not something every nation can indulge in (even China) without triggering a collapse of global effective demand – the US (or Spain, Ireland, Portugal and Greece for that matter) cannot play consumer of last resort forever. That this is really the heart of contemporary Germany’s economic DNA comes out clearly in Jens Weidmann’s 2012 speech at the Bank for International Settlements.

There are few apparent solutions to this inner-European current accounts imbalance short of Euro breakup, reevaluations and default. The present austerity and “internal devaluation” policy of the European Commission attempts to right the deficits of the debtor Euro periphery by slashing government spending (including on education, infrastructure and R&D) and lowering wages by means of mass unemployment levels not seen since the 1930s (all the time swinging the censer of nebulous “structural reforms”), while hopefully leaving the surpluses of the core countries and the stability of their banks untouched. While after a period of immense social misery this could restore “real exchange rate” export competitiveness, it is more likely to undermine than enhance their technological competitiveness and human capital in the long run (not to mention encourage the emigration of their best and brightest). Or the core could recycle its surpluses with unending bailouts (the “Transferunion” Germans so rightly fear, in the worst case just creating more Italian Mezzogiornos), or, on a more positive note, by investing in an EU Marshall plan. And finally, the core,  primarily Germany, could lower its current account surplus by increasing domestic consumption via higher wages, and raising internal investment, thereby sucking in imports from the rest of the Eurozone. An astute policy of a weak Euro would even allow Germany’s competitiveness with respect to the rest of the world to remain unchanged while this mutually beneficial rebalancing took place.

However, the fetish of the strong DM has been replaced by the idolatry of Germany’s Euro current account surplus. And while Germany has done quite well with this policy, it still has not sunk in that it is fundamentally incompatible with the survival of a healthy Eurozone. Even the Netherlands (not to mention France), a core Eurocore state, is being forced to abandon the austerity ship. Germany’s present stance, even if light years better than its Wilhelminian and Hitlerian precedents, is essentially predatory, masquerading as housewifely morality. Unfortunately, no amount of tinkering with EU governance will succeed until these fundamental issues are addressed.

Gerald Silverberg
Vienna, Austria

At Byzantine Banking Central: Summers vs. Yellen is a No Brainer

"Look, if you can't stand the Byzantine intrigue, perhaps you should get out of the cabal."
(Warren Miller/The New Yorker)

The claqueurs of Larry Summers (and to a lesser extent Janet Yellen) have been rustling the pages of the media (and presumably backroom connections, with President Obama playing coy) for their candidate for the chairmanship of the Federal Reserve Board, but not without a backlash, particularly at the New York Times.

Thus Paul Krugman has already come out for Yellen or against Summers, as has Maureen Dowd in today's op-ed The Summers of Our Discontent.

The 'Creditanstalt' monetary advisory committee has now unanimously decided on a recommendation and issues the following press release:

Appointing Janet Yellen is a no brainer - she is experienced, a top economist, personable and confidence inspiring. So why are we even debating Larry Summers, who is only some of these things, but comes with the toxic baggage of repeatedly putting his foot in his mouth going back a long way (remember the 1991 third-world toxic wastes memo - now the object of intense NSA-SWIFT scrutiny?).

Nevertheless, in his current Saul-to-Paul incarnation Summers has converted from the religion of deregulation to the slayer of the austerity dragon while expressing scepticism about the efficacy of quantitative easing. Brad de Long breaks a lance for Summers in the Financial Times and on his blog/NY Times: "Larry Summers has an edge as the most creative thinker likely to successfully think outside the box should outside-the-box thinking be called for." 

The 'Creditanstalt' monetary committee thinks that outside the box is precisely where Larry Summers belongs, and where he can make the best contribution to economic science and policy making. Being inside an institutional box, whether the World Bank, the Treasury, or the Presidency of Harvard, has never really suited him. Thus appointing Janet Yellen to the Fed chairmanship, in the quaint American expression, is simply a no brainer.

