Thursday, January 28, 2010

MMBF: the kittens are saved!

As of this morning, the MMBF stands at $4,099.86. (With several more pledged donations in the mail, making the total sum less auspicious - but more useful.)

Therefore, Dr. Vitamin will not get to drown those kittens. They are with me now. They are safe. And the pledge drive is over - I will stop pestering you for money.

Although, of course, kittens do need to eat. So it's not as if you won't always be able to:

I am also trying to organize some kind of group event for Bay Area donors - more details as they develop. If the email address you gave Paypal is fake, please send me another one, if you'd like to receive these valuable and interesting communications.

And again: thanks. Like your gifts, my gratitude can only be described as "epic." I'm afraid you've disappointed Dr. Vitamin, however - but he'll get over it.

On sovereign financial reconciliation

When Necker published his Compte rendu in 1781, many have credited him with causing the French Revolution. Before the Compte rendu, no one in France had understood anything about Bourbon finance - possibly not even the Bourbons. As La Wik puts it, in charming Wikipedese:
Before, the people had never considered governmental income and expenditure to be their concern, but now armed with the Compte rendu, they became more proactive.
Indeed. Of course, in the subsequent decades, many thought twice about becoming more proactive! But governmental income and expenditure had indeed become the people's concern - then and forever. Alas, it remains our own.

According to modern historians, Necker's accounts were not entirely honest. I will go with the modern historians on this one - sight unseen. I have not personally inspected the Compte rendu, but my guess would be that Bourbon finance included a lot of strange French holes in which strange amphibians things could hide. The Bourbon administration, while great at many times and in many ways, is seldom celebrated for either simplicity or transparency.

One of the most fundamental patterns of history is that good government is responsible government. A corollary is easily deduced: good government is financially responsible government. Since good government is indeed our concern, we should become concerned indeed when our government does not appear to be financially responsible.

An easy way to be financially irresponsible is to be financially opaque. If an institution is responsible, it must be responsible to someone; to observe it, that someone must be able to form a clear picture of its financial operations. There are many ways to be financially opaque, while superficially appearing transparent. Suffice it to say that I am not sure anyone has a really sound understanding of America's sovereign balance sheet.

But regardless of the cause, if an institution is not financially responsible, it must be reconciled. Reconciliation is simply a polite word for bankruptcy. What are we reconciling with? Reality!

As Carlyle writes:
Great is Bankruptcy: the great bottomless gulf into which all Falsehoods, public and private, do sink, disappearing; whither, from the first origin of them, they were all doomed. For Nature is true and not a lie. No lie you can speak or act but it will come, after longer or shorter circulation, like a Bill drawn on Nature's Reality, and be presented there for payment, - with the answer, No effects.

Pity only that it often had so long a circulation: that the original forger were so seldom he who bore the final smart of it! Lies, and the burden of evil they bring, are passed on; shifted from back to back, and from rank to rank; and so land ultimately on the dumb lowest rank, who with spade and mattock, with sore heart and empty wallet, daily come in contact with reality, and can pass the cheat no further.
But with a Fortunatus' Purse in his pocket, through what length of time might not almost any Falsehood last! Your Society, your Household, practical or spiritual Arrangement, is untrue, unjust, offensive to the eye of God and man. Nevertheless its hearth is warm, its larder well replenished: the innumerable Swiss of Heaven, with a kind of Natural loyalty, gather round it; will prove, by pamphleteering, musketeering, that it is a truth; or if not an unmixed (unearthly, impossible) Truth, then better, a wholesomely attempered one, (as wind is to the shorn lamb), and works well.

Changed outlook, however, when purse and larder grow empty! Was your Arrangement so true, so accordant to Nature's ways, then how, in the name of wonder, has Nature, with her infinite bounty, come to leave it famishing there? To all men, to all women and all children, it is now indubitable that your Arrangement was false. Honour to Bankruptcy; ever righteous on the great scale, though in detail it is so cruel! Under all Falsehoods it works, unweariedly mining. No Falsehood, did it rise heaven-high and cover the world, but Bankruptcy, one day, will sweep it down, and make us free of it.
There are many ways to define a sovereign bankruptcy, most of which convert one falsehood into another. A true sovereign reconciliation produces a financially sound and transparent sovereign balance sheet in one step, fair to all creditors. If your plan matches this definition, whatever it is, it cannot possibly be wrong.

As I see it, any sovereign bankruptcy which is "true and not a lie" must recognize three facts:

First, any real bankruptcy demands a change of management. What follows is certainly not a plan that can be executed by the present management. What restructuring plan is? But this is outside our scope today.

Second, precious metals are the only currencies to which a sovereign can be accountable. Therefore, reconciliation must produce a sovereign whose books are done in direct gold. A direct gold standard is 100% blue agave. A basket of gold and gold loans is not gold. (Ie, the 19th-century Bank of England "gold standard" was not a PGS.) The exact technical term is allocated gold.

Third, fiat currency is sovereign equity. Let me repeat that: fiat currency is sovereign equity. Perhaps I could say it a little louder: FIAT CURRENCY IS SOVEREIGN EQUITY. If the right twelve people ever understand this, the world as we know it will come to an end.

Fiat currency has to be equity. It is (a) a financial security, and (b) not a debt. Ie, it is not a promise of anything. If it was a promise of anything - regardless of the quality of that promise - it would not be fiat currency! D'oh.

Therefore, we know exactly what a dollar is: a share of stock in USG. It is just one class of stock, of course, conveying no voting rights. The dollar has never paid any dividends, though perhaps this will change. In sufficient quantity it does convey one very important benefit: the right not to be arrested by the IRS. It also conveys an important right: the right to be treated equitably with all other dollars. My dollar is worth just as much as your dollar or China's dollar.

If you disagree with these facts, you can stop reading this essay now. We are going to reason as if they were true. If they are not true, all that follows is nonsense.

First, we see instantly why we cannot get a clear picture of the financial condition of USG. It calculates its accounts in its own stock! Can you imagine a company which paid all its vendors in its own corporate shares?

Any corporation can, of course, issue new shares to itself any time it likes. (This is called dilution.) But how on earth can anyone assess whether this company is profitable? How do you value a share? Actual companies which do crazy things like this are generally not profitable, because otherwise they would not need to do crazy things like this.

And that's not all. Not only does USG calculate its own accounts in terms of its own shares - it compels its citizens to do likewise. It operates an entire economy in which the medium of exchange is this scrip. Of course, we all know this and think of it as normal, so it takes some effort to see how insane it is from an accounting perspective.

One metaphorical crutch that can help us with this is the new invention of virtual worlds. Virtual worlds tend to have virtual currencies, whose economics differ not at all from the economics of real currencies - except, of course, that they are virtual. But virtual worlds are operated by real companies, which exist in the real world and do their books in it.

The virtual world Second Life, operated by Linden Lab, is one such. Linden Lab is not a publicly traded company, and perhaps it will never be. Suppose it was. We'll call its stock ticker LLX.

Second Life has a currency called the Linden dollar. The Linden dollar is an irredeemable fiat currency, though LL keeps it roughly pegged. But suppose it was backed and redeemable - making it debt, not equity. What should it be backed by? US dollars? Gold? Or...

Let's suppose Bernie Madoff, or some other unscrupulous person, were appointed the CEO of Linden Lab. As CEO, he is responsible to his board. His board will love him - everyone will love him - if he can only get the price of LLX up. Hm...

