Archive for September, 2002


September 27, 2002

Morale-raising exercise

In an excellent book called “On the Psychology of Military Incompetence”, Prof. Norman Dixon mentions an anecdote immediately preceding the fall of Singapore in the Second World War, one of the worst military disasters in the recent history of the British Army. Brigadier Ivan Simpson, one of the few British commanders to emerge from the episode with anything approaching an intact reputation, had been loudly advocating the construction of defensive earthworks — tank traps, moats and similar — to impede the progress of any Japanese attack which might come from the North. The Commander in Chief, General AE Percival had repeatedly rejected these calls. Simpson decided to have one last go at persuading his commander, in a private meeting … Dixon takes up the story:

” […] At last, he grew exasperated. ” ‘But why won’t you let us put up defences, sir?’ I asked”, Simpson recalls in his memoirs. He received the considered reply from Percival that devoting effort to defensive earthworks would imply that Singapore was not impregnable, and that this would be bad for morale. “My blood ran cold. ‘It’ll be a bloody sight worse for morale to have Japanese troops running round all over the place, sir'”.

The idea that doing something about a problem might make things worse, because it would be tantamount to admitting that there is a problem, is almost always a bad one, but it is a common psychological defence mechanism for people who are excessively concerned with others’ opinions of them, Dixon notes. Morale is certainly important, but it is too often used as an excuse to prolong or forestall the recognition of unpalatable truths, with eventual results that are, of course, as disastrous for morale as they are for anything else.

At present, the Federal Reserve isn’t cutting interest rates, but is saying an awful lot about the dangers of the development of a “deflationary psychology”. To which all I can say is “It’ll be a bloody sight worse …”.


September 26, 2002

A tale of two ladies

The first of the two ladies in question being Ann Coulter, a frighteningly rightwing television person, and exactly the kind of racy blonde1 that I don’t hang around with any more since I set up home with the second, my own dearest Tess. (edit: Oh all bloody right then, I never used to hang around with racy blondes).

As far as I can tell, Ms Coulter is chiefly famous for writing a scurrilous book called “Slander”, in which she makes the point, at length, that the intelligent, well-groomed and personable Americans we see on our TV screens and in newspapers are by no means typical of that country, and that the vast majority of American citizens are less well-educated, more insular and in most respects nastier. I don’t know quite why she wants to portray such a bleak picture of that great land; perhaps she is a fifth-columnist of some sort. In any case, she’s always banging on about the subject, and has become quite a popular hate figure among my American lefty chums. I dare say that if you click on the Maxspeak link in my right column and then click on any of his links to lefty weblogs (the ease of doing this is the main reason why I haven’t bothered updating a proper link list of my own; sorry), then you’re more likely than not to come across at least one post by an angry male American leftist explaining why she’s absolutely horrible and they don’t fancy her one tiny bit. All good clean fun.

But anyway, what I’m concerned with here is the main thesis of Ms Coulter’s book, an idea which goes back to HL Mencken, that there are two Americas; a decent, intelligent, civilised one which is based in the great metropolises of the two coasts, and a horrible, stupid semi-human rabble organising Anti-Saloon Leagues and lynchings in the vast wasteland in the middle. Personally, I don’t think it’s that clear-cut; I’ve known a fair few Texans, and I spent a year growing up in Oklahoma, and there were lots of rather intelligent and good-natured people there. But let’s for the sake of argument assume that Mencken and Coulter are right, and that the majority of the low-population density states are full of what Karl Marx (who agreed with Coulter and Mencken on this issue) called “the idiocy of rural life”.

This would be the basis for the single most intelligent thing I’ve heard said about the 2000 presidential elections, which was said by Tess on the night itself. The points about whether the election was “stolen” or not, or whatever, are by the by. The really interesting and worrying thing about the 2000 elections was that, for the first time in a long time, the guy who got elected as President did so without winning a single one of the states where I, as a reasonably well-educated and Yankophile foreigner, might possibly want to live. The glamour of California? Blue state. The hustle and bustle and sophistication of New York? Blue. The quiet and scholarly elegance of Massachussetts? Blue. The go-getting, can-do spirit of Illinois? Blue. A whole lot of grass and cow shit? Almost exclusively red. The nearest that the Republicans came to a “nice place” was Florida and even then, a) it was a bloody marginal victory if it was a victory at all, and b) it’s not exactly Biarritz, is it? Say “Florida” to ten Brits and you’ll get ten replies of “cheap package holidays”.