Vienna, August 14, 2013

Breaking News: Mass NSA Dismissals Confirm 'Creditanstalt' July 28 Prediction!

Reuters reports today that the National Security Agency (NSA) intends to dismiss 900 of its 1000 system administrators, in line with our prediction in our July 28 blog "Forget PRISM":

The NSA now proposes to fire its thousands of mathematicians and computer scientists and replace them with low-wage medical laboratory technicians rendered unemployed by the ongoing Great Recession (this is the real reason Edward Snowden decided to get out of the business now).

Reuters reporter Jonathan Allen claims that this action results from former NSA system administrator Edward Snowden's revelations:

The National Security Agency, hit by disclosures of classified data by former contractor Edward Snowden, said Thursday it intends to eliminate about 90 percent of its system administrators to reduce the number of people with access to secret information.

People have begun to question what the symbolic meaning of these domes left behind by the NSA in Germany really is.

However, the 'Creditanstalt' intelligence bureau's informants continue to maintain that the real reason for the mass dismissals is the replacement of the NSA's ill-fated PRISM and other computer-science-based projects by SWIFT, based on impeccable neuro-fecal foundations (see previous blog for details on how SWIFT will work).

General Keith Alexander, the director of the NSA, unwittingly let the cat out of the bag at the press conference with his remark that "We've got to push out more, I recognize that."

His other main security change - the so-called two-man rule that no one can go to the bathroom unaccompanied - has also proved highly unpopular among remaining NSA employees, with female employees even raising accusations of sexism.

Remember: You heard it first on this blog!

'Creditanstalt' Exclusive: How the NSA's SWIFT Program Will Work

President Obama giving the green light for the NSA's new SWIFT program (photo courtesy of creative photoshopping at freakingnews.com).

The 'Creditanstalt' intelligence bureau has obtained exclusive access to the Presidential Directive recently issued by President Obama authorized the National Security Agency (NSA) to proceed at maximum speed in implementing its new SWIFT Program, the replacement for the disgraced and ineffectual PRISM Program recently outed by whistleblower Edward Snowden (see yesterday's report).

To avoid the dysenteric decision problem well known to mathematical logorrheaticians (see e.g. the classic paper by Alan Turding, "On computable flushings, with an application to the Abscheidungsproblem," Proceedings of the London Fecal Matter Society, Ser. 2, Vol. 42, 1937), the NSA intends to implement a clever branch-and-bound algorithm to zero in efficiently on target DFTs (this codeword has been variously deciphered as 'de facto troublemakers' and 'defecating terrorists' by our informants) while respecting US constitutional principles.

To simplify, NSA agents will first take samples from the top-level discharge sewers (see photos below) to determine if any subversive activity is taking place in a given municipality. While this encompasses discharges from all individuals in the region, the Foreign Intelligence Surveillance Court (FISA) has ruled that it does not violate the constitutional prohibition on unwarranted searches, nor does it store metamatter (e.g., anal identifiers), the chief weakness of the PRISM program.

NSA specialists taking samples from the highest-order domains.

If a subversion alarm is triggered, the NSA will then sample feed-in lines to close in on the source, using the branch-and-bound algorithm to minimize expenditures while preserving effluent anonymity.

    

Early NSA experiments with branch-and-bound algorithms in the 1950s, like the CIA's experiments with LSD, proved misguided and had to be covered up.

Recursive application of the method will allow the NSA to zero in on the guilty party in exponential time without violating the privyacy of the general population.

Improved version of the branch-and-bound algorithm developed at Indiana University will allow the NSA to rapidly target the guilty DFT. The names of individuals in this case study have been changed to zoological classes to respect privyacy.

An advanced projects subgroup at NSA has been experimenting with video surveillance and fecal recognition software. However, it is still unclear whether the FISA court will find this consistent with the fourth amendment's constitutional requirement for public analymity.