I know! Bernie will back Linden dollars with LLX shares. That way, when you buy Linden dollars to play Second Life, you are actually investing in Linden Lab. Share prices are set by supply and demand, of course - to issue a new wodge of L$, LL goes to Nasdaq to buy an LLX share. Naturally, this drives the stock price up. Which is what Bernie wants! Problem solved.

What Bernie has done is to redirect the monetary demand of Second Life residents into the market for LLX shares. Since as long as Second Life exists and thrives, this monetary demand will remain high and stable, what goes up need never come down. By using his own shares as a fiat currency, Bernie has performed a rare successful act of market manipulation.

The result is that LLX, as a stock on the Nasdaq, will not be priced like other Nasdaq stocks as a function of its theoretical earnings. LLX may have no earnings whatsoever, ever. A Linden dollar now certainly conveys no rights to any distribution. The shares of an ordinary company would be worthless under this condition, but not LLX. Were it not that Linden Lab's churlish, ungrateful vendors demand payment in US dollars rather than Linden dollars, Linden could operate forever under these conditions, however inefficient its operations.

Needless to say, Linden Lab's financial operations under this system would be entirely impenetrable - probably even to Linden Lab itself, but certainly to any external examination. But this is exactly the model under which USG operates: it directs the monetary demand of its own subjects into its own equity, in which it also does its own books. Small wonder no genuine Compte can be Rendu. There is nothing in the books but madness. Madness!

So let's reconcile this madness. Let us not only render accounts - but pay them. The ends of any design: (a) create a sound and viable financial structure; (b) treat all creditors fairly. These goals are just as appropriate and essential at the sovereign level as in any private bankruptcy.

No sovereign balance sheet can be reconciled without admitting and employing the full set of sovereign powers. Frankly, the days when it made sense to talk about property rights in the United States are over. Any such talk is babble - like talk of restoring the Bourbons. God may once have granted France to the Bourbon family, but he appears to have changed his mind.

If property rights must be preserved, USG's balance sheet cannot be reconciled. You either do this thing or you don't. We are all creditors of USG, and none of us has any special rights. After the reconciliation, of course, property rights can and should be as rigorous as anything. During the reconciliation, they are all just pieces of paper - signed by USG. USG is bankrupt. The pieces of paper remain important; the bankruptcy process will treat them fairly.

During the reconciliation, the essential criterion is fairness. A bankruptcy process creates no winners and no losers. At least, it creates no winners and losers among those in the building. If you got out before the bankruptcy, there is no way you will not be thanking yourself. Since USG is sovereign, to a limited extent it can perform such clawbacks, but a sovereign must be careful not to test the physical limits of its sovereignty.

What I'm trying to say here is that in any scenario in which any sovereign undergoes this process, and converts its balance sheet back to gold, there will be one set of big winners. These will be people who sold the sovereign shares, or assets denominated in those shares, for gold - before the bankruptcy. A sovereign, to a limited extent, can and should tax these moguls - just as it taxes people who bought Google at the IPO price. If it taxes them too much, however, it must either create a large gap between the price of natural gold and the price of monetary gold, or apply a tax rate which creates a black market in old gold. Either is dangerous.

There are always rich people. A marginal dollar in the hands of the rich is much less likely to be competing in any market with your dollar, than a marginal dollar in the hands of the poor. In other words: it is less "inflationary." Therefore, enriching the goldbugs is not a serious concern for policymakers. They were right; therefore, they should profit. In a word, that's capitalism.

The brutal truth about USG's shares is that, due to the above (and other) manipulations, they are overvalued in gold. If a dollar is a USG share, and USG shares are repriced in gold, a dollar cannot be worth anywhere near 30mg. It might be worth 1, or 2, or 3. For the dollar holder, the main pain is still to be felt. If 2008 and 2009 felt financially stormy, your barometer is overcalibrated. The market has barely come under pressure.

Because even its currency is tied up in the strange machinations of its bizarre 18th-century government, USG, America must experience bankruptcy as a whole. USG was never designed to be a total state, but it is one now. If you would like it not to be a total state, the only way to start is by acknowledging that it is a total state. Capisce? Is this for some reason difficult?

The task of the new financial managers of this total state is to set a new price level across the entire American economy. That price level must be one at which the economy is (a) stable and (b) can generally pay its debts. At present, the economy is artificially depressed by deflation; thus, the new price level should be set at a low, stimulative point.

Devaluation is always and everywhere an economic stimulus. It rewards the poor at the expense of the rich. This is bad policy on a continuing basis, but excellent policy as part of any one-time event. Any reconciliation should include a strong dose of stimulative inflation. Because the endpoint is a direct gold standard, this stimulus will not last; in the long run, the economy must rearrange itself to a profitable equilibrium with no fiscal, trade or monetary deficit. However, through devaluation the transition can be made almost arbitrarily gentle.

This transition plan has six steps. First, we identify all of USG's liabilities - simple or contingent, formal or informal - and securitize them, converting them to debt in dollars. Second, we nationalize all financial assets at the present market price, converting them all to dollars. Third, we cut each dollar in half: the left half is a share in USG without its gold reserve, the right half an allocated claim to that gold reserve. Fourth, we run a Dutch auction to set the price of left dollars in right dollars - an IPO for USG, now highly profitable, owning the entire country, and debt-free. Fifth, we convert all payment and accounting systems to right-dollars, treating left-dollars as ordinary portfolio securities, and normalizing right-dollars into units of weight - ie, grams Au. Sixth, we privatize all the nationalized assets

The first and second steps are the hard ones. The fifth is a lot of work, but it's a small matter of programming. The first and second actually require thinking. Let's do that thinking.

First: boys and girls, let's play a fun game - "find the liabilities!" USG has many conventional debts; it also has many strange liabilities of an unconventional form. We need to find and liquidate all of them, converting them into dollar securities.

In the second step, we convert all these liabilities to present dollars. We already did this in the first step for financial securities: if you held T-bills or Agency bonds, USG bought them at the present market price. However, many of USG's liabilities are (a) contingent; (b) actuarial; or (c) informal. All of these must be discovered and replaced with mere dollars.

First, USG has contingent liabilities. These are promises USG has made which may force it to be liable for a debt. A good example is a loan guarantee. USG has made a lot of loan guarantees. Most of them were made to institutions acquired in the first step, and obviously a guarantee to oneself is void. But in case any are still floating around, they need to be cleaned up.

To clean up a loan guarantee, assume the loan and pay it off. If A has loaned $X to B and USG has guaranteed this loan, USG pays $X to A and is owed $X by B. Poof! Reality is revealed. A loan guarantee is in reality a government loan. Better living through bankruptcy.

Next, USG has actuarial liabilities. For instance, suppose you have been paying into Social Security. You have therefore earned Social Security benefits. The payout will vary depending on your age. The present actuarial value at present interest rates of your benefits, however, is easily calculated. This sum is deposited into your Fed account. Social Security can be entirely closed out in this way.

So can all entitlement programs, even those paid in benefits rather than cash. For instance, what are your Medicare benefits worth? What would it cost you, in present dollars, to buy your Medicare benefits from a profit-making insurance company? That sum is deposited into your Fed account. In fact - why not give everyone Medicare coverage while we're at it? If the people want national health care, this is a perfect way to give them exactly that.

