Where the Theorem doesn't Apply

I was discussing free trade with a friend a while ago when he said something that struck me as a good example of easy false superiority.

“Comparative advantage only works between rationally self-interested individuals.”

The law of comparative advantage is a very important one, which shows what wide circumstances trade can be useful; even when one party is strictly superior to another. But, as for any theorem in maths, or physics, it’s important to know the scope of the law; the law only holds given some assumptions. Not knowing about comparative advantage makes you ignorant, but to understand it you have to be able to distinguish the cases where it applies from those it doesn’t.

For comparative advantage, these are not that both agents are rational and self-interested (or even rationally self-interested, which I’ve just realised is different). In this case, the domain of the law of comparative advantage is neither a subset nor a superset of the set of rationally self-interested individuals.

For example, it can work with irrational agents; if nothing else, you might be a not-bad approximation of a rational agent. I think it only collapses to the extent that irrational agents don't have a utility function, at which point it becomes ill-defined what exactly constitutes a benefit for an agent without a utility function. You could trade with a paperclip maximiser though.

It can also work between an altruist and an egoist: the altruist might buy food to give to the poor from the egoist, in return for his programming skills, or whatever.

It could also work between two altruists, but if they both knew each other to be perfect altruists it'd look exactly the same as division of labour, so it's not a very interesting case.

And it doesn't always apply with rational self-individuals.

There's the trivial case, where both agents are identical, and there are no returns to scale, so neither has anything to gain from trade.

There's the 'high costs of trade' case, where shipping, communication, etc. are too expensive. I suspect this is the most common one, and highly prevalent in the modern world: if there weren’t transaction costs, there would be no reason for involuntary unemployment.

There would also be no war; if it weren’t for lack of information and so on, the two countries could just work out what the peace treaty would look like, and use that as a basis for negotiation; both gaining, because they don’t actually have to pay the costs of war.

There's the 'diminishing returns to scale' case, rising marginal costs mean we don't want to trade. A special case of this is where you want to do something because you value being the sort of person who can or does do that thing in itself: you might be a better cook than me, but I still cook for myself because I want to be the sort of person who can cook.

There's the 'my ultimate goal is to kill you' case, where I'm not really interested in your ability to make shoes more effectively than me, and the 'I want to turn the world into paperclips, and you're part of the world' case, which are the same case really.

There’s the prisoner’s dilemma for a known (finite) number of iterations, where it’s in my self interest to defect. (Or at least, it is on the normal decision theories. If you run Timeless Decision Theory, you might cooperate)

There's the 'you have no ability to produce anything I value, or destroy anything I value' case, where I have no reason at all to care what you do. If you were in a very distant land, or another universe, or a lot smaller than me, this could follow. Alternatively, if there are more agents that coefficients in my utility function, it could be that there’s no point my trading with some of those agents; there are other agents with whom it would be more profitable for me to trade.

Finally, there’s a lot that’s abstracted away from the impression given by the Law of Comparative Advantage. It shows that there are mutually beneficial trades; but not which one will be enacted. Bargaining, bluffing and negotiation help determine which particular deal is done, and even with friendly deals the strategy of conflict is still important.

So the law of comparative advantage actually has a very different – and perhaps smaller – domain than we might have thought. It does seem it applies for quite a lot of the sort of human activity we care about though, like international trade. Also, it gives a rigorous account of one mechanism whereby two agents can both become better off through trade. But it isn’t magic, and doesn’t solve all problems.

Easy False Superiority

Like many people, I was an atheist before I was a Libertarian. Or, if atheism and libertarianism are the defaults that everyone implicitly accepts until they confuse themselves with theology or philosophy, I was a self-identified atheist before I self-identified as a Libertarian.

I spent quite a lot of time on atheist websites, reading new arguments, and retellings of arguments with theists. And then, when I became a Libertarian, I did the same; Econlog and Cato and a lot of Austrian Economics.

In retrospect, many of the articles took the same pattern. First, they would refer to some religious argument, or socialist person, and thus get rationality points for not arguing against strawmen. Then, they would offer a counter-argument; something straight out of Economics 101, or the lists of logical fallacies. As the reader, I’d understand the sentences the other person said, and I’d understand our response, and feel so clever: here was a great truth that I knew, and these other people didn’t! My opinion of myself, and my opinion of my opinion, rose. Wait till I showed the world this new thing!

In retrospect, of course, I was being an idiot.

Because everyone experiences this.

It’s so clear now, but it wasn’t to an obnoxious teenager. Socialists have Why Libertarianism Makes you Stupid, and a thousand other pages. They have it whenever a politician renounces ‘unrestained capitalism’.

And think how silly those guys look, who say stupid things like ‘Libertarians don’t understand monopoly’ or ‘Libertarians don’t realise that markets aren’t magic’ or ‘Libertarians ignore behaviourist economics because it’s against their religion.’

You don’t want to be one of those guys, whose both so arrogantly superior, and wrong, do you?

So, I’m not really sure why it’s so tempting to do this.

