Mail 269 July 28 - August 2, 2003 (original) (raw)
Tuesday, July 29, 2003
Begin with a letter from Zurich about a mad scheme:
Dr Pournelle,
I've read every column you wrote in Byte since about 1982 (when I was 10 years old). I'm very fond of a number of your novels as well. I haven't been keeping so closely up to date on your online post-Byte writings, I'm afraid--grad school doesn't leave as much free time.
I was curious about your thoughts on Poindexter's latest mad plan: futures trading in the Middle East, sponsored in part with DARPA funds ( http://www.nytimes.com/2003/07/29/politics/29TERR.html?hp ). I think it has some scientific merit, but is immoral and unethical. I feel it would be immoral for any government to do such a thing, but it is a particularly outrageous conflict of interest for a government so deeply involved in the Middle East, the scope of the current plan.
I find it deliciously ironic that Poindexter may be poindextered: Two Democratic Senators are fighting to have the budget for that item zeroed.
Highest regards, Scott
P.S. Soon after I joined ETH as a postdoc in May, I inquired about Niklaus Wirth; he has retired, but still comes to some colloquia and such. I haven't seen a Lilith machine here at the Elektroteknik building, nor at the main building, but perhaps there is one on display at the computer science building. My first "real" programming language was Modula-2 on my Amiga 1000.
|-| | Scott A Centoni
<scentoni @iis.ee. ethz.ch> | | ETH Z�rich Integrated Systems Laboratory | | Gloriastrasse 35 ETZ J88 | | CH-8092 Z�rich
If you see Dr. Wirth give him my regards. We have not forgotten his visit to Chaos Manor where I showed him Wing Commander...
My thought on reading about the market scheme is that it probably would work and whatever were they thinking of?
RE: Something else altogether
Dr. Pournelle, I try not to bother you more than once in a day but I found this on The Register and had to pass it on.
http://theregister.co.uk/content/6/32024.html
Kill a Middle East head of state, win prizes! - Pentagon shows how By Andrew Orlowski in San Francisco Posted: 29/07/2003 at 08:45 GMT
"Poor people aren't necessarily killers," the current President of the United States tells us. "Just because you happen not to be rich, doesn't mean you're willing to kill."
Phew! However, the poor now have an additional incentive to take up arms, thanks to an extraordinary initiative from the Pentagon-funded research agency DARPA. Long ago DARPA brought you the Internet, although its more recent windfall has gone on projects that range from the sinister to the whimsical, from Admiral Poindexter's Total Information Awareness surveillance research, to invisible body suits, and a self-healing minefield, complete with winking knight.
Now DARPA is launching an online gambling site called the "Policy Analysis Market". However, this one is, in its own words, "A Market in the Futures of the Middle East." What does that mean?
Douglas Knapp
I have a hundred letters on this madness, and all I can say is, whatever were they thinking of?
Subject: We are all lawyers now....
http://www.theregister.co.uk/content/6/32004.html
===== Tiomoid M. of Angle JD MBA
Indeed!
========================================
And now two long and complex letters on tariff.
They present a good explication of the "orthodox" economic view of tariff and free trade. [Note I do not use orthodox as a pejorative; I am fairly orthodox myself. I do believe that the standard economic analysis doesn't take account of inescapable political realities.]
Dear Dr. Pournelle,
I've been following the trade discussion, and I've noticed that the argument doesn't concur with some basic economics. To explain my view I thought I'd go back to the basics of International trade and why we do it.
The first principle of any Economics is scarcity. You can tell that some good is scarce if you made it free to everyone and there wasn't enough of that good available to everyone. So you can tell that cars, or trucks, or computers are scarce, because if they were free there would not be enough to go around. In a free market economy who gets what goods is regulated by price ( and it generally works pretty well. ) On the other hand things like dirt and tumbleweeds -which are free- are not scarce, because you can have as much as you want.
Goods sold anywhere in the world require various amounts of capital (the machinery of production), labour, land, and resources (things that are used up in producing a good, like rubber for tires.) Because of scarcity the production of any good requires giving up some other good. For instance if someone from Idaho decided to build a computer factory, he would have to give up land that could be used very well for producing potatos, he would also be required to get raise money to buy his factory (instead of buying a John Deere tractor for plowing the fields), the people to staff his factory would not be able to work in the fields growing potatos. In a very real way the cost of producing one thing is what you could have produced instead.