Essentially, we are cutting the strings of dependency that bind voters to Washington, not by eliminating their benefits but by cashing them out. Once said voters understand this model, it strikes me as unlikely that they will oppose it. If there is some problem with this, just increase the allocations by 20 or 30 percent. The yelps will rapidly subside.

These political buyouts should already be calculated in a generous and giving spirit. Since the old management spent 75 years buying political power with USG's printing press, surely the new management cannot be excused for doing so on a one-time basis.

(Progressives are attracted to national health care because of the enormous number of strings it will attach. Voters are attracted to national health care because they want national health care. If you have a plan that provides national health care without any strings attached, do not expect it to attract progressives.)

All recurring payments made by Washington should be investigated for conversion to debt. They probably are debts - just informal debts. For instance, welfare payments proper obviously cannot be monetized and transferred to the recipients. This budgetary stream, however, can be monetized and converted into an endowment, which endows a charity that looks after the recipients. Washington, which is a very caring place, can get all its caring good works out of its hair and off its books in this way. Even national defense can be endowed - a proposition that would certainly tend to minimize unmotivated adventurism.

Even the most basic expenses can in fact conceal debts. For instance: consider a government employee who cannot be fired. Well, new management is what it is! It turns out: he can be fired. (In fact, I would be quite surprised if new management keeps many of the old employees.)

But the old employees have a right: the right not to be fired. This is an entitlement. Being sovereign, the new management cannot be compelled to employ them. Being fair, and anxious to prove its fairness, it is compelled to respect this entitlement, as it respects others. Thus it should compensate fired government employees with a mammoth dollar severance, which repays them for their loss of tenure.

So there is a simple explanation for the first step. Formalizing and securitizing entitlements is always and in every case a Pareto optimization - except in one case, the case in which the entitlement is a mechanism of dependency through which the provider asserts paternal guidance.

USG is particularly noted for the high quality of its paternal guidance. Not. Moreover, since this objective (debatable in the first case) cannot be observed in polite company, it cannot be the actual motivation for these policies. Otherwise, you would be making the same argument for welfare that George Fitzhugh made for slavery. I'm sure you wouldn't want to do that.

Second: nationalize all financial assets, at their present market price.

This is not hard to define. But why? What is the rationale for this unprecedented act? The word "nationalize" is needlessly provocative. Rather, we are consolidating the sovereign balance sheet. This is both righteous and essential for more reasons than I can count. But let me just enumerate a few.

The basic moral reason is that since the dollar financial markets are so fundamentally and thoroughly manipulated, the prices of financial assets cannot in any way be regarded as market prices. The new management will create free markets. The old management ran the book at a rigged casino. The new management is closing that book - with its present entries. If you have a balance at the casino, you get the balance back in cash. (Ideally at a premium, for your trouble.)

Perhaps you doubt that all securities prices are set by the government. Actually, this can be trivially deduced from basic investment theory. The price of a loan is set by the interest rate of that loan, the probability of default, and the risk-free market interest rate. If the USG fixes or manipulates the last - as of course it does - in what sense is this price a market price? Duh.

We can still compute the probability of default from the price of the loan; this market information is still visible. We can compare relative prices of securities. The number that appears next to the loan in the owner's portfolio window, however, is entirely determined by USG. The absolute price, in dollars, is an administrative decision of the government.

For instance, if the Fed ceased to lend or buy loans tomorrow, interest rates might well go to 87%. I pick this number arbitrarily. It might also be 187%. Or 287%. Question: if interest rates go to 87%, what is a 30-year zero-coupon T-bill paying 5% worth? Can you even sell it? Or do you just recycle it? You do the math.

Moreover, this principle extends not just to financial instruments, but also to financed assets. Consider a house. The house's owner is in the quaint habit of talking about what her dwelling was "worth," as though this was some objective quality of the physical object, like being brown. Between 2000 and 2006, her house "went up" - before it was "worth" $300K, after it was "worth" 550K. The house, in fact, deteriorated. It did not spontaneously remodel its kitchen. Perhaps its neighborhood became more attractive - or perhaps the dollar market was being pumped full of government loans.

The economic planner thus faces a dilemma. Any return to free-market economics will have an extremely chaotic, and generally negative, effect on the price of financed assets. This is because any return to free-market economics is likely to result in higher interest rates, since there will be no government lending or loan guarantees.

This is why no realistic reconciliation plan can maintain property rights - at least, not in the market for securities and securitized assets. It is essential to fall back on the less rigorous, but more important, standard of fairness. What is fair in dealing with this problem? What's fair is that whatever you own, be it stocks or bonds or houses, you bought in dollars; if it "went up," you earned those dollars too; when it "went down," you suffered with it; whatever you are "worth" is yours. All results of the financial ancien-regime are permanent.

The present prices are not free-market prices. But they are market prices. They represent genuine results of real life. A fair system would maintain these results. Therefore, the only way to revert to market pricing, while preserving fairness, is for USG to buy these assets at their present price, which USG itself has set; and sell them again at market prices. Which will generally be lower, since any liquidation is bound to be deflationary.

What is the difference? Who takes the loss? The "loss" is a liability that USG assumed, when it decided to manipulate the freakin' market. It cannot just cancel this debt. Rather, the debt must be paid. But the debt cannot even be calculated without returning the asset to the market. Thus, temporary nationalization is essential.

Nationalization can be quite involuntary. Financial assets are not, in general, of sentimental value. Houses are an exception. There is no sense in kicking people out of their houses. However, there is such a thing as a long-term lease. If the government nationalizes your house, you will obviously get a long-term lease.

Therefore, we have our plan for the asset side of USG's balance sheet. Since USG is sovereign, it is the final and ultimate owner of everything. It exercises that right. It buys all market-traded securities at the market price. It grants all holders of all financed assets, right down to cars, the right to sell the collateral to USG at the present market or assessed price, whichever is higher. Cars and houses are leased back to their owners. For financed assets, this is an option and you don't have to take it - but if you don't take it, USG is not responsible for any pain you may taste.

Where does USG get the money for this? Remember, no one has any money. Fiat currency is sovereign equity. Instead, we have shares of USG. The correct question is: where does USG get the dollars? The answer is: it issues them. Any financial reconciliation will see the creation of enormous numbers of shares. That's why they call it a debt-to-equity conversion.

As for gold, USG demands that all citizens turn in half their gold. It's called a "tax," doofus. The new management is hardly about to abandon their right to tax! And the tax includes jewelry - to keep it, pay the gold tax. More than this, and people will cheat. Less, and USG would get more by asking for more. 50% should be somewhere near the top of the Laffer curve.

Moreover, no such tax is a rational reason for present gold holders to oppose this plan. Again, they will profit massively by it - as they should.

What have we done to USG's balance sheet? On the liability side, we have added 10 or 20 trillion dollars - at least. Almost all American debts are now owed to USG; almost all American assets are now owned by USG. This is the nation-state as giant totalitarian corporation. It is not a sustainable state of affairs, but we do not intend to sustain it. On the asset side, we have added a large number of valuable assets - debts, homes, corporations, etc.

We also must consider personal balance sheets. As a result of this operation, your net worth in dollars is unchanged. Your net worth, however, consists entirely of dollars. If you had $200K in home equity, you now have $200K in dollars. If you were in debt, you are still in debt. (Except that underwater nonrecourse mortgages are wiped out.) All that changes is that you now send your checks to Washington, instead of "The Lakes, Nevada."

