June 29, 2010
Chapter 2: The Chain
In the last chapter, our hero & heroine confronted the heroine’s rather wet brother on the matter of replacing the Rio Norte railroad, using metal bought from a company owned by a chap called Rearden. This is no ordinary metal, rather something as superior to steel as steel is to iron. It’s called, slightly egotistically, Rearden Metal. In this chapter we meet Rearden himself. As a journalist on a train heading past his enormous foundry puts it: “Hank Rearden is the kind of man who puts his name on everything he touches. You may, from this, form your own opinion about the character of Frank Rearden.”
While this journalist makes this brief note on the character of our new, well, character, a professor of economics sitting close by makes the observation, “Of what importance is an individual in the titanic collective achievements of our industrial age?”
Clearly, these so-called intellectuals have no understanding of the reality of a man like Rearden, one can only assume Rand intends us to think here. This is an odd claim, however, as I shall illustrate later.
Rearden is watching the first ever casting of Rearden Metal, for Dagny’s replacement of the Rio Norte line. While doing this, he treats us to a brief reminiscence of his life to date, from starting working in a mine, through to owning that very mine itself and then a vast empire of steel & industry. Clearly he is a man not to be trifled with, although Rand specifically does not touch on the intervening period between starting as a lowly worker before rising to own the mine itself.
This is odd. The key to any entrepreneur’s story is the first time they beat the market; at least in the lives of those entrepreneurs in the renewables sector I’ve encountered. The first time they identify a business opportunity is often the making of the man or woman, and is what really sets them apart. Why doesn’t Rand touch on it?
Rearden finishes watching the scene of his latest triumph, and trudges towards his home, a bracelet of Rearden Metal – a gift for his wife – clutched in his pocket. He is greeted by his wife, mother and brother, although certainly not warmly. He is condemned for working too hard, forgetting to come back in time for dinner, and for being self-centred. This is despite his gift to his wife and helping out his brother’s charity – all these efforts are interpreted through a prism of his enjoyment of dominance of them via his wealth & patronage. All this is said to his face, while he, staring blankly, thinks disparaging thoughts about them inside his head, never letting slip his actual feelings.
Again, this is odd. Rearden comes across as more of a surly teenager than a billionaire. His family are clearly appalling, but cast as dependent on him despite their obvious loathing. This is a peculiar ruthlessness indeed – but surely this is how we are meant to perceive him, as a ruthless businessman?
The chapter ends with his brother accepting his donation, but asking for it in cash for fear of being associated with his name.
Rearden does not come across as a successful entrepreneur, rather as an unhappy adolescent caught up with their own interests, and resenting a family that doesn’t accept his clear genius. This may be unfair of me – it’s possible that Rand will fill in the details that explain this character more – but if this is a representation of the titular Atlas, I am disappointed.
Part 3 is here.
June 28, 2010
The Internet is full of libertarians in a way in which real life is not. In the past, I have blogged about how I find their credo oddly fascinating; and have skirted around the edges of their arguments without ever fully engaging. I felt it to be rather unfair, without being familiar with their core texts, so to speak, attacking a position on the basis of Wikipedia’s interpretation of their arguments is unsportsmanlike. On this basis, however, I disagree with them, quite vehemently. But one cannot disagree with something without at least attempting to understand what it is, even though many appear to have a good run at it.
With this in mind, I have decided to read one of the core texts of libertarianism, Atlas Shrugged, the most well-known literary outpouring of Ayn Rand’s philosophy of Objectivism. I will blog my progress through this work, providing a brief summary of the plot and analysing more interesting arguments carefully. I do not intend this to be a wholesale attack on this philosophy, as the core of my political & philosophical motivation is identifying the truth and acting in accordance with it, and to claim that something is false before examining it is to presume an arrogance about the nature of reality to which no-one is entitled.
I am reading the Penguin Modern Classics edition, and in keeping with the minor touches of the ridiculous I use to make out like I have any creative gifts whatsoever, I shall be using a Peter Rabbit bookmark.
Without further ado, Chapter 1, The Theme
The book opens with a man called Eddie Willers being asked ‘Who is John Galt?’ by a tramp in the street, a question which causes him minor concern, a smidgen of apprehension. His concern is inexplicably heightened by the sight of a large calendar installed by the local government to tell citizens the date, and then equally inexplicably assuaged by the sight of a street stall, a bus and a flapping curtain.