So in other words, one has to view American politics now through the lens of the fact that the Stupid Party is in control, and that a lot of the policies we are seeing (as well as being motivated by the War Party in full effect), are motivated by what Mencken called “the yokel’s congenital and incurable hatred of the city man–his simian rage against everyone who, as he sees it, is having a better time than he is”. It strikes me that this is a profoundly important fact for anyone deciding how they are going to vote in the next American election; now that the Republicans know that they can win the nation without tackling such “enclaves” as New York City or Los Angeles, it’s not just a matter of the pro-abortion rightwing capitalist party versus the anti-abortion rightwing capitalist party. The 2004 race can quite simply be seen as a battle for civilisation itself, on a par with the Scopes Monkey Trial. So I may have to drop my usual strict rule of neutrality and insouciance when it comes to American politics, when it gets nearer the date. Of course, this is all conditional upon Coulter, Marx and Mencken being right about how horrible and stupid the inhabitants of “flyover country” are, which I don’t necessarily believe.

Thinking about it, there may be deeper things at work here. Although Ms Coulter clearly dresses like a metropolitan sophisticate of exactly the type I’d like to see running the country, I get the suspicion that “Coulter” is an Irish name. And a quick search reveals I’m right. Specifically, it’s a Scots Irish name with links to Lanarkshire in Scotland and to the unfashionable end of Ulster. “Bog Irish” rather than “Mick Irish”, for those who are au fait with insulting epithets for our Hibernian pals. It’s not a name that you’d expect to find attached to a silver-tongued, blarneying, cheerful Oscar Wildeish, Bernard Shavian, James Joycey happy-go-lucky Irish type. It’s more of a Lambeg Drum type of name, associated with a group of people, the Protestant Ulstermen, who while they have many admirable qualities, are not exactly known the world over for open-mindedness or cosmopolitanism. Which suggests that being a bit on the stubborn and opinionated side is probably in the blood, and that there’s not necessarily all that much that anyone can do about it.

My own dear Tess, of course, is a Cockney Sparrer a city girl through and through, and speaking as a Welsh yokel myself (with ancestry in the hardly swinging County Mayo), I don’t think I could love anyone who wasn’t.

1The link appears to be to “Jewish World Review”, but as I mention, I’m pretty sure that she’s not Jewish. I suppose she could be like Jennifer Aniston or something, but it’s an Irish name. Maybe the Jewish World Review has an affirmative action programme for Gentiles or something. In any case, whether or not she is, obviously no anti-Semitic implication is intended.

edit: There is something of a controversy over whether states which voted Democrat should be coloured “blue” or “red”. The current reading of the article is supported by USA Today. Please make allowances if you disagree.


September 26, 2002

Superficially similar sentences

They used to give this sort of test a lot when I used to go for job interviews and fill out psychometric tests. Here are three similar sentences:

  1. The US Government says it has evidence that Iraq provided weapons and training to Al-Qaeda
  2. The US Government has evidence that Iraq provided weapons and training to Al-Qaeda
  3. Iraq provided weapons and training to Al-Qaeda
  4. Iraq was involved in the September 11 attacks

Which of the preceding sentences does this news story support?

Which of the preceding sentences is it going to be used to support?

edit The correct answer to the first question is “I don’t know”. This is also, given our current situation, the correct answer to almost any question relating to Iraq in the present tense. As I’ve mentioned before, our only sources of information about Iraq in the present tense are the US Government and the Iraqi government, both of whom are proven liars on the subject. The only safe course of action is to regard all statements about Iraq as most likely deceitful.


September 25, 2002

Deep in my heart, I know I’m right

Well, it looks like I have materially misled readers on the subject of Iraq, and that the actual figure for oil exports is about four times what I said it was. I knew that the policy of never checking politically convenient facts would come back to bite me at some point, so I am perfectly content to admit that the oil exports permitted to Iraq amount to the princely sum of $1.25 per Iraqi per day (based on UN deductions of 40%) rather than the miserly 36 cents per Iraqi per day which I had claimed.