There’s a study in psychology (Mueller and Dweck) where they investigated the effect of praising children for intelligence, compared to praising them for doing something intelligent, or working hard. It turns out that the first group of children end up self-identifying as intelligent, and then become massively risk averse, avoiding hard problems so as not to spoil their reputation by failing. Which is not a very good long term strategy.

Maybe a similar thing is going on here: you read people arguing, and apparently doing the right thing, and then some of the halo effect washes of onto you.

Maybe people, given a load of training data biased towards one side, assign such low probability to socialism or conservativism or whatever that they don’t think it’s worthwhile investigating? This would require people to evaluate positions and facts in a totally stupid manner, but we know people do that anyway.

Alternatively, there’s the idea of an Affective Death Spiral. People basically think affectively: they have good or bad associations with concepts, and these dictate much of their thought and actions. Actual verbal propositional thought, the kind we think of as thought, is less important.

The major problem is when having a positive opinion of one aspect of something improves for opinion of it’s other aspects, for no good reason. And then you start looking for evidence, and by selectively filtering you become even more sure, which makes all the associations even better... and after a massive positive feedback loop, you end up with beliefs tangentially at best related to the truth.

But I’m not really very sure about any of that.

Getting over it this easy false superiority is hard. Stopping reading pundits (e.g., most blogs! – but thinks like Marginal Revolution are probably ok) Also, costly; it means having to miss chances to take digs at the accursed enemy, and potentially missing chances to signal your loyalty to your team. But at the moment, so much argument simply goes straight past each other. It’s not surprising that no-one ever changes their mind.

But this should be ok! We might appear to lose some arguments if we don’t have access to the dark arts of propaganda any more, and limit ourselves to evidence of a higher standard. But if we actually engage with the values and opinions that the others actually hold, maybe more people will be taken by the throat and forced by the evidence to change their mind.

And if it turns out that, in the cold light of the truth, we were wrong about something, or everything? I don’t think I can put it better than Gendlin;

What is true is already so.
Owning up to it doesn't make it worse.
Not being open about it doesn't make it go away.
And because it's true, it is what is there to be interacted with.
Anything untrue isn't there to be lived.
People can stand what is true,
for they are already enduring it.

—Eugene Gendlin

Traditional Socialist Values

Are Socialists Inherently Evil?

If you can’t be bothered to read the rest of the article, I’ll just jump straight to the conclusion and tell you the answer is no.

For the more intrepid reader...

There’s a really great post by Eliezer Yudkowsky on the sorts of values Capitalists actually have, rather than Socialists would like them to have. How Traditional Capitalist Values are more about

“Mak[ing] things that people want, or do things that people want done, in exchange for money or other valuta. This is a great and noble and worthwhile endeavour, and anyone who looks down on it reveals their own shallowness.”

than

“grab all the money you can get”

I wanted to a mirror one, on traditional Socialist Values. Except, because socialists actually are evil and immoral, I’ll have to invent some values that hypothetical, non-evil (merely delusional) socialists might have.

And these are the values and arguments you should be considering, when you evaluate different systems. If there are stronger arguments they could be making, that appeal to more humanely realistic value systems, it doesn’t matter if all the socialists you meet are idiots who don’t understand that Rothbard proved them wrong decades ago, that value being ordinal disproves their system.

We’re Libertarians; we didn’t pick our beliefs from those offered by the main political parties, and there’s no reason why we should pick our considerations from those offered by other ideologies. If there is a stronger case and you ignore it, you’ve lost your epistemic virtue; Libertarianism has become your fantasy, rather than actually about the world.

How not to argue like your opponents are characters in Atlas Shrugged.

By the time you’ve shown that socialism is the rejection of life and the worship of death, you’ve shown your point. The hard part is to get from actual positions that people take to Atlas Shrugged; getting from Wesley Mouch to some kind of contradiction is not the important part of an argument. And for that, we need to understand the values they’re starting from; maybe to understand that they’re human too. Values like,