His fears are entirely put to rest by his arrival at the Taggart Building, the offices of a railway company in which Eddie works. We learn of his past association with the Taggart family in a brief reminiscence of old oak tree, a symbol of strength that a bolt of lightening tore asunder to reveal a hollow core.
My first impressions are ‘Woah, steady on the symbolism there!’ Having a character be inexplicably afraid of symbols of state intervention and cheered by private enterprise is a little excessive when it comes to setting a plot – not to mention that the hollow oak tree is manifestly a symbol of the decayed version of capitalism that confronts our main character in the next scene. If this excess of blatant symbols continues, I’ll have to add a section called ‘Atlas Shrugged – The Graphic Novel’.
Eddie confronts his boss about the condition of a railway line owned by the Taggart Company, the Rio Norte line. In this confrontation, Eddie is oddly passive-aggressive, the conversation reading more like a lecture in which his boss makes rejoinders with which Eddie does not engage. His boss is revealed to be a creature of patronage and inertia, more focused on giving favours to preferred companies and friends than ensuring his own is successful.
The conversation reaches an impasse, and Eddie leaves his boss – who, as previously mentioned, was also a childhood friend – in his office. An old employee laments the decay in the quality of typewriters to Eddie, finishing with a mysterious, ‘Who is John Galt?’
The scene shifts to an enigmatic lady on a train, who – following a brief interlude with a train guard, in which a non-existent symphony is momentarily discussed – is revealed to be the sister of the boss from the first section, the rather ridiculously named Dagny Taggart. Descriptions of Dagny tend towards the worshipful: ‘She looked like a young girl; only her mouth and eyes showed that she was a woman in her thirties. The dark gray eyes were direct and disturbing, as if they cut through things, throwing the inconsequential out of the way‘.
There’s a lot more description of Dagny cast in this manner. Hello there, Mary Sue.
A delay on the line caused by a tedious guard’s regimented following of the rules is overcome by a decisive Dagny, who is speeding towards a meeting with her brother, Jim Taggart. Dagny feels that Jim has impeded work on the Rio Norte line long enough, and takes decisive action to remedy the situation. Jim is terrified by her decisiveness, reduced to a pathetic man anxiously blaming others for his own failings.
Decisive, decisive, decisive.
Following her crushing of Jim, Dagny moves to promote an employee she has admired as being effective – far more so than many of her weak other employees. He has already arranged a meeting, to her surprise, to tell her that he is resigning – but when pushed as to why, responds with only, ‘Who is John Galt?’
My initial impression, in philosophical terms, is that Rand is heading for a slightly more feminine version of Nietzsche. I add the feminine qualifier because Zarathustra’s legs were never described at such length and so frequently. This is interesting, because the theme of the chapter – a decayed capitalism holding back a few strong individuals – lends a significant role to the will and ability of those individuals, analogous to Nietzsche’s ubermensch*. The problem is the derivation of notions such as that from first principles tends to be very difficult – Nietzsche used the rather odd notion of eternal recurrence as a kind of rational check on the form of action one should take in a given circumstance, which while interesting was much more Kantian than he would’ve ever let on. Rand has a similar loathing of Kant, so it’ll be interesting to see how she derives a value system that encourages the virtues on display here.
The difficulty in generating such a system is that it is typically drawn from experience first and inferred second; we all know the annoyance that comes from working with those who frequently blame others for incidents for which they were at least partly responsible. This is the character of Jim Taggart here, a weak man unwilling to take responsibility – and hence blame. His character is reflected in the tedious train guard who delays Dagny. Indecisiveness and shirking of responsibility are the sins demonstrated to be the cause of the general decay of capitalism in this work thus far. But how to derive them?
*Not the same as the Nazi version.
Part 2 is here.
June 12, 2010
Disclaimer: Everything I know about economics is almost entirely derived from people like Joseph Stiglitz and random educated blogs on the subject. What follows may very well likely be wrong and will take the form of me thinking outloud (or outblog, however we have to use words these days), as it’s entirely based on received knowledge, but to me seems a logical explanation of why now is an appropriate time to begin cutting the deficit.