The final idea that makes trade work is different concentrations of the factors of production. In America we have an abundance of capital, and plenty of skilled laborers (college graduates in all manner of fields.) Whereas Mexico has a smaller ratio of capital to workers, and a very tiny percentage of those laborers would count as skilled. These different proportions of factors determine what a nation is really good at. For example Idaho with a lot of land to a few people (compared to say California) is a very good place to grow potatos, California with a high number of skilled laborers to a smaller proportion of land is a better place to assemble computers, or program games, etc.
Economists are kind of fond of examples, so I thought I'd explain the simplest trade example. Two countries two goods. America and Mexico are the coutries, the goods are clothing and grain. Lets say that America can produce 2000 units of grain, and 1000 pairs of pants. Mexico can only produce 200 units of grain and 800 pairs of pants. Now in this model you discover that in America to produce grain you have to give up the resources to produce 1/2 a pair of pants, this will cause the price of grain to be 1/2 a pant. In Mexico to produce the same unit of grain it costs 4 pair of pants. Now the differences in these prices gives incentive for trade. If the price of grain was two pair of pants for one grain, than America would focus on producing grain, and Mexico would produce pants. So America has 2000 grain and they want 400 pants which costs 200 grain; giving them 1800 grain and 400 pants. Mexico has 400 pants and 200 grain. Both of these results are outside what the country could produce on their own.
Both countries profited by speicializing in the goods they had an advantage in. Economists like to draw two dimensional graphs showing the two goods being traded, different slopes show trade is possible. The real world would probably have some hyper curve (millions of variables representing millions of goods for trade), but the principle of trade is still the same. To produce one good you have to give up resources that could be used to produce something else. So trade allows you to consume more than you produce by specializing in things that you can make well.
In the modern world we don't actually exchange one computer for say 50 pairs of pants. But the principle still works for international exchange. Countries sell things to Americans not because they like dollars, but because the want to be able to purchase things with those dollars. At this point the trade deficit is often used as an example of the failure of international trade. However if you track US dollars the money does in fact find its way back in to Americaa as investments in the US economy. The trade deficit is actually quite convenient. Americans are getting goods and the goods to pay for it aren't being sold, and the excess dollars floating around are being invested here in American business.
Now a tariff does several things: First it lets more domestic firms enter the domestic marketplace by pushing up the price. Second by pushing the price up domestic consumers buy less. Now with a simple supply demand graph it can be shown that consumers lose as a result of the price going up ( why don't we do anything? There are 300 million consumers in this country and if each us of loses 1whocares?)producersgain,andthegovernmentgetsmorerevenue.Butthegraphalsowillshowthereareareasofconsumerbenefitthatnoonegetspartofthisislostbecauseinefficientfirmsaresellinggoods,andpartislostbecausesomeconsumerschoosetoleavethemarketplace.Itturnsoutthatevenwiththetariffrevenue,theeconomyasawholeisworseoff.Wecouldhavefreetrade,taxeveryone1 who cares?) producers gain, and the government gets more revenue. But the graph also will show there are areas of consumer benefit that no one gets part of this is lost because inefficient firms are selling goods, and part is lost because some consumers choose to leave the marketplace. It turns out that even with the tariff revenue, the economy as a whole is worse off. We could have free trade, tax everyone 1whocares?)producersgain,andthegovernmentgetsmorerevenue.Butthegraphalsowillshowthereareareasofconsumerbenefitthatnoonegetspartofthisislostbecauseinefficientfirmsaresellinggoods,andpartislostbecausesomeconsumerschoosetoleavethemarketplace.Itturnsoutthatevenwiththetariffrevenue,theeconomyasawholeisworseoff.Wecouldhavefreetrade,taxeveryone1 and pay the workers to do nothing and the economy would be better off than without the tariff.
Why don't people do this? I'm sure President Bush is aware of the fact that his steel tariff is bad for the country. Plenty of politicians who pass tariffs know the economics is against them. So why do tariffs still get passed? Its a strait forward answer, the benefit from cheaper products being sold here is spread over every single person who buys something. The penalties for inefficient firms are concentrated in a very few places, the workers in that industry. So no one is even going to notice the benefits or even care all that much if they do see them, but the whole benefit to consumers outweighs the loss to producers. Also no one notices the jobs created by free trade, because if something is going well its not really worth commenting on. The squeaky wheel gets the grease (and gets noticed).