Having been so comprehensively found out by two contributors to my unfailingly excellent comments system, it would be churlish and unseemly to complain that $1.25 per day isn’t all that much to live on either. So, that’s what I’m going to do. Five bits is not enough to live on, full stop.

But, brainier readers will object, oil exports, gross of the UN deductions, are at about their pre-1991 levels, and the Iraqis weren’t starving to death then, were they? Which is true, but which rather points up how misleading a comparison that is. Basically, in 1990 there existed in Iraq, alongside the oil sector, something which might be called “the rest of the economy”. And these days, in many senses, there isn’t. It got bombed to hell in the Gulf War, and it’s been impossible to rebuild it in the intervening period because oil exports have been limited for most of the period to sums much closer to my original $4bn figure, the vast majority of which has had to be spent on food and medical supplies.

In actual fact, the CIA Factbook suggests that Iraqi GDP is around $2500 per capita at PPP rates, which would be around $6.8/day — not a hell of a lot, but a long way above the World Bank poverty levels. But that’s ignoring a further point, which as I mention in the comments to the original article, I should have been aware of earlier.

The point is that, it’s really just not on for me to make the claim that one “can’t live on” 36 cents a day. Even if that were the right figure, the fact that there are Iraqis today means that they are living on what they get. It was (oh ye benefits of hindsight) silly of me to suggest that the amount of money available to the Iraqi economy was not enough to buy food for its people. But, I call at this point on Amartya Sen, the greatest economist since the war (and if you want to argue about that, go for it in the comments; you will lose). In his groundbreaking work on famines, Sen points out that famines are never purely the result of shortages; they are economic catastrophes rather than ecological ones. Typically, the presence of a famine (or whatever the word might be for the pattern of deprivations visible in Iraq) is a sign that the price mechanism has broken down; that people who need the resources most are unable to get them. And the economy of Iraq has taken more of a battering than most in recent years, for reasons more or less entirely traceable to the blockade (see here for details of how significant this effect has been, and also here within that site for some suggestions that due to the regime of “holds” and “blocks” on items like fertiliser and medical supplies which could conceivably have military uses, the actual money available to Iraq is much less than the headline sum). Normal economic activity is not possible in Iraq under current conditions, so starvation and other equally nasty means of reaching premature death is inevitable. This fundamentally has nothing to do with the Iraqi military; even if Iraq were, per impossibile to pretend that it wasn’t under constant bombardment and imminent threat of invasion and reduce the size of its Army to Swiss levels, it would still suffer from widespread unemployment and starvation, because in economic terms, there’s no “there” there. The proof of the pudding, of course, is in the failure of the “change from within” strategy; surely to God, if history is any guide, then if anyone really believed that Hussein was starving his population in order to build himself palaces, they’d have revolted by now? The great mass of Iraqi people appears to believe that their misfortunes are the fault of the West, and they’re right.

Of course, the main effect of Prof DeLong’s critique is to weaken my support for an immediate shooting war (since the ongoing blockade isn’t as hopelessly destructive as I’d thought) but to reinforce my case that Clinton is still culpable for hundreds of thousands of deaths in Iraq, possibly more. Most of the blockade period took place on his watch; while there might have been decent reasons for imposing it in the first place, nobody at the UN had really expected it to be kept in place as long as it was. The oil-for-food regime wasn’t materially improved until 1998 and wasn’t lifted until 1999, both times at the insistence of France and Russia and in the face of opposition from the USA and UK. So, like the quintessential internet kook that I am, I concede all important points of fact while maintaining all my substantive views.


September 20, 2002

Get yer money for nuthin’ and your risks for free1

Friday afternoon thorts … as I’ve mentioned before, absolutely central to finance theory is the concept of the “risk free rate of return”. This makes an appearance in Classical economics as “the price of waiting”, “the intertemporal rate of substitution”, the “rate of time-preference”, etc. It’s an absolutely indispensable analytical tool for any economics which deals with the concepts of time and uncertainty (or to put it another way; it’s hardly used in mainstream economic thought at all).