Let’s begin by defining our terms, starting with the deficit. The huge, scary deficit that’s coming to eat your babies, or so the Conservative election campaign appeared to claim. The deficit is the difference between the amount of money the government spends this year and the amount of money they receive in taxes, border duties, pocket money and extortion. This differs from the debt, which is the accumulated total of deficits over the years the government has been running a deficit, as well as all public sector borrowing. This is an important distinction, but one which appears to be lost on many journalists. The deficit is currently about £145.4 billion, and the debt is about £893.4 billion.
This deficit is different to our balance-of-payments deficit. Balance-of-payments refers to the difference between how much money we send overseas to buy things or just out of the goodness of our hearts, and the amount other people send to this country to buy knick-knacks and support the British victims of the great Marmite Famine. This stood in deficit at the end of 2009 to the tune of 0.5% of GDP, or about £1.7 billion. It’s probably different now.
Gross Domestic Product is the sum total of the market value of all the goods, products and services our country produces each year. It’s someone’s job to add all that up. I assume they use a very big calculator. Currently this is about £1438.6 billion. It’s been increasing by tiny amounts like 0.2% and 0.3% since around mid 2009. Despite the small percentages, 0.2% of £1438.6 billion is still quite a lot of money.
How does GDP get bigger? This is a central question in economics, and one I won’t answer in any real way here. However, broadly it’s a question of demand and supply. In our glorious capitalist system, the value of any good is given by the complex interplay between seller and buyer and all the factors therein. The seller attaches a value to the product based on what it cost him or her to make it, and the amount they want to receive in profit. The buyer attaches a value to the product depending on how much they want it and how much they want to pay for it. Somewhere between these values, the story goes, a deal is struck and the market price of the product is given.
It’s therefore clear that if no-one wants to buy the things we produce (or the consultancy services we offer), GDP will fall. Similarly, if we’re producing too many things for the number of people who want to buy them, GDP will also fall – the value the seller attaches to the good has to decrease in order to reach accommodation with the buyer (as there’s lots of the same product they could buy instead), so the market value of our goods decreases. The first situation is an example of insufficient demand, the second excessive supply, but they’re both two sides of the same GDP-reducing coin.
So why are we in our current pickle? While lots of big words have been tossed around (sub-prime mortgages, collaterised debt obligations, Mervyn King), it comes down, in the end, to insufficient demand. No-one wanted to buy the exciting debt products our clever chaps in the city had been putting together, because they’d realised they had a tendency to not produce any returns when the poor people who’d been sold expensive mortgages couldn’t afford to pay them back. The market value of one of our main exports, ‘financial services’, collapsed, and so did our GDP. All of a sudden, the vast amounts of money flooding into banks and bankers’ pockets slowed to a trickle, and so the demand that bankers generated – for fine wines, fast cars, and lovely cheeses – collapsed too. Naturally, this meant that demand generated by cheesemongers decreased too, if one takes cheesemongers as representative of the workers of our nation as a whole. GDP fell, which is what’s called a recession.
The Government pushed money into the banks, which increased the value of their debt products by ensuring that they had enough money to not default on them, thus making these products a good thing to buy again. Alongside various regulatory measures designed to ensure (although not really) that the banks couldn’t make such bad products again, the Government also created money from nothing (‘Quantitative easing’, hem hem) and used it to buy debt products, reducing the supply of bad debt on the market.
The value of these products (and hence all the products dependent on bankers being rich) rose again, and our GDP began to climb, albeit marginally. Then came the election, and the question of £6 billion of cuts.
Gordon Brown made a big play during the debates of ‘taking £6 billion out of the economy’ and hence risking the recovery. This is a reference to the implications for GDP of the Government stopping spending £6 billion on public services, including the cost of staff, the cost of equipment & premises and all the various externally provided services things like the Child Trust Fund required. The argument is that this removal of demand will decrease the market value of these services (and all the services purchased by those staff whose jobs were dependent on that £6 billion of funding) and hence decrease GDP. It’s fairly clear that this will have this impact upon that particular part of our economy; it will decrease demand for these services and for the services purchased by staff, and so will decrease GDP.
The question is whether that GDP decrease will be compensated for elsewhere in the economy, and here’s where we get to the crux of the issue. You see, national debt isn’t like household debt, even though that’s the metaphor most conservatives (with a small ‘c’) feel instinctively comfortable with. If you don’t pay your household debts, bailiffs can come and take away your plasma telly to make good on your poor financial management. However, if we don’t pay our debts, no-one can come and repossess the Isle of Mann. They just won’t lend us any more money – or if they do, they’ll demand an extortionate rate. This is what happened in Greece – everyone suspected them of not being able to pay back the money used to buy their government debt products, and so they demanded higher rates of return to compensate for the perceived risk. It therefore became more expensive for the Greek government to pay for the debt they already had, as much of their Government debt needed to be refinanced – which means the time limit on the original debt product (‘bond’) was up, the Government needed to repay it, and so they had to take out another loan to repay the first loan.