In conclusion I would like to appologize for the length and lecture-like tone of this letter. I was just looking at my Econ notes from last semester, and since I got them as a lecture they sort of came out that way as well. I like this site and have enjoyed the books I've read by you.
Sincerely, Jon Nielsen
To which I replied:
You know, I have read Ricardo. And I note you haven't said one word about the cost of supporting the unemployed worker.
I did teach econ 101. I am thoroughly aware of the theory.
The Steel tariff is far higher than what I advocate; although steel is a strategic good and may need more protection.
Defense is more important than opulence said Adam Smith...
Dear Dr. Pournelle,
I apologize, I didn't realize how familiar you were with Economics. There is however another type of economic analysis called partial equilibrium analysis. The model is useful for demonstrating what Government policy will do in a given market. The following site has a graph which helps to explain the gains and losses from tariffs. I have also included an explanation of the graph to emphasize some of the points this document sites.
http://gias.snu.ac.kr/wthong/course/relation/re6.pdf
Some quick explanation of the graph. This is a representation of the supply and demand of a single product. Price (the independent variable) is on the vertical axis, Quantity (the dependent) on the horizontal (most math majors cringe when they see this, but Economists have been doing this for a while.)
What these lines mean: The line labeled P represents the world price. P* represents world price with a tariff. Q is domestic production Q* is domestic production with a tariff in place. M represents consumption. M* is consumption with the tariff.
Now to properly analyze the tariff we need to see how welfare changes once the tariff is emplaced. We begin with consumer surplus in a non-tariff situation. The triangle described by the world price line (P), the demand line (D), and the vertical axis (Px) represents consumer surplus. The idea is that many of the people would buy a given resource at a higher price if they had to, but since the price is so low, they save money, or get some kind of net benefit. The next area to analyze is producer surplus pre-tariff. This triangle is described by the world price line (P), the supply line (S), and the vertical axis (Px). This area is the profit domestic producers (including both firms and their employees) get from selling a product.
The next step is to look at the market with the tariff in place. The first thing we analyze is consumer surplus. The new consumer surplus with the price P* runs from P* to F to Px. Consumers have lost the area described by P*, F, D and P. The next thing we analyze is producer surplus. Producers have gained the area P*, C, A, and P. The final group to analyze is the government they gain the rectangle B, C, F, E ( The line B-C represents the difference between consumption and production or imports, the height of the rectangle is the price of the tariff ( this is computed differently depending on whether the tariff is a specific duty -say $5 on all goods imported- or a percentage tax). Now tallying up the net benefits and net losses of the tariffs we see that 2 triangular areas are lost to the economy. A,B,C, and D,E,F these used to be consumer surplus but no one gets the benefits now.
The effects of the tariff work out like this: P-A-C-P* went from consumers to producers (this is exactly like a tax of consumers and a subsidy of producers) area B-C-E-F went from consumers to the government (exactly the same as if a tax had been levied on consumers) triangles A-B-C and D-E-F disappear. This analysis suggests a better government policy: Tax consumers some amount equal to the area of P-A-C-P* give that money to the producers (owners and employees) this compensates them for the jobs they lose to lower prices (it might even be used for education and re-training.) If the government wants the revenue it picked up from the tariff, it can go ahead and tax consumers again to get the tax revenue a tariff might have given it. The consumers still keep the two triangles they would otherwise lose, so the economy as a whole is better off.
The issue of strategic/defense items is a good one. The idea is to guarantee a certain amount of domestic production in key industries. But there is another bit of economic analysis that�s useful in describing what to do. We�ll look at what our economic policy (a tariff) is trying to do (increase production) and what it actually does (increases domestic production, and decreases domestic consumption.) We can call a policy efficient if it only impacts areas we are trying to modify. In this case the tariff is less efficient then another option a subsidy. A subsidy is worthwhile because it lets domestic producers make more (that was our goal) but it also allows consumers to pay the world price instead of the price adjusted by the tariff.