In so far as mainstream Neoclassical economics gets to grips with time at all, it deals with it by assuming that (since markets are efficient), the rate of time-preference, or the premium one is willing to pay to have “Bread Today” rather than “Bread Monday”, is taken to be equal to the rate of return on a risk-free asset. After all, since markets are efficient, the rate of return on a risk-free asset has to be the price of something, and since it can’t be the reward to risk-taking, it has to be the reward to pure waiting, right?

Well … maybe. In actual fact, I have big philosophical problems with the concept of “pure waiting”. It seems more or less incoherent to use the normal economic tool of ceteris paribus in this context. If you hold everything else the same except that you allow time to change, then you’re saying that nothing changes, but time passes. But is time without change really a sound concept? How could we tell it had passed? But that’s not what I’m on about right now.

For the time being, let’s accept that “the reward to pure waiting is the rate of return on a risk free asset”. What is a risk free asset? Name one. Sorry, MBA students, you just gave the answer “ten year government bonds”, you are the weakest link, goodbye. As I’ve noted before, it’s perfectly easy to lose your shirt trading ten year government bonds; they fluctuate quite a lot. They give you a more or less risk free return in nominal terms and over a ten year horizon, but those two provisos include a whole load of items which we don’t want to count as part of the pure reward of waiting. Probably best to make a list first of potential investments which can’t possibly be risk free:

  • Any investment in physical capital (return depends on the rate of profit, which is variable)
  • Any investment promising a fixed return in nominal terms (doesn’t guarantee the level of consumption you can afford with the returns)
  • Any tangible item not directly consumable (what you can buy with it will depend on relative prices, which are variable) — this includes gold and land.

The most promising candidate left would be index-linked government securities, which promise that, on some future date, you will be able to buy the basket of goods represented by the CPI index, in a quantity which grows at the yield on the index-linked security. But this brings us face to face with the problem indicated above; as a matter of empirical fact, you can get carried out trading TIPS. A ten year bond will let you postpone your consumption for ten years, but your money is locked up in the meantime, and all sorts of things might change over the next ten years. You could get a bit more clever and buy TIPS strips, effectively “locking in” today’s entire forward curve of expected inflation, but you’re still not really protecting yourself in this way; you’re closer than anything else on this list to locking in a guaranteed stream of consumption goods, but that’s not the same as postponing your consumption in a risk-free way. It doesn’t get you round the fact that in carrying out any such financial transaction, you’re exchanging certain consumption for claims on deliveries in the future, during which time anything could happen. Or to put it more bluntly, when I swap an apple today for an apple tomorrow, I’m always at least taking the risk that I might be run over by a bus this afternoon, in which case I’ll never get to eat that apple. An asset can’t be risk-free in the sense one would need for its return to be the “price of postponing consumption” if it’s illiquid.

So what are we left with? Well, basically, that staple of the investment portfolios of millenarians and loonies, canned food. You can guarantee consumption at a future date by storing canned food (by the way, a quick tip to “child-free” whiners; this is the only way in which you can fund your retirement in a way which doesn’t make your moaning about having to pay taxes for the education of “other people’s children” utterly hypocritical), and you can open the cans and eat it any time you like. But what’s the rated of return on canned food? Probably negative if you consider that the quality of what you end up eating is lower than if you’d spent the same cash on fresh food today.

So, I’m turning this one over to the collective wisdom of my readers. Do please feel free to post schemes for securing risk-free exchange of today’s consumption for consumption at some future date, which deliver a positive implied rate of return, and I’ll report back in a couple of weeks (on the other hand, as a sort of Dadaist joke on the theme of this comment, maybe I won’t). The best I can do so far is buying an apple tree which is already bearing fruit, but I can’t help thinking this is some sort of cheat …..

1As is apparently customary in what I refuse to refer to as the “blogosphere”, I would like to point out that the titular phrase was conceived of entirely by me, in a single act of creativity with no input from any outside source ever. It is also copyright me for ever, as are its component words, which nobody can now use for any purpose at all.