Moreover, since the Fed has acquired all banks, you don't have $200K "in the bank." You have your own account at the Fed, a privilege previously reserved for actual banks. This layer of indirection is entirely artificial and unnecessary - in short, a historical legacy. In a world of electronic dollars, the Fed's state is simply a big spreadsheet in which each row is a pair: your SSN, and the number of dollars you own. Your number indicates how many brownie points Uncle Sam has assigned you, so to speak. And if you prefer your brownie points on paper, all ATMs now have a new logo: the Fed's.

Liquidation is the conversion of debt into equity. But when we find all the spending that is actually debt, and convert it into actual debt, we don't just liquidate the debt.

What we are doing here is destroying USG's chronic deficit. All of its regular expenditures which are not related to the production of revenue - revenue in gold - are in fact debts of the old regime. Since the old regime was bankrupt, all its debts are converted into equity - ie, present dollars. The result is a gazillion dollars - but all those dollars are shares in USG. Which is now massively profitable. Bankruptcy in a nutshell!

Financially, the continent has been converted into one immense gold farm. It costs very little to administer, the Americans being docile, and produces enormous returns. In short, it is more profitable than Jesus. This profits must be split, however, across a gazillion shares - or dollars.

The new America has the simplest possible balance sheet. On the liability side, it has no debt and a single class of equity. On the asset side, it has everything. An enormous stream of gold, from both taxes and debts, pours into Washington's coffers. Naturally, it must be distributed to the shareholders - and thus the shares have value. Gold value.

But what, exactly, is their price? USG's profits are not yet an enormous stream of gold. They are only an enormous stream of dollars. An entity cannot be financially responsible if it pays dividends in its own shares. This would just be bizarre.

We now face our third problem: dividing the dollar. This is our automatic dollar-gold devaluation figure.

Again, all dollars are cut in half. Quite literally - if you hold dollars as cash, you take a pair of scissors and cut them right down the middle. Electronically, of course, no scissors are required. Electronically, all dollars are in your Fed account. This will simply change from one number to two. If yesterday you held 50K dollars, today you hold 50K left-dollars and 50K right-dollars. These will not exchange at 1:1 exactly - probably nowhere near. But their sum is no more, and no less, than what you had before.

Left dollars are shares in USG's vast pile of assets, seized in the nationalization, and of course in the future revenues of USG itself. Which are themselves vast. Right-dollars are claims to USG's gold reserve, fully allocated and redeemable. Essentially, a left dollar is a share in the American Treuhand; a right dollar is a zilligram in BullionVault.

A crucial question is whether Fort Knox accepts bail-ins - ie, you can deliver a right dollar's worth of natural gold to Fort Knox, and get a right dollar for it. If so, the monetary system is a direct gold standard. If not, the price of monetary gold may float above the price of natural gold. There is no technical problem with this, but it is probably imprudent. A hybrid gold standard with restricted bail-in is an interesting design, but perhaps too experimental. After 75-plus years of New Deal economics, the people will demand only the simplest and most classical of financial designs. Floating super-gold is not in this class.

To divide the dollar, we need to (fourth) establish an exchange rate between left and right dollars; and (fifth) convert the standard of payment to right dollars. (a) is the same problem as the problem of valuing the East German Treuhand, except in gold - of assigning a stable gold value to all financial assets. Basically, a left dollar becomes an investment dollar; a right dollar a spending dollar.

In particular, all debts are converted to right-dollar debts, at the initial left-right rate. If the market does not set a good exchange rate, debtors may be unfairly penalized or rewarded. However, we cannot do better than this market.

In a single gigantic Dutch auction, a left-dollar price is set; all those who prefer left to right dollars below this price receive left for their right, and vice versa. The result is the Rate - best expressed as the price of a dollar in milligrams of gold. (My guess is: somewhere around 2.) The old dollar is split into left dollars and right dollars; the left is an investment, ie, a stream of future returns; the right is money.

To create a new capital market, we must value our investments in terms of money. We must value the dollar in gold. We do this, in one step, by getting all the investments into one pool, and valuing that pool in gold. We can then By centralizing this decision, we ensure that its consequences are fair to everyone.

And, again, fifth: payments can then be switched to right dollars. Or rather, grams of gold. Since right dollars are no more than claims to gold, going all the way to a weight-based standard is trivial. And probably advisable. But the difference is not substantive. Once we have valued left dollars in right dollars, we can value dollars in right dollars. Or rather, grams of gold.

Let's say we go directly to milligrams. On the flag day, therefore, all prices become milligrams Au, all payments gold payments. To set the gram price from the dollar price, multiply by the Rate. To rewrite old contracts written in dollars, multiply by the Rate. This change, like any redenomination of the currency, is mechanical.

Of course, these prices may fluctuate; all prices do. However, we have been extremely careful throughout this entire exercise to preserve relative purchasing power. Asset prices will have no choice but to change, because the entire financial market has been rebooted. Consumer prices and labor prices should remain roughly the same, because purchasing power (relative to the Rate) has remained roughly the same.

Or, for a slight stimulus, become slightly greater. At the expense, of course, of stealing from the rich and giving to the poor, the economy can be arbitrarily stimulated on a one-time basis in the course of this procedure. In the long run it will have to become more productive or more austere, hopefully the former. In the short run, the transitional management can print as many dollars as it wants. And probably should - to grease the wheels. Inflation is not a concern.

Not continuing inflation, anyway. Because, again, the result is a direct gold standard. A thing never before seen in history, at least not for the last three centuries. It will run stably and indefinitely without serious market fluctuations. It will certainly not exhibit persistent inflation, unless someone figures out how to extract gold from seawater. (There actually isn't that much gold in seawater.)

Finally, in the sixth step, USG spins off the nationalized assets and becomes a lean, mean 21st-century corporate government - extremely small and highly profitable. When it sells (reprivatizes) the private assets it acquired in the second step, it sells them of course for gold.

It will sell them into a market that can establish true, stable market prices for them. This market will price them by measuring their expected yield in direct, 100%-reserve gold, and setting a yield curve that reflects the balance between present and future direct gold.

And this is the end state: a stable private economy on the gold standard. Moreover, unlike most plans for returning to gold, this plan does not cause a reduction in aggregate consumer demand by reducing aggregate purchasing power. Implemented properly, it should perform a one-time inflation in which the purchasing power of the rich is redistributed to the poor - stimulating demand, not contracting it. But this inflation cannot be chronic, as it is one-time. It thus cannot produce the perverse incentive structure we see under chronically-inflating economies.

So can we do it? Nah, we can't. No way. Nothing like this will ever happen. I guarantee you.

Tuesday, January 26, 2010

MMBF: 2 days left to give

With two days left in our pledge drive, the MMBF has collected $3,605.63.

Again, I find myself flattered and elated. I can now disclose my original target for the drive, which was a mere $1024 - or 50 babysitting-hours. Instead, readers have contributed almost four times that sum.

Almost. My chief fundraiser, Dr. Fritz Vitamin, has just advised me of our final goal: a shocking $4,096. If this sum is not raised by Thursday, he tells me, kittens will die. So:

Friday, January 22, 2010

MMBF: 2-day results

In almost exactly 48 hours, the Babysitting Fund has collected the astoundingly auspicious sum of $2048 - or, to be more exact, $2047.75. (Of course, this is after PayPal's brutal 5% vig.)

