2007 Financial Crisis

I predict a major financial crisis and severe depression in 2007.

It's likely that JK Rowling plans to kill off Harry Potter in Book 7 (title still unknown):

Harry, others may die in the end, J.K. Rowling says

Author J.K. Rowling said two characters will die in the last installment of her boy wizard series, and hinted Harry Potter may not survive, either.

"I have never been tempted to kill him off before the final because I've always planned seven books, and I want to finish seven books," Rowling said Monday on London TV.
"I can completely understand, however, the mentality of an author who thinks, 'Well, I'm gonna kill them off because that means there can be no non-author-written sequels. So it will end with me, and after I'm dead and gone they won't be able to bring back the character.' "

Rowling declined to commit herself about Harry, saying she doesn't want to receive hate mail.

That will drive tens of millions of people in developed countries into deep depression. They won't buy anything, won't work nearly as hard, and the shock to the demand side will cause the global economic system to go unstable.

I've seen this effect in person with my nine (almost ten) year old daughter. In the very excellent Bartimaeus trilogy, a beloved character dies in the last paragraph. My daughter was significantly depressed for a long time. She kept reading the last chapter over and over again hoping it would turn out different.

The problem with Harry Potter is that ten to twenty million people will read it during the 72 hour period after it comes out. The overall depression of that large a group of people all at once will have a profound impact on the economy.

Reading tealeaves

I'm often amused when I hear people complain that there is too much information available or that it is hard to be informed or that they are being mislead. It simply doesn't occur to them that they need to try and develop an approach to sorting, sifting and analyzing what is abundantly available. In addition to refining their approach they can also pickup on subtle clues.

This article in the WSJ caught my attention, not because of the main thrust but because of this opening section:

It wasn't so long ago that insurers were pronouncing terrorism "uninsurable." But ask any insurer: Aon's Paul Bassett recently noted that the global war on terror had greatly reduced the threat of megaplots on the scale of Sept. 11, 2001.

Yes, suicide bombers and car bombs remain a threat, but not to the industry's capital base. Hurricanes are the new "uninsurable" now.

One reason for being on the offensive against Radical Islamists and their enablers is to reduce their effectiveness in supporting cells that might hatch a megaplot here at home. Critics who are sure that this policy is wrong exhibit thinking that is at odds with people who obsess about that risk for a living. Who's view would you lean towards: someone with an emotion laden approach (likely a sufferer of BDS) or a professional trying to take a clear eyed approach?

Spontaneous Order

I thought that this article by economist Daniel Klein was a nice followup to Bret's post about the superiority of self-organizing systems. Excerpts below:

At a roller rink you can see something that holds insights into great questions of politics and society.

"How are 100 people supposed to skate around the arena without guidance or direction? Each skater traces out a pattern, and the patterns must mesh so skaters avoid injury. That's a complex problem. It would require smart leadership. But it won't get solved! The arena will be a scene of collision, injury, and stagnation. Who will pay for that?!"

Intuition leads us to think that complex problems require complex, deliberate solutions. In a roller rink, the social good depends on getting the patterns to mesh. But no one is minding that good. As your friend describes the business idea, not even the owner intends to look after it. How can the social good be achieved if no one is looking after it?

Suppose you and I step into roller-skates and join the other skaters on the floor of the rink. In skating, I do not aim to solve the big problem of coordinating all the skaters. I do not try to get all 100 patterns to mesh. I show common courtesy, but basically I am out for myself. I want to have fun, and so certainly don't want to get hurt. Looking out for myself, I promote my interest in avoiding collision with you.

An important quality of collision is mutuality. If I collide with you, then you collide with me. And if I don't collide with you, you don't collide with me. In promoting my interest in avoiding collision with you, I also promote your interest in avoiding collision with me.

The key to social order at the roller rink is this coincidence of interest. I do not intend to promote your interest. I am not necessarily even aware of it. Still, by looking out for myself I am to that extent also looking out for you. My actions promote your interest.

Skating on the floor of the roller rink is an example of what Friedrich Hayek called spontaneous order. The process is beneficial and orderly, but also spontaneous. No one plans or directs the overall order. Decision making is left to the individual skater. It is decentralized.