September 20, 2002

Book Review corner

I’ve just finished reading a book by the Australian economist Steve Keen, which I liked very much. It’s lumbered with what I’d call an unnecessarily combative title (“Debunking Economics“, ye gods and bollock harnesses), but it’s bloody good on a number of technical points relevant to those parts of this weblog which I like to think of as “the ludicrous incoherent rants on poorly understood minutiae of what Piero Sraffa said in 1928”. If I’d read it before subscribing to the “Post-Keynesian Thought” mailing list, rather than after, I think I could have saved myself many weeks of mute incomprehension.

I’ve also been reading Straw Dogs by John Gray, my old university prof. Looking back on my undergraduate education, it’s quite easy to understand how I ended up with a somewhat bizarre Weltanschaung (“world-view” for the Readers’ Digest set, use it in a sentence three times today and it’ll be yours forever). I was educated by three fine men of British letters: John Gray, Galen Strawson and Don Hay. Gray is now the Professor of European Thought at the LSE, biographer of Hayek and Isaiah Berlin and most famous for False Dawn, an anti-globalisation diatribe which has as good a claim as any to have pioneered the current Klein/Monbiot/Hertz industry in such things. Galen Strawson’s most famous work at the time (he’s probably written a lot since, but I haven’t kept up) was Freedom and Belief, a systematic destruction of the philosophical concept of free will and a proof that there can be no such thing as moral responsibility. Don Hay’s best known work was the thumpingly good but painfully rigorous industrial economics textbook known to its sufferers as “Hay and Morris, but he also was (and remains) the doyen of Christian economics. So basically, from Gray I learned that everything’s going to hell and there’s nothing anyone could do about it, from Strawson I learned that that everything’s going to hell and there’s nobody you can blame for it, and from Hay I learned that I, personally, was going to hell and that if I didn’t show up for Industrial Economics lectures he’d send me there. Actually that joke is a horrible calumny on Hay, who was an utterly nice man and never threatened me with hellfire, even in the face of severe provocation.

But anyway, enough of this sickening nostalgia. “Straw Dogs” is a great book. It’s rather like the film of the same name in its bleak view of the prospects for humanity, although anyone hoping to see Dustin Hoffman going apeshit with a shotgun in Cornwall will be disappointed. Basically, John Gray asks the interesting question; what if we take seriously the fact that humanity is just one more type of animal on the face of the planet. The answer is that, we end up being brought face to face with the fact that an awful lot of things which over the years we have seen fit to kill each other over, end up looking pretty freaking silly.

The really good news for me is that Gray has finally found a prose style that works. I’ve been a fairly loyal buyer of his books over the years, and have always marvelled at how someone who gave such interesting lectures could write such constricted prose. I have a copy of his “Liberalisms” that is basically mint apart from the first fifteen pages, because I’ve never been able to read any further without wanting to drill a hole in my head to release some of the pressure. But he’s been reading (and apparently, hanging round with) JG Ballard of late, and it shows. He’s now setting out his philosophical arguments in simple declarative English sentences (harder than you’d think) and using imagery that contributes to his unique and bleakly pessimistic view of the world, rather than parodying it. As a work of philosophical literature, I think it’s right up there with Marshall Berman’s “All That Is Solid Melts Into Air“, and I think I’ve said that about precisely zero books before.

So, for people who give a floating shit what I think about anything, there’s a couple for you. Thanks to the reader (you know who you are) who recommended the Keen book.


September 19, 2002

Cheap shots at war-libertarians? We got ’em!

In re: “nation building” and the idea that the real problem with the Arab world is that it doesn’t have enough US puppet states, I adapt an old libertarian joke:

Q: What’s the most frightening sentence in the Arabic language?

A: ” ��� �� ������� ���������� ��� ��� ��������

(“We’re from the US Government. We’re here to help”)

Translation provided by


September 19, 2002

Bubba the Dread

I’d like to rephrase my argument in favour of war in Iraq (that it is the only politically possible way of ending the horrendously cruel blockade of Iraq) in terms which won’t convince anybody any more, but which might hopefully spoil the dinner of most of the other members of the pro-war camp.

The main argument of the warbloggers at the moment is that inspections won’t work, can’t work, can’t be made to work. Because there are a million and one things that Saddam Hussein could do to foil, harry or impede the work of the inspectors, there is no way in which we can countenance taking seriously Iraq’s offer to allow “unconditional” inspections. The only thing we can possibly do is invade, and there’s an end on’t.