• “From each according to their ability, to each according to their need” – not looting from the productive to keep the Twentieth Century Motor Company afloat, but each individual proud to achieve the best he could, in the knowledge that he was helping those in need, rather than making the rich richer.
• “Every socialist movement’s proud and beautiful goal is a society based on freedom, mutual cooperation, and solidarity, where all exploitation is abolished and each individual’s free and harmonious development is the condition of everyone’s free development.”[1]
• “Democratic socialism is an international movement for freedom, social justice and solidarity. Its goal is to achieve a peaceful world where these basic values can be enhanced and where each individual can live a meaningful life with the full development of his or her personality and talents and with the guarantee of human and civil rights in a democratic framework of society.”[2]
• That it is outcomes that matter, and a millionaire who fails to help the suffering masses is as bad as one who inflicts suffering upon them.
• That death or suffering is always bad, whether it is wrought by nature or man, and we should try to prevent it either way. We should not be a bourgeois state and ignore the former.
• That it’s crazy, in an era of industrialised farming and genetic engineering and the internet, for us to not be able to feed the world. That it’d be comic, if it wasn’t tragic.
• That advertising destroys the self esteem of millions of people by presenting them with unobtainable targets. If we move beyond profit-obsessed corporations and media manipulation, we can acknowledge the full range of human values, including honesty, and allow people to flourish in their own manner.
• That inequality generated by Capitalism is morally wrong, because it fragments society and prevents us from relating to one another. Can the tycoon in his luxurious penthouse relate to the pensioner shivering in her flat, or the unemployed man waiting for the bus in the rain?
• “What does it mean to be a intellectual of the field? To muddy your boots, to swat mosquitoes, to eat out of the common pot, to listen to questions, to accept criticism. To adjust theories to workers experience. To adapt to changes as well as to defend principles.”
• That, if there were no other effects, it might be better to have a richer but more unequal world, if it made everyone better off. But at the moment, we’re not on that margin: redistribution from the pampered elite to the starving masses will make them better off, not worse.
• That Feudalism was wrong to assign a child a station at birth, and Capitalism is wrong to assign it a socio-economic class.
• That it is wrong for huge corporations to manipulate governments, especially of poor countries, into weakening environmental laws to allow for greater profits: the public good of the atmosphere, and other parts of nature, needs protection.
• That people should be defined by their own values and projects, not by their job.
• That ‘positive freedom’ matters; we might quibble over the semantics of whether or not this counts as freedom, but whatever it is, actually being able to achieve your goals is important.
• That the view of human nature as rational, egotistical agents is slander; our other values, like community, family and fellowship are important, but ignored in a Capitalist Society.
• “To love the country; do it no harm
• Serve the people; do no disservice.
• Follow science; discard ignorance.
• Be diligent; not indolent.
• Be united, help each other; make no gains at other's expense
• Be honest and trustworthy; do not spend ethics for profits
• Be disciplined and law-abiding; not chaotic and lawless.
• Live plainly, struggle hard; do not wallow in luxuries and pleasures.”[3]
• "It's easy to offer an "opportunity" that in practice goes to a few; the hard and serious task is to ensure the means of flourishing to all." HT: SarahC
• It is better to live for others than only for yourself .

---

[1] Swedish socialist leader Nils Karleby, quoted in Timothy Tilton, The Political Theory of Swedish Social Democracy (Oxford: Clarendon Press 1990), p. 73.

[2] Socialist International, Declaration of Principles.

[3] http://english.peopledaily.com.cn/200604/11/eng20060411_257606.html

Getting Past the Words

‘Libertarianism’ is just a word.

Ideologies are not some kind of special, ontologically privileged thing.

Rather, an ideology is just a strongly compacted set of beliefs about the world.

You don’t arguing for an ideology, you argue for those facts about the world. The ideology is just a convenient categorisation; something that will fit on a bumper sticker. The goodness or badness of a policy isn’t caused by whether or not it’s libertarian; it’s caused by facts about the world.

Because libertarianism is just a word, you should be able to justify your beliefs without having to appeal to the word ‘libertarian’. You should be able to taboo ‘statist’ and still argue against higher taxes, be able to advocate free speech without appealing to ‘liberty’.

If you can’t follow the chain of concepts back to brute facts about the world, then your beliefs aren’t rooted in the real world: they form a free floating bubble, each idea backing up each other one. But because your beliefs are independent of the real world, they no longer provide evidence about it. If you would believe them regardless of the physical state of the world, then they’ll always recommend the same policies, regardless of whether or not those policies are the best; they no longer restrict anticipation.

And your evidence can’t just be ‘The Soviet Union was terrible’. There’s more than two options, and you need to have evidence to distinguish between Libertopia and a stable western mixed economy, not a straw-man.

Take healthcare. You should be able to trace your belief back past liberal pieties like ‘free choice will cause competition and improve standards’ to actual facts about the world. You should know of the RAND health insurance experiment, in which thousands of poor Americans were given varying degrees of health insurance, and ten years later those with total coverage were no healthier than those without. Then you’ll know your position has empirical, not just rhetorical, support.

And you’ll stump any socialists you argue with. Won’t that be grand? Instead of your talking in Libertarianesse, and his talking in Socialesse, you’ll be basing your arguments in the same reality he lives in.

And as politics makes everyone stupid, he’ll never expect it.

But you can’t stop there. You can’t just look for the evidence you want to find – you have to take into account all the consequences of the evidence, even those that don’t fit neatly into a ‘libertarian’ shaped box. And you can’t help but find evidence on both sides.

You have to notice that the RAND study didn’t investigate catastrophic care, and so isn’t evidence either way on the value of public funding for really expensive, but effective, treatments.

You have to notice that the RAND study is also evidence that privately funded medicine isn’t that useful either. Not as strong evidence as it is against publicly funded medicine, because the people in the control group still bought private medicine, but if private and public money is buying the same type of medicine...

Or take trade unions.

You can argue that trade unions are monopolies, and that monopolies make consumers worse off. But that’s not obviously true for all monopolies; what about natural monopolies? Or what if the benefit to consumers, in the form of companies and then shareholders, was outweighed by the benefits to workers, who value money more?