Now the assumptions of this model need to be explained. First, it is assumed that consumers will buy more of some good if the price falls. Second, we assume that producers will make more of something as the price rises. Third, we assume that all government employees are equally efficient. That means that the tariff revenue B-C-E-F will be used just as effectively as the money the government would get by taxing consumers. Fourth, we assume that goods are homogenous; if textiles from one country could be readily substituted for textiles from another than textiles are homogenous.
Shortcomings of the model: Supply and demand aren�t lines, they are curves. This means that consumer and producer surplus are more difficult to calculate and thus taxation is a trickier issue (The department of commerce employs economists though, and I�m sure they could figure it out eventually.)
These shortcomings and exceptions do not however negate the fact that a subsidy is a generally better way to influence production than a tariff. Also a tariff is still an inefficient way to transfer funds to producers (if we decide that�s what we would like our government policy to be.)
Thanks for responding so quickly to my last long-winded e-mail.
Sincerely, Jon Nielsen
[Emphasis added]
At which point I have run out of time. The key sentence is given in BOLD above; Jim Baen (who is pretty smart for a publisher -- I'll tell that story another time) and I had this tariff argument years ago, and he came to that conclusion: subsidies are better than tariffs, particularly for preserving key industries.
I don't agree, but my arguments are not economic, they are political-philosophical. I do not want American workers to be dependent on subsidies and government payments. I want them to feel, and be, important, and productive; and tariff has always been the means for accomplishing this, and I think still is.
There is also a place for arsenals, and subsidies for key industries, but they aren't really the answer. What I want is competition under a protective umbrella. I don't care which manufacturing companies survive, I am willing to leave that to the market: but I want to be sure that SOME of them survive.
I do want to make it clear that I understand the Ricardo argument about comparative advantage. It is also the case that Ricardo, like economists until very recently, thought of "goods" as just that: things, which were consumed. They didn't live in an age when much of the world's wealth was in speculation and bubbles that could vanish in an eyeblink, and in which one of the best managed energy production companies in the world, Southern California Edison, could be turned into a hollow shell without energy production facilities, while the facilities were sold off to companies that make more 0n speculation than generating energy: and this at a time when energy was one of the most important goods of all.
The United States is losing its manufacturing base. The great plants symbolized by the name "Detroit", which defeated Germany and Japan, are pretty well gone. The implications of that for national defense have not yet been thought through, and this in a time when we have overseas adventures on a scale hardly contemplated in the past. The Cold War is over but it was not the End of History.
I will leave it to others to analyze the "model" above. At least it does try to look at what most economists ignore, that exporting jobs has a price, and the price is not paid by those who benefit from the job export. It's paid by everyone including the chap whose job was exported.
I will remind everyone that half the population is below average in intelligence. Few of them read this web site or indeed any web site. They have been, however, the backbone of America, the shop workers and assembly line workers, farmers before that, laborers whose labor is less and less needed -- but who remain as citizens, and are not "the great unwashed" or the "stupids" or clients despite what the intellectual class seems to believe (at least they act as if they believe that).
And I have work to do. But see below
One nit to pick in Jon's article (I generally favour free trade if only on the ground that you shouldn't interfere with the market unless you are sure you are doing good):
"We could have free trade, tax everyone $1 and pay the workers to do nothing and the economy would be better off than with the tariff."
This assumes that raising the $1 tax in another way would have no effect. As Schroedinger pointed out anything we do is going to have some effect. Raising the money by income tax discourages earning in the legitimate economy & encourages accountants. My favoured taxes are on alcohol, cigarettes, pollution & other things which I personally think should be discouraged but I recognise there would be an effect)
CRG
And it assumes that paying people to do nothing -- bread and circuses -- is a good thing. Economists often think this way. People are not people they are "workers" and "consumers": units in a model.
But in the real world it doesn't work quite that way. And see below
===========================
And on another favorite subject:
Subject: Global Warming Hype
Jerry
Thought you might find this article on Global warming interesting. This brainiac has came up with the brilliant idea that global warming is actually a weapon of mass destruction and of course it is our fault. The not so subtle, underlying message is that our culpability in global warming makes the 9-11 attacks justified. I suspect that this is the kind of political hype that set the stage for your book "Fallen Angels." This kind of political posturing makes it understandable why someone in the developed world might become arrogant and vicious enough to launch the kind of biowarfare attack that Niven described in "Saturn's Race."
James Crawford
Why am I not astonished?
Thanks