The argument put forward by the Tories is that if we don’t start cutting now it’ll cost us more to refinance our debt, wiping out any increases in GDP that have arisen from the Government spending that’s raised demand. However, this argument only works if private demand is such that it can take the place of Government demand in maintaining economic growth. Otherwise, the increase in GDP from increased demand is lost, and the cost of refinancing our debt rises regardless as it becomes clear a shrinking economy is less able to repay its debt.
It’s therefore clear that the crucial in determining whether to cut or not to cut is the strength of private demand. It’s important to be clear that all demand is ultimately private: debt-generated Government demand is ultimately sourced from the private investors who buy Government debt. The questions is whether the private demand for fairly secure Government debt products can be translated into demand for private debt products or for other products, both financial (e.g. shares) and physical. To understand this, let’s look at who owns Government debt now.
Pulling this information out of the Office of National Statistics has proven extremely tricky, as I suspect it involves a significant amount of work in pulling together different figures from different accounts. I don’t really have the expertise to do that reliably, so I’m forced to go to the BBC for some work they’ve done previously:
‘Gilts’ is the name given to Government debt products. The bar that includes the Bank of England includes all the debt that the Government bought itself by printing money. The price of gilts varies over time:
This is a price chart of gilts with a 5-10 year redemption period – the time until the Government has to pay the gilt back. It represents – amongst other things, including future changes to the interest rates paid out for gilts – demand for medium-term UK Government debt products. As you can see, demand for these products has risen dramatically since the start of May, following the election of the coalition Government.
It’s therefore clear that private demand for government debt products is high. But will that demand be pushed into the rest of the economy when, as a result of the cuts, the Government lowers the expected supply of gilts?
To answer this, let’s quickly look at the two largest holders of gilts. The first, insurance companies & pension funds, are organisations who’ll be naturally looking for long-term, stable investments with a guaranteed rate of return, to service their customers. It’s interesting to note that high government debt results in a rising proportion of taxes being directly transferred to those who hold private pensions in the form of interest payments on gilts – i.e, a direct transfer from the taxpayer to the better-off. It’s not clear how this can be considered ‘progressive’ in any sense of the abased term.
These organisations will be looking to pay back their UK customers in sterling, so will most likely opt for financial products held in sterling with a significant level of stability in the absence of new gilts being put onto the market. We can therefore – perhaps – assume that this demand will be moved into debt products issued by major UK banks and into shares in reliable FTSE 100 companies (like, err, BP). These organisations can’t stop investing just because there’s no gilts for them to buy – they need to service their customers.
The second big holders of debt are overseas purchasers of gilts. To look at where this demand will go, we need to look at exchange rates – overseas investors will need to convert their currency into sterling to buy gilts as well as other products produced by the UK. Let’s look at the Euro and the dollar for this purpose. First, a chart of how many pounds you need to buy one dollar:
And one of how many pounds you need to buy one Euro:
The picture is obviously mixed. While there’s been a general flight from people buying things in Euros to people buying things in sterling, there’s been a similar flight from people buying products in sterling to those in dollars – although the latter appears to have plateaued since the start of May. We can therefore anticipate that overseas demand from the Eurozone will either increase or remain constant, while demand from the USA will either decrease or remain constant. I don’t know enough to anticipate the relative volume of this demand from both currency areas, although the majority of our trade is within the EU.
From this brief discussion, we can gather several things. Firstly, economics is endlessly complicated but sometimes needlessly so – if the terminology of the subject were cleared up and made more accessible, it would greatly aid the debate. Secondly, on balance from the information I’ve presented above, it would appear that now is, if not a good time to cut, certainly an acceptable time to cut, as it doesn’t place the economy in significant risk of further decline. However, it’s important to consider the human impact of all this high-brow chat about gilts and similar pompous re-labellings of relatively simple concepts, which will be on families, on jobs and on deprived areas. But it’s better to minimise the pain now rather than causing much greater pain in the future.