What does your opposition to trade unions actually imply about the world? How much lower would prices be without them? What would be the difference in working conditions? If you’re not willing to put your money where your mouth is on these issues, you shouldn’t base your beliefs on them.

Instead, you could read Robert Wiblin’s post. It turns out that trade unions don’t transfer income from evil capitalists to hardworking workers: they transfer money from hardworking workers to unionist workers.

We can use Libertarianesse to communicate between Libertarians. If we already agree on a lot of things, you can transmit information very quickly just by saying something like ‘conscription is slavery’. But without the shared background, the agreement on things like differing conceptions of the good, the opportunity cost of time, the effectiveness of slaves in combat, the effect of wars of war domestically and abroad, the incentive problems involved with slavery... without this, saying ‘conscription is slavery’ is just rhetoric. You need to be able to dissolve the question, and get at the underlying facts.

Looking for Proof

Freedom's pretty great, huh?

I’m pretty sure it is.

Maybe I’ll go and look for some more evidence today; read some articles in economics journals or something. And then I’ll be even more sure that Libertarianism’s the best. Infact, the longer I study, the more confident I’ll be. If I knew all the arguments and all the facts, I’d be absolutely confident.

...

Except that’s impossible.

Your expectation of your level of belief after the new evidence you’re going to find must be the same as your current level of belief. If there’s a big chance of becoming a little more confident, there must be a little chance of becoming a lot less confident to match it. Only one will be the case, and your level of belief will change, but you can’t know in advance which way, or how much.

If you already knew that, after reading that book, you’d be more sure of the Law of Comparative Advantage, why not just update your belief now? Afterall, you’d have evidence of evidence – and that’s as good as actually having evidence. If you expect to become more confident, or less, you should have already done so.

To say it a different way, lets suppose we represent our levels of belief using probability.

Are we allowed to do this?

We're not allowed: we have no choice. Anything else is just plain wrong, and if you do anything else you will lose.

Let H be our hypothesis, and E be some piece of evidence we’re going to look for. We can easily represent our expected level of belief in the proposition thus,

P(H|E)P(E) + P(H|¬E)P(E)

but we can break up our current level of belief in exactly the same way

P(H) = P(H and E) + P(H and ¬E)

= P(H|E)P(E) + P(H|¬E)P(¬E)

Yes: our expected new level of belief is the same as our current level. There’s a conservation of expected evidence.

So you can’t go looking for proofs of Libertarianism.

Well, ok, you can. But if you don’t find them, if it turns out to be ¬E rather than E, you have to become less confident in Libertarianism. We may be right, but we’re not magic, and the laws of probability bind us too.

James Tyler - The Importance of traders and the evils of bankers

James Tyler gave the following talk to the society on 27th May 2010 at Christ Church. It is also available at the Cobden Centre.

Trader: One whose business is trade or commerce.

Trade and commerce is the lifeblood of wealth creation. Without specialisation and exchange, we would all starve. You have oranges, I have apples. Individually we are bored, together we have a fruit salad.

For specialisation, exchange and commerce to work its magic, firstly we need some common ground: a market. Now, mention that word to a Socialist, and he starts to froth and foam at the mouth. The evil of markets, how the market forces this and exploits that, blah blah.

Unfortunately, they are confused. You see a market is just a bit of space, physical or virtual, where people who want to buy meet those willing to sell. That’s it. It has no power of its own. No influence. No horns and a pointy tail.

However, badly aimed as their invective is, they do have a fair grievance lurking in those passionately beating breasts. What they are trying to say is that they object to those who have power in a market. Who wields the power in a market, and where does it come from? That is a fair question to ask.

I contend that power always comes, ultimately, from Government. They hold the monopoly on power, they set the rules, and their arbitrary decisions can mean life or death for any businessman taking a risk. They get the keys to the gun cabinet.

Markets and traders

Only loons attack commerce between good old wholesome types looking to exchange the hard earned fruits of their labour for other stuff they need: I exchange my apples for your oranges.

Unless, that is, you want pears. The free interaction of people that is the market decided on a clever mechanism to get around this problem. It created an intermediate commodity called money.

Money is just a commodity like any other. The free market chose something that was durable, portable, respected, and consistent. The free market originally chose gold and silver as money, and gold remained money until governments came along and nationalised then destroyed it. Money now is a fraud – the greater fool theory of acceptance only because somebody else will too.

The creation of money was a fantastic innovation – a neat solution to the problem of the double coincidence of wants… or rather what to do when there wasn’t a coincidence.

But what happens if an orange farmer wants to sell next year’s crop now? Maybe there is a great demand for oranges and the farmer has cultivated trees to meet the demand, but does not want to take the risk of a craze for plums depressing the demand for oranges. A consumer of oranges may only want to buy what he can pick up and select. A grocer may not want to tie up his cash in something so far off into the future.

What is needed is someone in the middle. Someone willing to guarantee a price for those oranges now, take them in the future and then sell them on when they are needed. This is where the speculator steps in and provides a vital service.

Ahh… the evil speculator, now there is a ripe target!

How can somebody who produces nothing, does not employ physical labour, and does not reorganise the factors of production, be in any way productive in society? Off with their heads!

