Sunday, June 17, 2012

Known Unknowns, and our Enduring Malaise

Had an interesting, if inconclusive, discussion this morning with my friend about Ignota about what we (know) (do not know) about the enduring malaise, and how that affects our impulse to deal with it.  I think Ignota's analysis (crudely oversimplified) goes something like this: we live in a world increasingly dominated by financial elites who have no incentive to tell us "the truth."   And this pervasive lack of motivation is aggravated by an overriding irony: in fact, they don't have any idea themselves what went wrong, or how to set it right.

This is interesting, and I don't want to reject it out of hand, though it seems to me more complicated than my primitive summary.  I'd certainly agree, at least in broad outline, that we live in a world more and more dominated by financial elites who really don't give a rat's patootie about the ordinary functioning of good government (saying nothing of more contentious issues like succoring the dispossessed and whatnot).

But as to "know":  I think a difficulty here is that this matter of known/unknown breaks out into a number of  independendent (albeit overlapping and interrelated) issues.

One: algorithmic trading.  Ignota has just lately focused her attention on the remarkable fact that so much market activity is being carried on by robots acting on galactic volume at galactic velocity..  She's certainly right about the novelty of the trading.  I'd concede that there is so much difference of degree here we must have a difference of kind.  Yet I guess I'd rank this one rather low on the ladder of issues that rattle me.  The whole point of markets has always been that we never know exactly what is going on out there and that, indeed, our ignorance of the inner workings more feature than bug.

Two: "macro," by which I mean the stuff conventionally taught in Econ1B and  its ilk: Keyesianism, monetarism, money supply, pump priming,booms and busts and suchlike.  Now here, I think she really is onto something.  Face it, the failure of the good and great in macro is simply appalling--so much so that I can't understand why the entire sodality didn't just resign its tenured positions, put on false mustaches and retire to a monastery (assuming one would take them).  Remarkably, I think a good many macro types did understand the flaw in their enterprise: it is the utter impossibility, systematic and in principle, to forecast future behavior.  I've been there, done that, in a small way.  In the law school, I've sketched out those "models" (fables) where we identify possible future states (windy/rainy/cloudy/sunny), attached probability weights to them and sum to a value.  Like most, I've usually forgotten to say--you know this is all hokum. The truth is, we haven't the foggiest notion what will impel people to act one way or another, and how they will act when so impelled.  We know that  but we continue to build models that assume people behave like robots (for a tantalizing possible exception, go here).  I don't know if "the elites" understand how vacuous this modeling has proven to be; at any rate, if they did have the impulse to tell "the truth," on this issue, it is hard to imagine just what they would say.

Three, the nature and structure of banking.  Now here, I think we do know quite a bit.  We understand that the structure of banking has undergone a sea change over the past generation, almost entirely to the profit of bankers and the expense of everyone else.  There are some disagreements over remedy (do we, or do we not, need to go back to Glass-Steagall?).  But there is fairly general agreement (even among the elites) that a smaller, tamer, banking sector would be better for society as a whole, even if worse for bankers.

But again, there is a separate issue with regard to execution.  If you wanted to explain the banking system to the multitudes, how would you go about it?  The history of (say) 100 years of public policy in banking does not offer a hopeful augury.  Indeed, it is hard to think  of any area of public life more liable to misunderstanding and confusion--not to say outright hokum--than the workings of the banking system.  The are very few grounds for optimism on the prospect that we might ever have a useful broad-based discussion of this issue.

In short (thanks Bill Greider) who will tell the people?   Not "the elites," whom I suspect I should really be calling "the oligarchs."  And even if (counter factual) they did undertake to tell, how could they possibly explain it, particularly considering little they actually know?


Larry Hamelin said...

You are insufficiently cynical; indeed you may be entirely naive.

I suspect, Buce, that you see the elite in light of the class struggle between the professional-managerial class and the rentier class. The problem is that the rule of the professional-managerial class, ascendent from the end of the Second Imperialist War, has already been decisively broken after having been outfought since the mid 70s. Their aspiration to rule is no longer tenable.

The professional-managerial class never, I think, had any extrinsic "incentive" as a ruling class to tell the truth; their generally truth-conforming behavior was a relic of when they were a subordinate middle class. They may have been defeated because they told the truth, or they may have been defeated because they too-quickly abandoned truth-telling (postmodernist epistemic relativism?); I'm not sure which. But beyond a doubt, they have been defeated they have been.

According to today's elites, nothing has gone wrong: they are still in power, and unless and until things become decisively worse, they face no challenge to their rule. Indeed, all the measures that might help the hoi-polloi would erode their own legitimacy and power and signal surrender to the just-defeated professional-managerial class. Why should they look for solutions that would hurt them for problems that only help them?

Buce said...

At last, an ad hominem attack! Someone is finally treating me like a serious blogger! [Thanks, mom!]

Larry Hamelin said...

Oh puleeze. :-p You know the difference between an ad hominem fallacy and a simple insult.

Randy said...

I'm confused, did you say robots do our trading?

Larry Hamelin said...

I don't know what Buce is saying, but yes, robots do a lot of trading..