The contrast is centralized decision making. Again, intuition tells us that the only way the complex social good can be achieved is by central planning. Yet Hayek tells us that sometimes another way it can work is "decentral" planning. He tells us, in fact, that, often, decentral planning is the only way it can work.

Suppose the social good on the floor of the roller rink were entrusted to central planning. The rink owner appoints a really smart, really nice guy to look out for the social good. He hires a man with the reputation of a saint, and with two PhDs from Yale, one in Civil Engineering and one in Ethics. This smart saint stands in the organ booth, holds a bullhorn up to his mouth, and calls out directions: "You in the blue jacket, speed up and veer to the left." "You in the black overalls, I want you to slow down and move toward the inside." And so on.

The results would be terrible. The smart saint could not come close to achieve the brisk dynamic order that spontaneous skating achieves. The main reason he could not is that he lacks knowledge of individual conditions. Using his Yale learning, he looks closely and does his best. But he has 100 skaters to watch, and the conditions of each are changing moment by moment. The planner's college knowledge is useless in informing him of the particular conditions of your situation. The planner tries to apply engineering principles, but each skater has principles of motion all his own: Do I feel like going faster? Am I losing my balance? Can I handle this turn? Do I have to go to the bathroom? Am I content to follow the planner's directions?

Your local conditions—your opportunities, constraints, and aspirations—are best known by you. No one else comes close. College knowledge is no substitute for what Hayek called local knowledge.

Moreover, even if somehow the smart saint from Yale has all the local knowledge of the individual skaters, what would he do with it? How would he interpret it? How would he integrate it? And if he came up with orders for how to direct our skating, how would he communicate those orders to 100 people simultaneously?

Being smart and saintly, the planner would recognize his limitations and just slow things down. To prevent collisions, he would have to impose regimentation. Skating would be slow and simple. Skaters would be bored. Moreover, they would not find the joy and dignity that come from making one's own course.

On the floor of the roller rink, the social good can only be achieved by spontaneous order. As Hayek explained, the case for leaving action spontaneous is stronger the more complex social affairs are, because greater complexity only exacerbates the planner's knowledge problems. When the situation is simple, central planning can succeed. If there were just four skaters on the floor of the rink, central planning might not be so bad. But with 100 skaters, it is preposterous.

If, besides being smart and saintly, the planner were also wise, he would beseech the rink owner to relieve him of his assigned task. He would renounce central planning. He would recommend spontaneous order.

The principles find direct application in economics. Just as we want to discourage collisions, we want to encourage voluntary exchange. In both cases, the key is mutuality. Gains from trade are mutual, giving rise to coincidence of interest: In promoting my interest in gaining in a voluntary exchange with you, I also promote your interest in gaining in a voluntary exchange with me. You would not enter into the exchange if you did not stand to gain.

Once again, actors buzz about spontaneously to advance their own interest, but in the process advancing the social good. As merchants, we garner the honest dollar by serving our customers—that is, by serving society. As consumers, we obtain stuff by rewarding suppliers for services rendered.

Again, if someone were to presume to plan the economy, the result would be disaster. The social patterns in an economy are fabulously complex, making decentral planning all the more necessary.

In economics, the substance of "spontaneous" is liberty. Liberty means freedom from others messing with your stuff, including yourself, your person. When the government tells you that you can't enter certain contracts, can't use your property in certain ways, and can't keep 35 percent of your earnings, it treads on your liberty. It is making affairs less spontaneous and more centrally directed or controlled.

It sounds self-centered—freedom from others messing with your stuff. But the principle would go for everyone, so it also requires you not to mess with others' stuff. Liberty implies not only security and freedom in ownership, but duties to respect ownership by others.

But more importantly, we live in a world of mutualities. I want others not to mess with my stuff so that I can use my stuff to best participate in mutual relationships. The point is not self-centeredness; it is to center control over stuff in the owner, so that action draws on local conditions and advances mutual betterment. The bonds of mutual relationships form the vast network of society, and when its members are individually empowered and motivated to advance those bonds, we have a society that is well cared for.