While this will not found the Froude Institute, it will purchase quite a few Sibyl-hours. Or a new MacBook, or something like that. I am, of course, flattered and overjoyed, and will be thanking all contributors individually. (Since - ha ha - I have your email addresses.)

But I'd like to express a little collective appreciation as well. One of the nice things about starting a pseudonymous blog, without identity or affiliation - and with no actual affiliation behind the nym, either - is that it creates a very different user experience than can be produced by, say, Professor X at R1 University Y.

When you read the blog of Professor X - and since he's had the training, whether he announces himself or not you'll know he is what he is - you are offered a safe intellectual experience. Professor X, right or wrong, is scrutinized, filtered and delivered to your door by the Computer. The Computer is your friend, and you trust Professor X.

In a phrase, you're playing intellectual touch football. Whereas since UR is what it is, you cannot avoid a game of tackle. You are thrown back on the resources of your own judgment. You must exercise that judgment - and may find it aches a little for the next day or two.

For me, of course, writing this blog has been an appalling journey into the unknown. But this journey would have been scarcely worthwhile were it not for an audience, to whom I have tried to convey some of the drama of this jungle expedition in the past and present unknown. And who have shared, in just the time it takes to read this stuff, the reality of the trackless swamp.

But when you send actual money out into that unknown, what a confidence you express! Real bills, bearing real presidents, vanish from your wallet. Clipped by Paypal they arrive in mine, and I do God knows what with them. And you do this - why? Because (if you followed the instructions) you learned something. Or think you did, anyway. Lord, I only hope it's true.

If you still think it's true, and you haven't yet given, our drive has five more days:

Otherwise, you may go about your business. :-)

Wednesday, January 20, 2010

The Mencius Moldbug Babysitting Fund

Dear UR readers,

Alas, the time has come to encumber you with that inescapable reality of the independent, not-for-profit blogosphere: the pledge drive.

A bit of background. Why do we need a pledge drive? And why haven't we had one before? Here is the reality behind UR. It is no big secret, especially not now that I've shown my face.

The reality is that, after dropping out of grad school in 1994, my plan was to make some money in Silicon Valley and then retire as an independent scholar - thus sating both the Talmudic aspirations of my rabbinical forebears, and my irresponsible aversion to bureaucracy.

To say that I executed this plan ably would be a profound overstatement. Nonetheless, after joining a large startup in 1998 a few months before the IPO, and writing the harsh, stateful guts of the world's most popular WAP browser (or at least, the most installed), I walked out onto the street in 2002, with a small pile of dollars that would support at least a few years of this entirely un-economic lifestyle. And immersed myself in old books, code, and surfing. (Alas, I haven't been in the water since 2007 or so - and even then, I sucked.)

With an adjustable-rate mortgage (about the best you can do under these Japanese conditions, actually, if you were so foolish as to buy a condo) and a little dabbling in the precious-metals markets, I have managed to stretch the pile to eight. However, it is just about gone. Also, I seem to have acquired a wife and a two-year-old daughter.

(In a blatant act of emotional manipulation, I cannot resist telling a Sibyl story. The Sibyl, it seems, is the Antichrist. While not in fact Jewish, the Moldbug household is a satisfied subscriber of the PJ Library, a free service that sends us one Jew-related children's book every month. Some of these books are awful, whereas others are merely bad. Sibyl enjoys them all immensely. Hm.

And the other day, we were reading her favorite - this Passover book, which tells the Passover story in a big block of text at the end. It is not an early reader; it is for reading to preschoolers. The Sibyl, now reading phonetically, can tackle a sentence but is always defeated by paragraphs. But she wanted to read it, so I asked her to look at the story and see if she saw any words she knew. She stared at it for at least ten seconds. Then she turned to me, and spoke. "Sacrifices," she said. Sibyl will be 2 in March. Support me - support the Antichrist.)

It would, of course, be very cool if UR readers could support me as an independent scholar. Obviously, if you're wondering what you can do to encourage my kind of thinking, this is one thing you can do. (Unfortunately, if you'd rather discourage it, your options are more limited.)

But I have no such inflated expectations, and even if I did I wouldn't admit to them. Therefore, in this first ever UR pledge drive, which will last exactly one week - normal service to resume next Thursday - I inaugurate the Mencius Moldbug Babysitting Fund.

The goal of this ambitious and unprecedented fundraising effort: hire a professional childcare provider, to ensure that MM spends his hours on UR and/or (at his discretion) Urbit - rather than on caring for the world's most wonderful 2-year-old. For those blissfully innocent, a professional childcare provider costs $20 an hour. Therefore, a gift of $20 to the MMBF buys an hour of UR and/or Urbit.

In theory, anyway. MM reserves the right to spend the Fund as he sees fit. Once it leaves your credit card, it's gone.

(And MM reserves the right to rent his head in the usual professional fashion; in fact, he probably will. For $100 an hour, I will do anything at all. If the work is not sordid and degrading, significant discounts are available. While I am a congenital generalist and can take a crack at anything, so long as it does not involve mathematics or home repair, my training and expertise is in system software. In particular, I am one of these people.)

My expectation, though, is that if the Fund raises $1000, I will spend it all on babysitters. If it raises $10,000, I will spend it on babysitters and my mortgage. If it raises $100,000, ditto. If it raises $1M, I will found my long-dreamed-of Froude Institute. (Alas, Carlyle is taken.) What will it raise? Dear readers, it is entirely up to you.

Whatever the take is - unless it be utterly risible - I will announce it next Thursday in this space. Since this is UR, we might as well have a coordination signal. Therefore, dear reader, you have a week to decide whether or not to donate in this, UR's first ever pledge drive.

But what, exactly, am I asking for? Of course, that's up to you. Any amount will be accepted, with my personal gratitude.

In case you can't decide, however, I've constructed a handy table of suggested donations. In fact, I actually have two tables: for regular people, and rich people.

If you are a regular person, the suggested donation follows this sliding scale (if you are not in the US, please convert to your actual cost of living):

under 18$0
financial stress$0
student/day job$10
good job$20
financial industry$50

If any of these numbers feels too small to you, please feel free to double it - just for being a true fanatic. But if the entire scale is just not right, perhaps you need the scale for rich people.

If you are rich, please donate by net worth:

Of course, with gifts on this scale, all requests are reasonable. But you at least get to buy me lunch.

Of course, no gift however great can affect my independence - if I was in that business, I'd be dealing with USG. Short of actual intellectual prostitution, however, I can be rented like a piece of meat in (almost) every conceivable way.

But finally: let me try to convince you not to donate. Since this is UR.

Here are some good reasons to keep your wallet closed:

One: it's important to recognize that donations to UR are not tax-deductible. Support me - support Caesar. This is only appropriate considering my political perspective. If you're considering donating, please remember it and make your decision appropriately.

Two: a fair percentage of my time lately has gone into a self-published book I'll be releasing in the next few months: Motivation and Architecture of the Antiversity. This started out as part 9c of the Gentle Introduction, but has become its own thing. It is not recycled blog text, but written to a higher level of quality control. While the print quality on these things is hideous, the royalty rate is not hideous at all - I can sell a book for $20 and go home with $10.