Speculator: one who speculates on abstruse or uncertain matters

The key is uncertainty. The future is not known; if it was, then the central planners might stand a better chance. But the future peculiarities of individual desires and wants can never be known, so there are always highly uncertain outcomes inherent in planning for the future. The world is too complicated to simplify into maths or bureaucratic diktats. The risks are too great and the mistakes too expensive. What we need is a mechanism to attempt to put a price on future outcomes. We need to “crowd-source” the answer to the problem of resource allocation. And, that’s what speculation is…

I risk my own shirt to take on risks that others do not want. I’m proud to say I speculate. I speculate that I will be able to find another buyer for those risks at a future point in time, and then I charge a fee for my services.

Some say that this is making money from nothing, but I say I provide a service to the world in smoothing out the jagged pointy edges. If things go wrong, I will have to pay the price personally.

The act of speculation is important in the signals it sends out. If prices rise, it signals a shortage which stimulates extra production to satiate demand. Or if the speculator successfully sells short some shares, the falling price will send out a signal that not all is well with that company.

Let me quickly clear a couple of things up …

Markets are not efficient

This is a stupid, indefensible idea peddled by neo-classicist eggheads. Information is often wrong and therefore people err. Mistakes are made, but I contend that the mistakes made by crowds are much smaller than when Government gets its grubby hands on a ‘problem’.

Markets work in waves and ripples and patterns, not aggregates, averages and efficiencies

Early adopters get rewarded the most; late arrivers are penalised. The crowd sometimes gets carried away, and prices rise too much or fall in an unwarranted way, but by and large, when not unduly influenced by power, markets are a remarkably efficient way of making a myriad mind-numbing decisions that all hang together. Markets are smart in the way a regulator can never be.

Short Sellers

Secondly, I want to sing the praises of those great unsung heroes of stock markets: the short sellers.

Selling short is the process of selling something you do not own, in order to profit from a fall in prices, then buying it back at a lower price.

Short selling is a dangerous game. You are hated by all and sundry. Governments, regulators, corporate bosses, and fat cats. Everyone, it seems. You are always at risk of being targeted for a ’short squeeze’. But short selling is vital for two reasons:

1) Buyers need a seller to buy from.

If you want to buy some shares – who do you think it is that will sell them to you?

It’s not usually an investment fund, or a pensioner, or your mate. It’s the ‘market’, and it is more than likely that the person you bought them from will not own them, but will scrabble around for the rest of the day trying to find them a penny cheaper. Can you be bothered to do that?

The stupidity of banning short selling is that it stops the market working – meaning that movements are likely to be bigger, and the falls greater.

2) Short sellers are the policemen of the markets – a much better (and more fearsome) regulator than the FSA.

Without short sellers, Enron and WorldCom would have got away with their fraud for a lot longer. It is a tragedy that the short sellers of banks were not bigger and better armed during the run up to the sub-prime crisis.

Don’t get me wrong, short sellers were there, playing their lonely game, but they were just too small in face of the great money/banking juggernaut carelessly careening away. Stronger short selling might have seen off the sub-prime fiasco earlier and with less pain.

As a society, we should desperately be encouraging short sellers in situations like this. Big business needs to respect the short seller – it keeps them honest. When prices are rising in a rampant fashion, usually no good comes of this. This is when we need the short seller to tame the wild beast.

Speculators do a much better job of sifting through the morass of conflicting signals to fish out the price for the best allocation of resources in a way that Sir Humphrey, sitting in an ivory tower in Whitehall, could only dream about.

So, traders and speculators are vital for a productive and fully-functioning capitalist economy. In a pure and free economy, they are a force for efficiency and part of the crowd-sourced resource allocation system.

But unfortunately, we do not have free markets

The sub-prime fiasco has shown us that markets, especially financial markets, are anything but pure. Markets are distorted by power, and it’s important to turn your swivel gun onto the source of that power….

The one thing you should always know about busts is that you can’t stop the pain at that point: it’s too late, the damage has already been done. The boom may have felt good at the time, but those tequila slammers at 2am always seem like fun. Remember the feeling in the morning. Trying to alleviate the hangover by more of the same is the action of an alcoholic. It’s the boom when assets are wildly misallocated, and that’s where we should focus.

The sub-prime crisis started with government, was promoted by government agencies, and was taken to the dizzying heights of stupidity by a banking system fuelled with masses of cheap money, produced by central banks that panicked after the previous cheap money bubble went pop in 2001.

The bankers perceived an inexhaustible supply of cash that could be lent at a profit to people who had no chance of paying back. The Mexican strawberry picker given a $750,000 loan to buy a house he could never afford to repay. A cleaner running a buy-to-let portfolio of 4 houses, with zero down payment.

What’s the problem with banks, after all, it’s a free world?

Banks are not run by kindly old bespectacled men, carefully lending money to young families to give them their first break. Remember It’s a Wonderful Life with Jimmy Stewart – the friendly banker looking after good ol’ townsfolk? Scrub it from your mind.

Banks are vast hedge funds, with vast trading floors of speculators, all doing “God’s” work, as some idiot once said.

