Pope II

Here I wrote about the Freakonomics podcast with Jeffrey Sachs which covered the Pope’s anti-capitalism remarks.

Shortly thereafter, in Taleb’s book, Antifragility, I was surprised to read what I think is a more thoughtful response to the Pope’s remarks and one that supports the Pope’s view.

What surprises me even more is that what Taleb writes about isn’t new to me. It’s a frequent topic of conversation, something that I know well. But, I hadn’t taken it to the logical conclusion.

First, Taleb points out that even the patriarch of capitalism, Adam Smith, was

…extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough.

And he detected–sort of–the problem that comes with managing other people’s business, the lack of pilot on the plane:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left of the Triad.

“The Triad” is Taleb’s classification of systems as (from left to right) fragile, robust and antifragile; and what he means by ‘left of the triad’ is people who get the downside, as well as the upside, or they have skin in the game.

Taleb contiues:

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives — something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors.

He provides an example:

…banks have lost more than they ever made in their history, with their managers being paid billions in compensation — taxpayers take the downside, bankers get the upside [Russ Roberts has been saying this for years]. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rose de Provence brand of summer wine on their yachts in St. Tropez.

To bring this all together:

We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price.

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

Now, let’s re-read what the Pope wrote (quoted from the Freakonomics post):

“[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. … One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! … While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

To me, this reads like leftist dribble, where their intuition leads them, perhaps, in the right direction for outcome, but the wrong direction for cause.

Maybe the Pope is right that there are some fundamental problems in the mixed markets that have emerged.

But, they’re wrong about the cause of those problems. They blame things like “trickle down theories” (Thomas Sowell challenges us to name one economist who used “trickle down“).

But, the part of the Pope’s passage that reminds me of Taleb’s point is:

…expresses a crude and naïve trust in the goodness of those wielding economic power…

Perhaps that is true. And Taleb tells us why:

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

They don’t have downside.

This includes politicians, apparatchiks in government agencies, economists and — the one that I am really disappointed that I missed because of my biases — managers of businesses who only have upside and no downside. I’ve even noticed that senior managers often have the same characteristics as politicians, but darn if I haven’t carried that through.

So, as I like to say, all problems can be traced to problems with feedback — I think Taleb exposes a couple of real feedback problems in — not free markets — but our mixed market economy. That feedback problem is that too many people “wielding economic power” don’t have downside. Rather they have incentives to game the system for their upside.

How can this be changed? Taleb gives one example that surprised me:

…in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Think about that. Would bankers act differently if they may have to repay the bonuses they received in what are now apparent as the fraudulently fueled good-times?

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Sachs on Freakonomics

Freakonomics podcast host Stephen Dubner speaks with economist Jeffrey Sachs about the Pope’s recent drubbing of markets.

Several things about this rubbed me the wrong way.

First, the quote from the Pope (in the linked Freakonomics blog post) starts off with “Some people continue to defend…” As I wrote here, readers deserve to know who the Pope is talking about.

Second, Jeffrey Sachs tried too hard to clean up the Pope’s words. Around the 16-17 minute mark, Sachs comes out with ‘getting people into positions where markets work for them, and not against them, is extremely important.’

Granted, I think somewhere Sachs admitted that he switched to his view, not necessarily the Pope’s, but I think the podcast was about making sense of the Pope’s opinion.

This even seemed to annoy Dubner, as he replied:

Of course, that makes sense. But compared to what the Pope has written about capitalism…it was much heavier on the can’t work part and here’s why it doesn’t work. What is the Pope actually calling for?

Third, Sachs complains that the Global Fund to Fight AIDS, TB and Malaria, a fund he helped “architect 12 years ago” (a little self-promotion never hurts), recently fell short of its funding goals. I wasn’t clear on who they were going to for ‘replenishment’, but it sounds like bureaucrats in government.*

Sachs says:

When it [the Fund] came to the replenishment, just now, it couldn’t raise the funds for the minimum package. It was saying that it needed at a minimum to fight these three diseases $5 billion a year, mind you hundreds of million of people and their lives are at stake. $5 billion we know in macroeconomics is nothing in this world, and yet they could not raise $5 billion a year. They raised $4 billion a year.

And that may not sound so consequential [You’re right, especially since one sentence ago you said $5 billion is nothing, that would mean $1 billion is even less] when you’re in a village and the rapid diagnostic tests aren’t there or there’s a medical stock out…this is life and death [oh, that’s when it become consequential, in micro]. Since I’m living in a neighborhood, if not down the block, then a few blocks away, or a couple miles away [let’s keep hedging on terms] are billionaire hedge fund owners taking home personally paychecks of a billion dollars for the year, the fact that we can’t come up with $5 billion for this institution from all worldwide sources (governments?) is the globalization of indifference.

 

Too easy to pick on unpopular hedge funds, many who put their own skin in the game. Let’s not mention sacred cows like taxpayer funded sports venues, where billions of taxpayer money is tied up so team owners can afford to pay millions, even hundreds of millions, to the best kids game players. Soon the team owners will want to offload the liabilities of sports injuries on taxpayers, too.

I wonder if he also views that as a marker for the ‘globalization of indifference’.

Of course, you can probably also tell by the comments I inserted in the quote that Sachs’ verbal fitness annoyed me in how he framed $5 billion as inconsequential in macro, but a billion very consequential in micro in the span of three sentences.

My BS detector rings off when someone tries to sell me on something because, well, it’s just not that much money. Of course, it’s always enough that they can’t come up with it themselves.

*Sachs said “George Bush said, ‘we won’t let money stand in the way, you show that this works and the money will be there'”. So, I’m assuming it’s folks like Sachs trying to convince bureaucrats how to spend taxpayer money, rather than raising money from individuals. Which is the last thing that I found annoying that I will comment on.