Spontaneous-order principles argue against full-fledged central planning, but do they condemn all incursions on liberty? The key is coincidence of interest. In some activities, such as polluting the air, maybe there isn't coincidence of interest. Maybe there is conflict of interest. In cases like that there is less of a case for spontaneous arrangements.

Likewise, in the roller rink, there are occasions for simple rules, such as signaling to skaters when the direction for skating is to be reversed, or when the floor is open only to ladies, or only to couples. These rules are largely self-enforcing.

But in the great roller rink of human society, many government restrictions are more like the central planner imposing foolish restrictions on ordinary skating. Spontaneous-order principles ought to have more purchase than they do.

The principle of spontaneity, of liberty, is not an all-or-nothing proposition. But the principles of local knowledge, coincidence of interest, and spontaneous adaptation have much more power than is generally recognized. People have a hard time understanding how spontaneous order works, or even that it exists. At a roller rink, spontaneous order happens before our very eyes. But in the great rink of society, each of us is immersed deep within the spontaneous order, focused on our own particular situation. Each has no window on the whole, not even a glimpse. Although economics cannot make the whole actually visible to us, it can help us see the principles at work.

Jonathan Swift said that vision is the art of seeing things invisible. In that sense, economics gives us vision.

Calling out Progressives

JUST SAY NO...
...to yet another class of victims. That's Heather Mac Donald's advice, anyway; and I think it very sound:... So says Dr. Sanity over at her terrific blog. She continues:

I especially like her idea of overthrowing the progressive pedagogy which is at the root of the attempt to feminize boys and eliminate any masculine "taint" to learning (e.g. competition).

...victimhood is still "in", having replaced personal responsibility and hard work as the means of getting ahead in the world. Try to change that and you will be accused by the progressive lot (see here) as being either Racist, Sexist, Homophobic, Islamophobic, Imperialist, Bigoted, or--worse of all --Intolerant or Insensitive.

That's what it has come down to. Either you do it the "progressive" way; or they will label you as vermin and attack you with all the firepower of their rhetorical armament. "Progressives" aren't really interested in what works to achieve the desired result in the real world; they are more interested in what makes them feel virtuous.

She goes on to list 10 commandment of multiculturalism and then concludes:

The only way we can rid ourselves of these toxic commandments; and free the millions held hostage in our own country by the virulent victimhood cult of the left; is to expose progressive pedagogy for what it is--totalitarian propaganda that disables free will; individuality and personal responsibiity; replacing them with "an oppressive tyranny sincerely exercised for the good of its perpetual victims." (C.S. Lewis, again)

Once again the good Doctor is on fire! - see the archives too

Culture Matters

The title of this post covers so much ground that someone should write a book on the subject!
(re linked to book: This collection of essays addresses a difficult question: Are some cultures better than others at creating freedom, prosperity, and justice? Although Culture Matters offers varying responses to this politically incorrect question, its editors, Lawrence E. Harrison and Samuel P. Huntington, as well as the bulk of its contributors, answer in some form of the affirmative.)

Culture is our evolutionary hyperdrive. Even aside from the impact of our biology, culture shapes us and we shape our culture. It is a vessel containing intangible elements of what makes civilization.

In my usual style of intellectual parambulations, I stumbled upon this article by James Q. Wilson which touches upon many important ideas and demonstrates the richness one encounters when tracing lines of thought through the complexity of a cultural issue. Heavily excerpted here, the full article is worth a read.

WHY WE DON’T MARRY

Everyone knows that the rising proportion of women who bear and raise children out of wedlock has greatly weakened the American family system. This phenomenon, once thought limited to African Americans, now affects whites as well, so much so that the rate at which white children are born to an unmarried mother is now as high as the rate for black children in the mid-1960s, when Daniel Patrick Moynihan issued his famous report on the Negro family. For whites the rate is one-fifth; for blacks it is over one-half.

Almost everyone—a few retrograde scholars excepted—agrees that children in mother-only homes suffer harmful consequences: the best studies show that these youngsters are more likely than those in two-parent families to be suspended from school, have emotional problems, become delinquent, suffer from abuse, and take drugs. Some of these problems may arise from the economic circumstances of these one-parent families, but the best studies, such as those by Sara McLanahan and Gary Sandefur, show that low income can explain, at most, about half of the differences between single-parent and two-parent families. The rest of the difference is explained by a mother living without a husband.