One UK clearing bank has been described as a huge smart hedge fund, with a mediocre provincial bank bolted onto its underside. That’s probably true for all of them.

A few starters on banks:

1) They are licensed by the government. I cannot start up a bank – neither can you, unless you go through the various hoops, fires, and barriers erected in front of you. You need mountains of capital. They make it difficult to join their club.

2) They operate under a specially loosened set of accounting rules.

Normally, companies are required by accounting rules and law to make sure they provide for their liabilities as they fall due. If you order a load of gear on credit, you have to show that you have the ability to pay for it – and pretty rapidly. Companies are expected to make their creditors ‘whole’

Look at the accounts of Vodafone and in their balance sheet they have to provide for ‘current liabilities’ and ‘long term liabilities’, but not so for a bank. Banks get away with a broad ‘liabilities’ section, with no attempt at sorting near term risks from long terms assets. It doesn’t matter whether they owe money tomorrow and are due to cover it in 5 years time.

3) Banks thrive on red tape, loopholes, fuzzy wording and obfuscation

For instance, 75% of people in this country believe that when they place their hard-earned money in a current account, it remains their money. It most emphatically is not. You hand your money over, and you get a promise. Well, I say promise, but the bank goes to great lengths to hide this fact. You are given a statement, which shows your money proudly sitting there, waiting for you – all safe and sound.

Except it’s not.

It is being lent out to Dubai World! Or passed onto the trading floor, and being pushed into Alphabetti Spaghetti Derivative Hooplas, funnelled into their massive casino operation.

Even though you might spend it tomorrow, the bank will not have your money. If you want it, they have to get it from somebody else’s account, or go onto the money markets and borrow it.

4) A bank is an operation designed to make profits from money that is not their own.

When you put your Tesco’s money into a bank, you are investing in a hedge fund, except you don’t get any of the profits. If it all goes wrong, as it did in 2008, then the taxpayer pays for all the losses.

Even in the good times, the taxpayer insures deposits (explicitly or implicitly), leaving the banks free to gamble away. Does this seem like free market capitalism to you?

What is the problem with this, after all, it’s a free world?

Well, it’s not. As I said before, banks operate with privilege and monopoly rights, with taxpayer backing. And we can add a final potion into the mix: incentive and liability

The sub-prime crisis cost Wall Street and the City trillions, or rather it is costing taxpayers that much. If I lose money, I remortgage my house; otherwise I don’t come back.

When Goldman Sachs put all its eggs in the AIG basket, they should have received a bloody nose – at the very least. Yet uncle Sam paid them out 100c on the $ and Goldman scored a slam dunk. God’s work, eh? A miracle indeed.

A trader called Howie Huber recorded the single biggest loss ever at a bank. He cost Morgan Stanley over 10 billion dollars, but he got to keep the 24 million dollar bonus he earned the year before.

Dick Fuld at Lehmans faced some devastatingly hard questions from some horrible congressmen, but retired a very rich man.

It was the taxpayer who paid the price. Private profits and socialised losses – emphatically NOT what I’d call free market competition.

Now I don’t mean that we should round these guys up and shoot them, or even take their bonuses back – they signed contracts, and we respect the rule of law, and contracts. It’s the basis of our freedom and we risk tyranny if we selectively choose to violate these rights.

We have to recognise that bank traders get a free option. You can bet it all on red or black: win, you get a bonus. Lose, you may lose your job – but then probably use your ‘reputation’ to walk into another one.

The system is wrong, and something must be done about it.

In terms of dealing with the crisis we have to understand that damage is done before we are aware of it. In the sub-prime crisis, it was done in those happy days of 110% mortgages, up front discounted rates, and more freshly printed money than you know what to do with. We were killing our economy with cheap money love.

When gravity asserted itself, and the inevitable bust came we faced a simple choice: take the pain, or hide it.

In 1982, 100 Keynesian economists wrote a letter to the times saying that the government’s economic policies were suicide. It’s a bit of a coincidence, then, that that was the exact moment the real economy started to grow. Time and again, history shows us that if we take our medicine early, we get through the illness quicker.

Or we could take the Japanese/Keynesian approach, and hide it with fiscal aggregate kabalah nonsense. And lose twenty years in the process

But banks.. what should we do with them?

Some suggestions:

1. Firstly, banks should not speculate with your beer money – unless you understand this, and you explicitly sign it off.

2. Banks should be audited as strictly and as thoroughly as normal companies are – no favours.

3. Banks should legally have to provide for liabilities as they fall due – as every other company should.

4. Banks should offer accounts that are 100% reserved. That is where your money is kept safe, not used to speculate – and it remains your property.

5. Speculation should be undertaken by hedge funds and specialist trading groups, not by deposit-taking institutions, or by the likes of Barclays, that can borrow money from the Bank of England at 0.5% and walk over to the craps table.

6. Anybody, or company, that offers fiduciary advice should face 100% liability in case it goes wrong.

And most importantly,

7. Any person paid more than a certain amount by a bank, should be liable when things go wrong.

The contract that Dick Fuld signed should have meant he lost his house when he crashed Lehman’s. Howie Huber should now be serving Big Macs. And Lloyd Blankfein should be a little more circumspect when talking rubbish about doing God’s work.