Therefore, if you're a cheapskate like me (have I ever mentioned that I'm half Jew, and half Scotsman?), and you prefer to purchase an actual product rather than just giving away free money to some total stranger, by all means wait until the Motivation is on sale. And there will be other paraphernalia, such as T-shirts (with Mrs. Moldbug's stunning, disturbing UR logo). But then again - you can donate now, and also buy the merchandise later. You may go about your business.

Three: when donating, you are paying for performance. But you are not paying for future performance. You are paying for past performance.

Namely, for the million-odd words I've posted at UR since April 2007. Did I mention that there are holes in my (original MacBook Pro) keyboard? There are holes in my keyboard. All this I have done for you, dear reader, and nothing charged. Until now, of course.

But have you actually gained from all this? Or have I just been entertaining you? There is no harm, of course, in the latter. Still, I have been entertaining people, for free, on the Internet, for literally over half my life. I hate to give up now.

Therefore, I have to ask you not to donate to the MMBF unless you've actually learned something here. What has UR taught you? If the answer is nothing, please do not give. If the answer is something, please consider the resources expended on your pre-UR education, which for whatever reason neglected to inform you of that something.

And again, since your donation is a payment for past performance, it does not oblige me to any future performance. I may spend the rest of 2010 on Urbit, for instance - or even on some actual, paying endeavor. I will never abandon UR, but posting may become arbitrarily sporadic. If donating under these circumstances would make you feel cheated, please don't donate.

Fourth: If I have unanswered email from you, dear reader - which is quite likely - and I receive a donation, I will actually answer it. If this transaction strikes you as vaguely sordid or undignified, perhaps demeaning to us both, by all means desist. Otherwise, I should note that I also do parties and weddings, corporate events, etc, etc. Basically, anything that doesn't require me to dress up in a Hitler costume.

Finally, if you have any questions at all, please don't hesitate to contact me. My gmail account is moldbug. Otherwise:

Monday, January 18, 2010 92 Comments

The Hanson-Moldbug debate

Occurred as scheduled last night. As scheduled, it was taped. I will post a link if/when I get one. I haven't seen any such thing, so this reconstruction is entirely from memory.

I had a simple plan for handling Professor Hanson. First, I'd prepare myself both chemically and intellectually by sneaking off before the receptions to a Peet's, where I'd order a quadruple espresso, read the Latter-Day Pamphlet No. 6 (Parliaments) on the left side of my screen, and watch the arguments in Slice v. Gannon on the right. Then, back to the reception for an hors d'oeuvre and a glass of red wine. When Dr. Hall rang the bell, I'd spring forward and disable the Professor with a hard snap-kick to the inside knee, then finish the job with a few quick rights to his bulging, alien-like forehead.

While I followed the first part to a T, I was unable to implement the second. Professor Hanson is just too nice a guy. In fact, I'd like to thank both the Professor and Dr. Hall for what I hope was an entertaining evening. The original idea for the event was, I believe, Dr. Hall's; he suggested it to Professor Hanson, who suggested it to me. Which shows you what good guys they both are.

Professor Hanson is not, of course, a retard, and of course I never suggested that he was. Quite the contrary - he is an American social scientist of the 20th century. This phenomenon, in which non-retards express retarded ideas, is no novelty in that time and place.

As a student of history, I am entirely ignorant of all centuries before the 17th. I know a little bit about the 17th and a bit more about the late 18th. I feel I have a solid, but hardly exceptional, understanding of the 19th. On the 20th, ain't no nigga that can touch me.

At least, not as a generalist. Nor is this because my general understanding of the 20th is excellent. In many ways I feel I am actually stronger on the 19th. Rather, it is because everyone else's understanding of the 20th is so poor. This is to be expected. It barely just happened.

In the early 21st century, almost everyone, even the nominal experts, still reads the 20th century through some 20th-century propaganda filter. As Francesco Nitti said of the Italians, we are ubbriacati di bugie - drunk with lies. The 20th's nominal experts on the 17th, who generally are experts, suffer from no such intoxication. Even a Marxist, like Christopher Hill, can be perfectly perceptive and trustworthy on the 17th century.

Therefore, we can stop lubricating ourselves with lies about the 20th. And at some point, we will. If not now, when? As I told the Professor, he is as far ahead of his institution, as his institution should be ahead of him. He is at least trying to overcome his biases. He is fully engaged with his subject matter, believes sincerely in his nominal beliefs, and wants to discuss them with others. This makes him one scientocrat in a thousand.

The great intellectual mistake of the 20th century is that its governments believed they were subsidizing science, when they were actually subsidizing scientocracy. For instance, over lunch today I sat across from Ralph Merkle and Rob Freitas. "What's the largest present obstacle to the development of this stuff?" I asked. "Money," Ralph said.

I am slightly skeptical of diamondoid nanotechnology, (a) because I have learned to be skeptical of anything that promises results in so long a term (scientists, even real scientists, are the world's greatest liars), and (b) because I suspect slightly that it represents an inappropriate transformation of macro-scale engineering into the nanoscale. The molecular nanotechnology we have, life, is built on low-energy bonds and runs in a wet environment with a very high error rate. Diamondoid nanotech is built on high-energy bonds, runs (at least for manufacturing) in hard vacuum, and depends on a very low error rate - errors will cascade like crazy.

Nonetheless, Merkle and Freitas are clearly real scientists, and they reacted to my objections more or less the way Kimbo Slice would react to my punches. I realized within a couple of minutes that I was wasting my time, and moved on to royalism and cryptographic weapons control. Ralph Merkle, being a very intelligent person, is very easy to instruct. If you can explain something interesting to him, in five minutes he will be explaining it to you.

These guys, however, are about as likely to get government money as Charles Manson. It will be a great day when Merkle and Freitas get all the money they need, and ITER has to hold a bake sale to buy a tokamak. Alas, they are by no means the only scientists in this position.

In the late 20th century, scientocrats of every possible flavor got all the money they needed. More, in fact. As for science, in some fields it flourished; in others, it was almost entirely defunded. There was never any shortage of cargo-cult science to fill these random holes.

The basic problem is that the robber-barons of Silicon Valley, unlike their Victorian forebears, do not realize that, if they want all this science, they will actually have to pay for it - themselves. Instead, they look at their tax forms and think: I gave at the office. But they didn't. They gave to scientocracy. Now, they need to figure out how to patronize science - or there will be no science. Just scientific Bondo, sanded to perfection and painted with meticulous care.

Professor Hanson, while a good guy and not a retard, clearly has at best a dim sense that he is in any sense any part of any such apparatus. He is a 20th-century "social scientist" - a scientocrat by definition, a true believer in government by science and science by government. He is aware that this system does not work at all, but this does not lead him to question the entire tradition. Indeed, since his mind exists inside that tradition, he interprets it as mere reality. There's something going on here, Mr. Jones. And you don't know what it is - do you, Mr. Jones?

In any case - back to the debate. I should note that last night was not, in fact, my first public appearance. It was my first public appearance since I was on It's Academic in the mid-80s. Wilde Lake High School - the quiz-buzzer terror of the lower Chesapeake basin, I'll have you know. And I was the anchor of the Brown team that almost beat MIT's 35-year-old grad students in the '91 College Bowl regionals. And I have taught, a little. And I played a waiter in one of Mrs. Moldbug's short films.