And even the income explanation is a bit misleading, because single moms, by virtue of being single, are more likely to be poor than are married moms. Now that our social security and pension systems have dramatically reduced poverty among the elderly, growing up with only one parent has dramatically increased poverty among children. In this country we have managed to shift poverty from old folks to young folks. Former Clinton advisor William Galston sums up the matter this way: you need only do three things in this country to avoid poverty—finish high school, marry before having a child, and marry after the age of 20. Only 8 percent of the families who do this are poor; 79 percent of those who fail to do this are poor.


... comparing single-parent families and average spending levels neglects the real issue: how attractive is welfare to a low-income unmarried woman in a given locality? When economist Mark Rosenzweig asked this question of women who are part of the National Longitudinal Survey of Youth—a panel study of people that has been going on since 1979—he found that a 10 percent increase in welfare benefits made the chances that a poor young woman would have a baby out of wedlock before the age of 22 go up by 12 percent. And this was true for whites as well as blacks. Soon other scholars were confirming Rosenzweig’s findings. Welfare made a difference.

But how big a difference? AFDC began in 1935, but by 1960 only 4 percent of the children getting welfare had a mother who had never been married; the rest had mothers who were widows or had been separated from their husbands. By 1996 that had changed dramatically: now approximately two-thirds of welfare children had an unmarried mom, and hardly any were the offspring of widows.

To explain the staggering increase in unmarried mothers, we must turn to culture. In this context, what I mean by culture is simply that being an unmarried mother and living on welfare has lost its stigma. At one time living on the dole was shameful; now it is much less so. As this may not be obvious to some people, let me add some facts that will support it.

Women in rural communities who go on welfare leave it much sooner than the same kind of women who take welfare in big cities, and this is true for both whites and blacks and regardless of the size of their families. The studies that show this outcome offer a simple explanation for it. In a small town, everyone knows who is on welfare, and welfare recipients do not have many friends in the same situation with whom they can associate. But in a big city, welfare recipients are not known to everyone, and each one can easily associate with other women living the same way. In the small town, welfare recipients tell interviewers the same story: “I always felt like I was being watched”; “they treat us like welfare cattle”; people “make nasty comments.” But in a big city, recipients had a different story: Everyone “is in the same boat I am”; people “don’t look down on you.”

How did stigma get weakened by practice and undercut by law, when Americans—no less than Brits, Canadians, and Australians—favor marriage and are skeptical of welfare?

Let me suggest that beneath the popular support for marriage there has slowly developed, almost unnoticed, a subversion of it, which can be summarized this way: whereas marriage was once thought to be about a social union, it is now about personal preferences. Formerly, law and opinion enforced the desirability of marriage without asking what went on in that union; today, law and opinion enforce the desirability of personal happiness without worrying much about maintaining a formal relationship. Marriage was once a sacrament, then it became a contract, and now it is an arrangement. Once religion provided the sacrament, then the law enforced the contract, and now personal preferences define the arrangement.

The cultural change that made this happen was the same one that gave us science, technology, freedom, and capitalism: the Enlightenment. The Enlightenment—that extraordinary intellectual development that began in eighteenth-century England, Scotland, Holland, and Germany—made human reason the measure of all things, throwing off ancient rules if they fell short. What the king once ordered, what bishops once enforced, what tradition once required was to be set aside in the name of scientific knowledge and personal self-discovery. The Enlightenment’s great spokesmen were David Hume, Adam Smith, and Immanuel Kant; its greatest accomplishment was the creation of the United States of America.

I am a great admirer of the Enlightenment. But it entailed costs. I take great pride in the vast expansion in human freedom that the Enlightenment conferred on so many people, but I also know that the Enlightenment spent little time worrying about those cultural habits that make freedom meaningful and constructive. The family was one of these.