God is watching you mate… be careful.

Can classical liberals avoid gender trouble?

I’ve recently read Judith Butler’s Gender Trouble, a key text in contemporary feminist and queer theory. It is provocative, with many interesting (and perhaps even true) ideas. It also says a few things that are either trivial, though maybe they weren’t so trivial in 1990, or just plain misconceived. It has a reputation for dense unforgiving prose, but the best bits of it are no more difficult to understand than a detailed argument in analytic philosophy. Indeed, without the silly numbering and lettering that litter some analytic philosophy, the argument reads as much smoother prose.

The worst paragraphs follow a pattern of disconnected quotations from various French thinkers presented as opposed perspectives but without much explanation of their theories, ending with a few questions that fall somewhere between the speculative and the rhetorical: “X says ‘this’, Y says ‘that’ but if Y is right, what does it mean for X’s fundamental theory?” She often doesn’t explain in these exchanges why we should care about these theories. Butler’s discussion of psychoanalytic thought, in particular, sinks into this pattern. I suppose these references are unavoidable in academic discussion where the ability to cite a broad literature is a prerequisite for presenting a fresh view. However, Butler is much better when she commits to making and defending an argument of her own. In Gender Trouble, this is a broadly Foucauldian strike on multiple fronts against all forms of sex and gender naturalism and determinism.

The key idea is that there is no stable ground on which to found a universal normative idea of sex (let alone gender). There is no past or future utopia of a ‘true’ sexuality that remains hidden by existing power structures. One cannot scour the psyche for a pure sexual desire or practice that is divorced from social or political power, at least not in a straightforward way, since even repressed sexualities (like lesbianism) are formed as distinct identities using the same forces that oppress them. It is heterosexuality that creates the homosexuality one sees practiced and desired. In fact, ‘sex’ as an institution is generated by social practice, a set of acts that are grouped together using various ethical, medical and juridical discourses.

This ‘troubles’ some feminists as it means that their primary category of political representation (women) is constituted by the very forces of power and domination that their theories attempt to oppose or reform. But, of course, it should trouble anyone who cares about human freedom since according to Butler, sexuality and gender are in no sense natural facts, but unchosen arbitrary institutional impositions on individuals. In fact, they even generate our individual identities and create, police and punish transgressions against them. Quite a lot of her critique hits the mark but I am going to look briefly at two weaknesses. They point to how classical liberals might answer the charge that the free institutions we espouse rely unthinkingly on the domination constituted by the social practices of sex and gender.

Butler’s critique of biological naturalism

One of Butler’s key points of attack is the binary distinction between sex and gender, or the classic idea that one ‘is born female, but becomes a woman’. She attempts to demonstrate that it is not just gender that is the product of social forces, as theorists have traditionally maintained, but that sex itself is a product of discourse. We are undifferentiated beings until discourse groups together certain physical characteristics and inscribes a sex on a body (in fact, constituting the very notion of a ‘body’ by doing so). We are not born even biologically male or female, but have these identities thrust upon us.

Butler holds the discourse of the biological sciences to be a product of this binary and solidified notion of embodied sex and, in turn, a site where the construction of sexuality is hidden behind a façade of nature. How does she argue this? In an early chapter, Butler seems to imply without any argument whatsoever that biology is a site of strategic action, where scientists carefully reproduce ‘common sense’ sexual discourses in order to establish the legitimacy of existing social divisions. In a later chapter, she bolsters this point with reference to a single scientific article on genetics, where scientists discuss their search for a master gene that will explain why some people with XY chromosomes fail to display typically male traits, and some with XX chromosome fail to have fully fledged female traits. She criticises their use of the label XX-females and XY-males which she says introduces the very assumption that needs proving, that genes correspond to actual observed sex. But it is unclear whether she is taking issue with this one article, the hypothesis one group of scientists are trying (and apparently failing) to prove, or the entire field of biological science. Beyond the search to explain exceptions, the correspondence between XX/XY chromosomes and female/male is certainly sufficiently durable that to deny it is to rapidly descend into Python-esque levels of radical obscurantism.

More generally, Butler offers a fairly skewed and partial interpretation of what biologists and geneticists are doing. Scientists use the male/female labels in a variety of ways which seem far from reinforcing and policing common sense notions of sex. They are completely unperturbed with the idea that plants have both male and female parts on the same body. They aren’t troubled by the notion that some amphibians can spontaneously change sex according to social context. Indeed they are fascinated by this discovery. That some lizards can reproduce by making something akin to clones of themselves is, similarly, not making trouble for a biologist. So one cannot assume, as Butler seems to, that the use of sexed labels in biology implies any specific reinforcement of strictly binary sexuality that one sees propounded by some in the human sciences. Natural scientists would generally be fascinated rather than troubled by the discovery of a distinct third or fourth biological sex within humans.