In short, I have no real training or experience in acting, speaking or debating, whereas I'm sure Professor Hanson is no stranger to the microphone. ("We're both in the entertainment industry," he told me after the debate. I agreed.) Therefore, my strategy would have to be extremely blunt and simple. For the most part I think it went well, though I made a couple of mistakes which I'd correct in retrospect.

In my 10-minute opening statement, I said - reconstructing, in the Thucydidean manner:

Futarchy is considered retarded because it violates both common sense and logic. If it violated only one of these, it might just be considered harmful. Since it violates both, a stronger word is called for. Since we all went to fourth grade, we all know such words. My goal tonight is to work through the logic, and leave the common sense to you.

Futarchy is the use of decision markets for sovereign decisions. Decision markets are useful given two requirements: they need to be well-trained and disinterested. Since these requirements are obviously seldom true at the sovereign level, futarchy is retarded.

Because most of us have no training or experience in managing a sovereign, and because the sovereigns we know seem quite poorly-managed, the sovereign case is a bad first example for understanding decision markets and their limitations. Let's use a simpler example: chess.

Can a decision market play chess? Yes - given certain assumptions.

Imagine a chess game. Now, imagine a group of kibitzers watching the chess game. Now, imagine the kibitzers begin to bet on the game. The betting will create odds. The odds express each side's probability of winning. This is a prediction market.

To turn this prediction market into a decision market, we say: could we get rid of one of the players, and just have the kibitzers play the game? Indeed we could.

We notice that after White makes a good move, White's odds go up. After White makes a bad move, White's odds go down. To decide between two moves A and B (or any N moves), we can take conditional bets on White's chances if move A is made, and White's chances if move B is made. Whichever bet produces the best odds is, in the market's opinion, the best move. If a move is not made, all bets in that market are nullified - like a "scratch" in horse racing.

For instance, on the opening move, the conditional odds for P-K4 might be 50-50 (assuming the players are equally ranked), and the conditional odds for P-KB4 might be 40-60 (because it's hard to recover from a strange bad opening). Therefore, White will chose P-K4 over P-KB4.

Or should. Now: in what conditions will this process actually work, ie, generate good moves?

My point was: a market is not magic. It is just a way of collecting the votes of the market players. It is not democracy, not exactly, but in this sense it is like democracy. Under what conditions will this result be wise, rather than foolish?

Carlyle [whose quote I mangled horribly] enlightens us on the matter:
'If of ten men, nine are recognizable as fools, which is a common calculation,' says our Intermittent Friend, 'how in the name of wonder will you ever get a ballotbox to grind you out a wisdom from the votes of these ten men? Never by any conceivable ballotbox, nor by all the machinery in Bromwicham or out of it, it will you attain such a result. Not by any method under Heaven, except by suppressing, and in some good way reducing to zero, nine of those votes, can wisdom ever issue from your ten.'
[BTW, don't bother searching for Carlyle's 'friend Crabbe' or his Intermittent Radiator - Crabbe is just one of Carlyle's many imaginary friends, like Dryasdust or Heavyside.]

Thus, we have our first requirement for success. The kibitzers need to actually be chess players. However many non-chess-players you have betting on a chess game, their bets will not express anything interesting. They will still produce a number - but that number will be noise.

In an actual betting market (as opposed to a ballotbox), there is actually some Bromwicham machinery for suppressing the fools. Namely: the fools lose money, and are forced to go home - or never (as Professor Friedman pointed out) arrive. For the wise, it is the other way around.

This Darwinian training effect is crucial to prediction markets. A market is only as wise as its players. The mere mechanism is not sufficient. A market's opinion is the democratic vote of the players, weighted by the size of their bets. In a well-trained market, the wise will be betting with fat wallets and the fools with thin - providing Carlyle's vote-suppressing machine.

Now, when we map from chess back to government, we see an immediate problem. Lots of people know how to play chess well. Open a chess decision market to the public, and you will get scads of chess masters. (Chess computers, even.) It's unclear, however, that anyone in the 21st century knows how to govern well.

Certainly, our government today makes bad decisions (a claim with which Professor Hanson and I agreed fervently), so those with experience are without skill. Amateurs might do a better job. Or not. We are back to our non-chess-playing kibitzers.

There's a worse problem, however. The market must also be disinterested.

If the predictions of a prediction market are simply thrown away, it is disinterested by definition. Its results have no side effects. If the predictions are used to make decisions, however, those decisions by definition have effects. If those effects affect a player in the market, that player is not disinterested.

So: suppose player P stands to make $X from decision D. In our chess example, he might have a side bet, paying $X, that White will open with P-KB4. Therefore, the question is: what will be his expected loss, $Y, from buying enough P-KB4 bets that White opens with P-KB4?

If X is greater than Y, manipulating the market (ie, moving it intentionally) is profitable, and P can be expected to do it. If Y is greater than X, moving the market is unprofitable. Obviously, even in the world's deepest prediction markets (financial markets), large transactions move markets all the time. In fact, many traders are paid the big bucks for figuring out how to place large orders in these markets without moving them.

Now, I said, there is simply no way to ensure in general that Y is greater than X. To know that Y is greater than X, there is only one way. You have to know Y, and you have to know X. Or you have to know that there is some algorithmic relationship between the two.

In futarchy, this is simply impossible to quantify or analyze. There's no way of measuring who will profit how much from a bad decision. There's no way to classify the market players into wise men and fools, measure the size of the money behind the wise players, and figure out Y. There's also no way to figure out X.

Professor Hanson, so far as I can see, addresses this problem in three ways.

First, he constructs a model in which Y is infinite and X is finite. (In fact, his "wolves" not only have infinite liquidity - they know the magnitude of the manipulation.) Therefore, the model proves: Y is greater than X. As it is indeed, in the model.

Second, he does sociological experiments with undergraduates. He sets up these markets such that Y is greater than X. We can tell that Y is greater than X in the experiments - because the experiments succeed.

Third, he finds actual markets in which actual manipulations fail. Sure enough: Y is greater than X. Of course, because non-disinterested decision markets are retarded, one would not expect to discover them in reality.

None of this goes even a millimeter toward proving what needs to be proved - namely, that in all markets, Y is always greater than X. It is just a list of cases in which Y is greater than X. In two of the cases, Professor Hanson has constructed his examples himself. In the third, reality itself has performed the selection. Therefore, he succeeds in proving his assumptions.

Now, this is where I ran into a bit of trouble. As I asserted, deduction beats induction every time. You can show me all the markets in the world in which Y exceeds X - whether you've constructed these markets yourself, or found them in reality. But to show that your markets will not be manipulated, you need to show that Y will always exceed X. And this you cannot do, because you don't know Y and you don't know X, and you can make no general statement about the relationship between the two.

Philosophically, this argument is unassailable. As a matter of practical communication, however, it would have been awfully nice to show up with some actual examples of cases (in the futarchy department) which X is almost certainly greater than Y. Brad Templeton asked for this, and I had to stutter for a moment before answering, off my back foot, "cap and trade." Clearly, in a public appearance one should never have to think on the spot. It makes one look dumb.

Cap-and-trade is an good example because while X is, obviously, enormous, there is simply no population of wise people who can predict its effects. Because nothing like this policy on this scale (eg, reducing carbon emissions 80% by 2050, the standard proposal) has ever been pursued. To get a big Y, you need big money behind sharp predictors.