But why did the Enlightenment have its greatest effect on the English-speaking world and on northwestern Europe? I think it was because life in those countries had for so long been arranged in ways that provided fertile ground in which human reason and personal freedom could take root and prosper. Alan Macfarlane, the great English anthropologist, has shown that land in England was individually owned as far back as the thirteenth century and possibly even earlier. There, and in similar countries in northwestern Europe, land ownership had established the basis for a slow assertion of human rights and legal defenses. If you own the land, you have a right to keep, sell, or bequeath it, and you have access to courts that will defend those rights and, in defending them, will slowly add more rights.

The Enlightenment did not change the family immediately, because everyone took family life for granted. The most important Enlightenment thinkers assumed marriage and denounced divorce. That assumption—and in time that denunciation—slowly lost force, as people gradually experienced the widening of human freedom.

The laws, until well into the twentieth century, made it crystal clear that, though a child might be conceived by an unmarried couple, once born it had to have two parents. There was no provision for the state to pay for a single-parent child, and public opinion strongly and unanimously endorsed that policy.

The sixties reinstated trends begun half a century earlier, but now without effective opposition. No-fault divorce laws were passed throughout most of the West, the pill and liberalized abortion laws dramatically reduced the chances of unwanted pregnancies, and popular entertainment focused on pleasing the young.

As a result, family law, in Carl Schneider’s term, lost its moral basis. It was easier to get out of a marriage than a mortgage. This change in culture was made crystal clear by court decisions. At the end of the nineteenth century, the Supreme Court referred to marriage as a “holy estate” and a “sacred obligation.” By 1965 the same court described marriage as “an association of two individuals.”

People still value marriage; but it is only that value—and very little social pressure or legal obligation—that sustains it.

But there remains at least one more puzzle to solve. Culture has shaped how we produce and raise children, but that culture surely had its greatest impact on how educated people think. Yet the problem of weak, single-parent families is greatest among the least educated people. Why should a culture that is so powerfully shaped by upper-middle-class beliefs have so profound an effect on poor people? If some intellectuals have devalued marriage, why should ordinary people do so? If white culture has weakened marriage, why should black culture follow suit?

I suspect that the answer may be found in Myron Magnet’s book The Dream and the Nightmare. When the haves remake a culture, the people who pay the price are the have-nots. Let me restate his argument with my own metaphor. Imagine a game of crack-the-whip, in which a line of children, holding hands, starts running in a circle. The first few children have no problem keeping up, but near the end of the line the last few must run so fast that many fall down. Those children who did not begin the turning suffer most from the turn.

There are countless examples of our cultural crack-the-whip. Heroin and cocaine use started among elites and then spread down the social scale. When the elites wanted to stop, they could hire doctors and therapists; when the poor wanted to stop, they could not hire anybody. The elites endorsed community-based centers to treat mental illness, and so mental hospitals were closed down. The elites hired psychiatrists; the poor slept on the streets. People who practiced contraception endorsed loose sexuality in writing and movies; the poor practiced loose sexuality without contraception. Divorce is more common among the affluent than the poor. The latter, who can’t afford divorce, deal with unhappy marriages by not getting married in the first place. My only trivial quarrel with Magnet is that I believe these changes began a century ago and even then built on more profound changes that date back centuries.

Now you probably expect me to tell you what we can do about this, but if you believe, as I do, in the power of culture, you will realize that there is very little one can do. As a University of Chicago professor once put it, if you succeed in explaining why something is so, you have probably succeeded in explaining why it must be so. He implied what is in fact often the case: change is very hard.

One could imagine an effort to change our culture, but one must recognize that there are many aspects of it that no one, least of all I, wants to change. We do not want fewer freedoms or less democracy. Most of us, myself included, do not want to change any of the gains women have made in establishing their moral and legal standing as independent actors with all the rights that men once enjoyed alone. We can talk about tighter divorce laws, but it is not easy to design one that both protects people from ending a marriage too quickly with an easy divorce and at the same time makes divorce for a good cause readily available.

The right and best way for a culture to restore itself is for it to be rebuilt, not from the top down by government policies, but from the bottom up by personal decisions. On the side of that effort, we can find churches—or at least many of them—and the common experience of adults that the essence of marriage is not sex, or money, or even children: it is commitment.