In fact, it seems more likely that scientific discourse (when used properly) has played a role in breaking down essentialist notions of sex. We know through evolutionary biology that the existence of sexed bodies is not a stable fact of any obvious normative consequence or significance, but the result of contingent (often random) mutations over the course of millions of years that have impacted on the way humans reproduce. There is no intrinsic reason why reproductive functions couldn’t have been divided up in a different way to how they are; it just happens that a two-sex divide generally holds amongst humans, but only in the same way that we generally have two feet, two hands and two eyes. Of course, why people should have their body inscribed and defined by their reproductive functions is another matter and one much more in need of critique, but it isn’t scientific discourse that contributes especially to this process.

Targeting biology in this way is particularly ill advised, considering that even Martin Heidegger (who sits at the roots of much post-structuralist theory and had a major influence on Foucault) was, at least on some accounts, a realist with respect to the entities of natural science. Of course, once one introduces a human element to a practice, such as in medicine with its notion of wellness and illness, then you have lost the unique scientific perspective that Heidegger called de-worlding (the studied treatment and analysis of entities as divorced from the human world and its values), but to claim that biology falls into this category requires rather a lot more proving.

Gender as a ‘social formation’

Butler’s references to classical liberalism are quite basic, treating it essentially as adherence to consent and contract as a foundation of legitimate power. She does not discuss classical liberal social theory at all. This is unfortunate as elsewhere Butler seeks out a concept that breaks down the binaries of natural facts and social constructs, and free will and determinism. She notes that although always acting within or against a set of boundaries defined by social institutions, freedom can be found through elaboration on or even parodying of existing practices. Hence, she emphasises the role of queer sexuality in opening up new possibilities in human discourse. Such a concept, of a contingent social framework that structures individual will and identity, or something very close to it, can be found in Hayek’s social theory.

‘Social formations’, for Hayek, are emergent institutions that are the product of human action but not of human design. Like, for example, natural rock formations that are formed over millions of years, they look so elaborate that one assumes they are a product of intelligence. In fact, they are hewn over generations of human interaction, discourse and commerce, not according to a single plan or design. Institutions like language, law and property all fall under this category. So, for example, there is no author of the English language, but a designer trying to come up with an easy means of verbal communication could hardly have come up with a better system (Esperanto, a ‘rationally’ constructed language, never took off). It is unavoidable that people come to be defined and identified by many of these social formations, whether as English speakers or as subjects of common law, and this is prior to the deliberate decisions and designs of individuals or Governments, which have to contend with what a post-structuralist might call the ‘always already’ present aspect of these institutions.

Social change is characterised by the piecemeal adaptation of these institutions. What a liberal wants from these institutions is a framework through which people can form and pursue plans of action without being constantly interrupted and disrupted by the arbitrary powers of others (whether it is being arrested, attacked or having one’s property expropriated). In carrying out their plans, individuals have an imperceptible but eventually decisive role in shaping the future of their social world.

Gender and sexuality fit this notion of social formation quite well. They are institutional impositions that provide a durable set of norms, practices and mutual expectations within a social field. That heterosexuality developed and flourished as a norm when reproductive capacity was scarce and in demand is unsurprising. Now, however, heterosexual norms, enforced either legally or socially, operate like a trade union’s closed shop, restricting access to and legitimating only some kinds of sexual interaction and preventing possible innovations in human relations. Some people continue to benefit from this asymmetrical enforcement of sexual norms, while others find themselves excluded. In addition, the policing and prohibition of sexuality has led (as with most prohibitions) to unintended consequences that are both interesting and sometimes tragic, which is a parallel idea to Butler’s explanation that juridical prohibitions help to generate the very subversive sexual desires they avowedly attempt to snuff out.

Sex in a free society

It goes almost without saying that classical liberals believe that consensual sex should not be subject to any legal regulation, that medics should have no power to decide what kinds of sex are healthy (though they would remain able to offer advice to those willing to listen), and that marriage should not be instituted by the state at all. All these things, to some extent, arbitrarily exclude and punish individuals who are merely pursuing their own personal plans. But what would a classical liberal expect sexual relations to look like in the absence of these juridical and medical impositions? Could sex as a concept disappear to be replaced by more generalised notions of simply ‘adults at play’? Or would everyone have their own unique notion of sexuality?

My hunch is that most people would be satisfied with following a set of sex and gender norms in the same way that most people are happy to pick out a style of clothes that suits them (and in a sense comes to define them), rather than making their clothes from scratch. What you would see, as we already witness, is more choice. In other words, the question would not just be whether one is to identify as gay or straight, but a whole range of possible practices and lifestyles. In this context, ‘queer’ individuals would take the role of social entrepreneurs or pioneers, experimenting with new ways of living, with the more successful, interesting or aesthetically engaging lifestyles being imitated subsequently by others. Just as owning an IPhone has advantages because they are so popular and compatible with various other products, so most people will tend to define themselves along relatively popular lines just for ease of co-ordination and participation. The important thing is that popular identities are not protected and policed through violence or law, and that alternatives and elaborations on existing sexualities are allowed to flourish. And, of course, they should always be available for parody. This is one liberal response to gender trouble.