The NSA has already begun visual acquisition experiments at various locations in the USA, even though the FISA court has not yet ruled on their constitutionality (photo courtesy of Spiegel Online).

NSA fecal recognition software still has trouble differentiating elephant dung (top) from bear scat on apple diet (below; photos courtesy of Wikipedia Commons). The NSA has refused to release its human feces archive on national security grounds.

Forget PRISM: The NSA's new SWIFT program promises to solve the excremental complexity problem

The NSA's new data center in Utah (shown here under construction) can still be converted from housing now unnecessary network servers to useful EACs (Excrement Analyzer Complexes), saving taxpayers billions.

A suspected subversive under surveillance by an agent of the NSA.

George Dyson points out at Edge that the purpose of intelligence is not just to collect signals but ultimately to understand what people are thinking:

The ultimate goal of signals intelligence and analysis is to learn not only what is being said, and what is being done, but what is being thought. With the proliferation of search engines that directly track the links between individual human minds and the words, images, and ideas that both characterize and increasingly constitute their thoughts, this goal appears within reach at last. "But, how can the machine know what I think?" you ask. It does not need to know what you think—no more than one person ever really knows what another person thinks. A reasonable guess at what you are thinking is good enough...

There is one problem—and it is the Decision Problem once again. It will never be entirely possible to systematically distinguish truly dangerous ideas from good ones that appear suspicious, without trying them out. Any formal system that is granted (or assumes) the absolute power to protect itself against dangerous ideas will of necessity also be defensive against original and creative thoughts. And, for both human beings individually and for human society collectively, that will be our loss. This is the fatal flaw in the ideal of a security state. 

Our 'Creditanstalt' intelligence bureau has just learned that in view of the insurmountable computational complexity of this problem, the NSA has decided to abandon its controversial PRISM program, which was drowning in unfiltered taps of narcissistic Facebook pages and free-association Skype chats, and replace it with the SWIFT program, inspired by Jonathan Swift's 1726 classic Gulliver's Travels.

In Part III A VOYAGE TO LAPUTA, BALNIBARBI, LUGGNAGG, GLUBBDUBDRIB, AND JAPAN, Gulliver encounters surveillance scholars well in advance of the NSA:

Another professor showed me a large paper of instructions for discovering plots and conspiracies against the government.  He advised great statesmen to examine into the diet of all suspected persons; their times of eating; upon which side they lay in bed; with which hand they wipe their posteriors; take a strict view of their excrements, and, from the colour, the odour, the taste, the consistence, the crudeness or maturity of digestion, form a judgment of their thoughts and designs; because men are never so serious, thoughtful, and intent, as when they are at stool, which he found by frequent experiment; for, in such conjunctures, when he used, merely as a trial, to consider which was the best way of murdering the king, his ordure would have a tincture of green; but quite different, when he thought only of raising an insurrection, or burning the metropolis.

The NSA has now commissioned studies of Osama bin Laden's stool recovered from the Navy Seal's mission to Abbottabad to serve as a benchmark for a worldwide program of excremental analysis to unmask potential terrorists with their pants down.

Bin Laden producing the sample which will be used to kick start the SWIFT program.

The NSA now proposes to fire its thousands of mathematicians and computer scientists and replace them with low-wage medical laboratory technicians rendered unemployed by the ongoing Great Recession (this is the real reason Edward Snowden decided to get out of the business now).

NSA's current PRISM program (left, in slides revealed by Edward Snowden) has proven computationally intractable, and will be replaced by cutting-edge science about human neuro and gastrointestinal physiology (right).

Once again, Jonathan Swift has proved to be a thinker well ahead of his times. As we have previously pointed out, his A Modest Proposal has also been one of the few effective policies for the resolution of the Euro crisis, inspiring the troika's program of structural reform in the Eurozone periphery by transferring superfluous babies to core countries to bolster biofuel production and rebalance competitiveness.