Now, as Professor Friedman (who not only has a considerable personal resemblance to Yoda - but, as soon as he opens his mouth, confirms that resemblance) pointed out, this begs a question which I asked in my essay but was going to skip in the debate - futarchy being such a target-rich environment. How do we measure success? In chess, easy. In government, hard.

You need a "national happiness" number. I believe Professor Hanson actually used some phrase of this type. Of course, Stalin's famous quote came instantly to mind: "Life has become better, comrades. Life has become more joyful." This is the reductio ad absurdum of the scientocratic planned economy - or would be, if anyone realized how absurd it was.

For instance, GDP (total end-consumer sales of all businesses) is a ridiculous proxy for national happiness. It is not even a unitless number - it is measured in dollars, which are anything but constant. Removing this denominator involves substantial mathematical fudge. Moreover, to accurately predict conditional impacts on this number, you need a very large impact, and you need a very good default prediction of GDP.

Moreover, the effect of carbon controls on GDP will probably be negative. No - we need a positive environmental mitigation number to add to this already-ridiculous fudgeball. And so on. In Professor Hanson's own Foresight presentation, he had a wonderful chart of "economic growth" going back to, I kid you not, 200,000 BC. With points representing actual numbers - apparently plotted from some actual dataset, not just randomly scribbled.

Needless to say, no units appeared on the "growth" axis. There's really nothing like a unitless number. I wanted to raise my hand and ask the Professor to define "growth," a word he used 47 times in his presentation, apparently with the assumption that both he and his audience knew exactly what it meant. If so, I feel it could at least have, you know, units.

Not only is the utility of such a number-soup metric questionable, its predictability is extremely questionable. There is a classic business-school exercise in which the professor puts a jar of jellybeans on the desk, then asks the class to guess how many jellybeans are in the jar. Shockingly, the answers tend to fall in a bell curve with the center around the right answer.

To me, this says something about the human brain's ability to estimate geometry. However, if the professor left the jar under the desk, and the experiment still worked, it would say something about the human brain's ability to operate telepathically. This, of course, is Feynman's problem of the Emperor of China's nose.

So, my general answer: X is likely to exceed Y in a case in which there is a large side effect, and little or no predictive power in the market. Carbon mitigation is an obvious such example. It is hardly alone in this.

Honestly, I think the greatest difference between my perspective and Professor Hanson's is just that I have much higher standards. His entire argument proceeds from the position that, since government today is so bad, anything that could be somewhat less bad is worth a look. Sure, we can't know that Y is greater than X in all cases, but often it will be. Besides, don't people buy decisions now? Well, gee, they sure do. So there you go.

For me, government safety is like airplane safety. Not only do I want a watertight proof that Y is greater than X, I want two or three parallel and independent proofs. At least one of them will probably turn out to be wrong. Professor Hanson is a professor, and thinks like a professor. I'm an engineer, and think like an engineer.

I am also a student of history. So I have two sources of higher standards for government design: my perfectionist engineering attitude; and the European writers of the Victorian era, whose aristocratic governments worked much better than ours, and were thus appalled by government failures which to us seem trivial and not worth mentioning.

Therefore, this idea that since we have a bad system, we should consider new and different bad systems which may (or may not) be slightly less bad, strikes me as comical. It's actually quite easy to fix our government. All we have to do is restore the old, effective system - aristocratic and/or monarchical - which we foolishly discarded in favor of all this Bromwicham machinery. A new gizmo, a prediction market rather than a ballotbox, is not what's needed. What's needed is an end to gizmoes, and a return to real statesmen.

In other words: if you want to play chess, hire a chess player. In the chess example, the enthusiasm for Bromwicham machinery by which a roomful of kibitzers can, in some collective way, play chess, is easy to explain. The explanation is anarchism - the desire for no one to be making mere personal decisions at the sovereign level. Everyone wants power; all the kibitzers envy the chess player. So: let's shoot the chess player, and let the kibitzers play the game. We shall have no king. We shall rule ourselves. Freedom! Or something like that.

And we tried this. With what results - we now see. How long will it take to admit the mistake? Alas, at least another century or two, I suspect. The fruits of anarchism! Visit Port-au-Prince before Port-au-Prince visits you.

Thursday, January 14, 2010 34 Comments

Urbit: functional programming from scratch

My good friend, C. Guy Yarvin, continues the saga at his new blog, Moron Lab.

In case all this programming stuff bores you and you're looking for more traditional UR material, I suggest the Adams-Adams letters. Or, more topically, Lothrop Stoddard's French Revolution in San Domingo... discuss.

Sunday, January 10, 2010 53 Comments

Public appearance

While I've learned never to announce these things until the comp ticket goes through, I'm fairly confident that I will be debating Robin Hanson at the Foresight conference in Palo Alto on January 16 - without my Sea Dragon Conqueror mask, which would provide an excessive advantage. Many thanks to Professor Hanson and Dr. Hall for arranging the occasion.

Unfortunately, because this was set up at the last minute, it is at the reception rather than the conference proper - an extra ticket. But if you weren't going to use that ounce of raw opium, why not sell it and come see the show? If you can't part with it, however, video is promised...

Thursday, January 7, 2010 66 Comments

Maxwell's equations of software

I haz dem:
1 Context

This spec defines one function, Nock.

2 Structures

A noun is an atom or a cell. An atom is any unsigned integer.
A cell is an ordered pair of any two nouns.

3 Pseudocode

Brackets enclose cells. [a b c] is [a [b c]].

*a is Nock(a). Reductions match top-down.

4 Reductions

?[a b] => 0
?a => 1

^[a b] => ^[a b]
^a => (a + 1)

=[a a] => 0
=[a b] => 1
=a => =a

/[1 a] => a
/[2 a b] => a
/[3 a b] => b
/[(a + a) b] => /[2 /[a b]]
/[(a + a + 1) b] => /[3 /[a b]]
/a => /a

*[a 0 b] => /[b a]
*[a 1 b] => b
*[a 2 b c d] => *[a 3 [0 1] 3 [1 c d] [1 0] 3 [1 2 3] [1 0] 5 5 b]
*[a 3 b] => **[a b]
*[a 4 b] => ?*[a b]
*[a 5 b] => ^*[a b]
*[a 6 b] => =*[a b]
*[a [b c] d] => [*[a b c] *[a d]]
*a => *a
For context and comparison, see this or this or this. Here at UR, axioms are axioms - we leave no "niceties such as arithmetic" to the programmer's imagination. Just sayin'.

To grok Nock, construct a formula f such that *[s f] equals (s - 1) for any atomic nonzero subject s. The equivalent formula for (s + 1) is [5 0 1]. The first 16 people who mail me a correct answer may (or may not) win a prize, which may (or may not) be valuable. (Please include your interpreter - in any language, it should fit on a page. Please do not post the answer here or anywhere, and let me know if you see it posted. This is not a difficult problem.)

As you'll quickly see if you try this exercise, raw Nock is not a usable programming language. But nor is it an esoteric language or automaton, like SK combinators. Rather, Nock is a tool for defining higher-level languages - comparable to the lambda calculus, but meant as foundational system software rather than foundational metamathematics.

To define a language with Nock, construct two nouns, q and r, such that *[q r] equals r, and *[s *[p r]] is a useful functional language. In this description, p is the function source; q is your language definition, as source; r is your language definition, as data; s is the input data. You will find this a tractable and entertaining problem.