Fair enough. But note that this argument could have been made at any time in the last ten years. So it does rather raise the following question:

If we really think that there is no possible inspection regime which would be any use at all, why the fuck have we been starving people to death for ten years in the pretence that there is????


1) As Jude Wanniski regularly points out, the answer to the question, frequently asked over the last ten years “Why doesn’t that evil megalomanic just let the inspectors back in if he cares about his people so much?” is almost certainly “Because he knew that some lugnut like you would make exactly the argument you’ve just made now that he has offered to let them back in“.

2) Starting from this premise, it is not easy to avoid the conclusion that the policy of the United States of America over the last ten years has not been to get inspectors back in, but rather to attempt to starve the Iraqi people into revolution against Hussein. Starvation, in my opinion, ought to be classed as a weapon of mass destruction.

3) It further degrades the already debased currency of UN resolutions that they have been, in this case, clearly used in an entirely disingenuous manner.

Of course, this isn’t Bush-bashing. Although the “inspections, schminspections” wing of the warblogger community are probably guilty of pretty serious bad faith (it’s not possible to both hold the view that no inspection regime is satisfactory and maintain that the deaths from malnutrition and want of medical treatment which I call “starvation” for polemic purposes above were the fault of Saddam Hussein rather than the fault of the USA acting through the UN), bad faith is a much lesser crime than mass murder, and at least, in a sort of bumbling and insanely worrying way, Bush is holding out some hope for the end of the suffering. Nope, the policy of maintaining the death-grip of the blockade in bad faith, in the face of copious information about its murderous nature, and in the hope that it would eventually result in “regime change” without a fight, was the work for the most part of William Jefferson Clinton. Would it not be better for the soul of the Left to admit that the policy of starvation took place for the most part during the Clinton years and represents the logical outcome of the “triangulation” strategy (neither invasion nor accomodation, but rather a “third way”) which marked out most of what Clinton did?

I fundamentally like Bill Clinton. That’s why I’m right there on his side on most issues; whatever he does, he isn’t an arsehole about it. And most of his opponents are such horrendous arseholes that one’s every instinct cries out to support him. But after thinking through the argument above, I find it very hard to look at pictures of his big red old face without getting the same mental picture of heaps of emaciated bodies which always lingers as a retinal ghost image in the portraits of all the worst villains of the twentieth century.

edit: Forestalling the argument that “the reason people are starving in Iraq is that Saddam does this, that, the other instead of spending the money on food”. It isn’t so. Under the terms of the blockade, Iraq sells around $4bn of oil a year. The UN keeps 40% of this for its expenses and for reparations, leaving $2.6bn. That leaves around 36 cents per Iraqi per day, which is nowhere near enough to live on. And Iraq has next to no other exports but oil, and agriculture is pretty difficult to establish when you aren’t allowed to buy fertiliser because it might be used as chemical weapons precursors. Furthermore, any argument based on how much money Iraq spends on its army overlooks the tiny technicality that every nation tends to increase military expenditure when they are under immediate threat of bloody war!. There is simply no way off the moral hook by twisting the facts in this manner.

other edit: Just realised that, of course, all references to “USA” should be “USA and UK” above, but can’t be bothered to change them individually. I’m part of the collective guilt on this one too. The French, bless ’em, aren’t.


September 18, 2002

The Trouble With Oligarchs

An answer, finally, to a question which has been bugging me for ages. Conversations between me and Harvard Institute types about the disastrous “shock therapy” experiment in Russia where an attempt to build capitalism in one country ended up killing a fair chunk of the population have always tended to go like this:

Me: What the hell happened? How did you fuck up Russia so badly? People call Art Laffer a crap economist, but he never starved a million people to death! What were you guys smoking?
Harvard Institute type: Oh it was terribly sad. Our policy mix was about right, but, unfortunately, the whole thing was derailed by the botched privatisation program
Me: I’ll say it was fucking botched! GDP fell by 42%! Life expectancy fell by seven years! I simply do not believe that a freaking privatisation program, a fairly mild supply-side reform, no matter how badly designed, could have that kind of immediate and catastrophic macroeconomic effect!
Usher: Excuse me sir, would you mind lowering your voice and minding your language? Professor Shleifer is about to make his speech
HI Type:Well the problem is that because the privatisation program was handled badly, the national assets ended up in the hands of a small group of oligarchs.
Me: So fucking what? They were in the hands of a small group of oligarchs before the privatisation! In any case, how does this affect output?! When people find out that their employer has been taken over, they might slack off a little, but they don’t suddenly decide to down tools, go home and starve to fucking death! There’s got to be more to it than that!
Somewhat more burly usher: Excuse me sir, would you mind stepping outside …?

Which has always been the kernel of my argument. Terribly unfair and corrupt or not, handing over ownership of a factory from this bunch of gangsters to that bunch of gangsters doesn’t stop the wheels turning. Surely to goodness, the Harvard Institute must have made some other criminally stupid mistake to do so much macro-level damage in such a short time?

The answer to which was, “yes and no”. Fundamentally, what we have to realise that, at an economic rather than a political level, what’s bad about oligarchs is a monetary perniciousness rather than a moral one. The fact that they’re crooks is economically neutral. However, the fact that they know they’re crooks, and they suspect that they’re going to get found out soon, can have disastrous effects. Think about it this way:

A party apparatchik can be a pretty venial and horrible person. But there’s only so much self-dealing he can do for himself under a communist system. He can get a bloody fine dacha, the best food and drink, good clothes and a couple of mistresses and that’s it. Don’t get me wrong; it was possible under the Soviet system to live a lifestyle not unlike that of a Western millionaire if you played the game right. Let’s assume that the actual consumption of the oligarch class was unchanged post privatisation.

The trouble with a capitalist robber-baron as opposed to a corrupt commissar is that because he’s a capitalist, he is concerned with accumulation as well as consumption. Specifically, his goal is not just to live like a king, but to take as much of the cash flow of his factories as he can, convert it into dollars and stash it somewhere outside Russia where the people he’s meant to be answerable to can’t find it. In the balance of payments, this shows up as a negative item on the capital account (ie, by depositing the money in a foreign account, he is increasing the claims of Russians on institutions outside Russia). When you have the entire productive industry of the country owned by people like this, then the capital outflows can be pretty massive.

Unfortunately, for a country in Russia’s stage of development, you would normally want to see capital inflows, not outflows, which was rather the problem. Billions of dollars in aid and investment went into Russia between 1990 and 1998, but most of it just ended up providing the liquidity for capital flight. And of course, as one learns in the dull national accounts lecture in the first week of your macroeconomics course, a negative item on the capital account has to have as a counterpart a positive item on the current account; to accomodate the capital flight, Russia had to run a current account surplus. Which is pretty tricky; given that Russian exports to the outside world were more or less fixed in the short term, the only way to create the surplus was through import reduction or “domestic demand compression”. Which is exactly what happened; Russia experienced a huge and horrendous depression precisely because an item which is usually small enough to be forgotten about (the drain on domestic liquidity brought about by capital flight on the part of criminals) became significant enough to be large relative to the domestic money supply. So the *really* stupid policy of the Harvard Institute was to impose the open foreign exchange and capital markets which made the capital flight possible.

Interestingly, there is a corollary to this “monetary theory of kleptocracy”. Note that most of the bad effects of the kleptocrats took place because they converted their (local currency) profits of theft into dollars, draining the economy of hard currency. Because of this, we can credibly hypothesise that there is one case in which you could hand the entire economy over to robber barons and it wouldn’t really matter at all. That would be the case in which the local currency is the global reserve currency, so that the kleptocrats are happy holding their wealth in local currency. In other words, the one country in the world which has literally nothing to fear from becoming a gangster state is the United States of America!


September 18, 2002

The Nukes of Yesteryear

I read in my evening newspaper that Saddam is definitely on the threshold of developing suitcase nukes, and that all he currently lacks is the necessary uranium … takes me back to my own schooldays. Readers may be interested or reassured to know that, based on my own adolescent attempts to build a nuclear device in my parents’ shed, the “getting hold of uranium” stage was the difficult bit for me too.