The Flying Flipping Finger of Fate

Why did I say in a previous post that many times when non-economists use the world "speculator" they are probably engaged in a pejorative and emotional description that has little to do with economics?

A good working definition is that speculation is a purchase (or a sale) whose motivation is for capital gains rather than for (or in addition to) a stream of consumptive benefits or for the hedging of risks. There's no moral content to the term "speculation," and the definition covers numerous activities that average Americans practice all the time. Have you ever been a collector of anything (baseball cards, campaign buttons, plates) in which you bought something because you thought it might go up in value? Then you are a speculator. Do you consider whether the funds in your IRA or 401k will go up in value and when you can cash them in? Speculation. Have you or has anyone you know ever said something like "I'll buy a townhouse for my daughter while she goes to college; it's really a good investment and I can sell it at a profit when she graduates" ? You qualify too.

My hypothesis is that we have social conventions in which some commodities (anything that can generate capital gains) are naturally thought of in a way that says that they are supposed to go "up" or "down" in price, and that anyone trading for capital gains in the opposite direction is tarred as a "speculator." Thus, this public expectation is that stocks "should" go up in price, and anybody who trades on opposite expectations (a short-seller) is a nasty speculator. On the other hand, food and energy prices are good when they go down. So, when oil price rise, we look for the speculators (but not when they go down). And, as we saw in the Graham book from my previous posts, when food prices go up during a shortage, we blame the "sinful" (quite literally, in Graham's eyes) speculator. On the other hand, if you spend any time in rural areas, you'll find that it's the evil speculators who are always driving down the prices of corn, soybeans, or wheat, but when prices are going up, that's good ole supply and demand. (To an economist, demand or supply shifts from changes in expectations about the future are correctly part of the supply and demand process).

But, probably the best example of recent memory has been U.S. housing prices. Everyone wanted on the capital gains bandwagon (unless, of course, you were a middle income young couple trying to buy your first house). So according to my hypothesis, people who traded on upward expectations were the good guys; traders who expected that the bubble would eventually burst, would be the villains. Indeed, I've talked with friends and family who can't believe how people can walk around as upstanding citizens and admit that they were shorting the housing bubble. I tell them that we would have been a lot better off if MORE people had realized that the bubble was going to burst and that, if I had could have found a convenient security to have profited from an eventual housing price drop, I probably would have done the same thing. On the other side, the speculators who were helping to drive up the price of housing took on the status of cult heroes. According to this count, we had no fewer than five cable television shows on house flippers: Flip This House, Property Ladder, Flip That House, Real Estate Pros, and Flipping Out. I think my conjecture explains why we didn't have shows called "Short This Bubble."

Swiss Revolutions II: French, German, and Italian

One of the marvels of the Swiss Federation is that the union growing out of the medieval city-states has produced a single nation with three different languages. I was thinking of this while continuing to read sections of the book by W. Fred Graham on Calvin, the reformed church, and economics (see the earlier posts). Unfortunately, what I was thinking about was why, it seems to me, that pastors and economists can be nominally of the same tongue and yet still seem to speak completely different languages. For someone that wants to have cross-fertilization between theology and economics, this can be a real problem.

The case in point was that I got to a section in Graham's book in which he discussed exactly the example I used in the earlier post: crop failures leading to increases in grain prices. Graham states the economic condition, then he interprets what he believes Calvin's position is, and then he produces the supporting language from Calvin. The problems are a) the economic distresses that Graham posits have little or nothing to do with the economic issues he considers, and then b) the supporting language from Calvin has little or nothing to do with how Graham frames the problem.

In the presence of a crop failure, as we have seen, prices will rise in a competitive market. This is a shift backward in the supply curve. But Graham says,"Perhaps because of the lack of abundance in basic grains, Calvin was particularly incensed at those who engaged in monopoly or speculation." Fair enough, but neither have anything in particular to do with Geneva having few farming lands in her sphere of influence. And, as we just noted, prices of grains rise and fall with agricultural conditions even if those markets are highly competitive. Graham also tags speculation, but as I will discuss in a follow-up post, while "speculation" may have a technical economic meaning, in popular discussions, where it is used negatively as here by Graham, it is almost always in an emotional and non-rigorous sense that has no real economic meaning.

Then Graham provides his quotes from Calvin's commentary on Amos. But the problem is, Calvin doesn't directly mention monopoly or speculation. Graham provides excerpts from Calvin, but to be fair I went online to an English translation of his commentaries on Amos. There's not much that Graham didn't quote, and again, there's nothing about monopolies per se nor about speculation. Instead, Calvin exposes three problems from the time of Amos. 1 ) Wealthy grain merchants were greedy. 2) Wealthy grain merchants were more than willing to allow starving people to sell themselves into slavery. 3 )Wealthy grain merchants committed fraud, selling chaff and waste mixed into the grain as the grain itself. All of these things are bad, they do match what is written in Amos, and Calvin was correct to criticize them. But they are not a general condemnation of either monopoly power or speculation.

Apple Corporation has gone through a period in which they had a type of market power on "iPods" and"iPhones" (although this is eroding).If you have bought anything from mutual fund shares to baseball cards because you hope to profit from reselling them (capital gains) then you have engaged in speculation. I don't see that either of these have anything to do with the conditions in the time of Amos, with wheat prices rising because of crop failures, or with Calvin's comments. (It goes without saying that I do see the implications in the other direction: greed, heartlessness, and fraud in any field of human endeavor are timeless, universal problems.) But maybe I'm a in a city state (Economicus?) that just doesn't speak the same language as pastors and theologians.

Feel the Global Love

This is to continue on my discussion that, as Milton Friedman once forcefully argued, the marketplace is an institution that serves to break down tribal and kinship boundaries. Consider my Dad. Before he turned 20, he had been assigned to the U.S.S. Leutze, served in the South Pacific, been blown off of the ship into the ocean by the explosion of a Japanese kamikaze, seen his shipmates die, and witnessed the liberation of a Japanese military concentration camp for Korean women forced into sex slavery. If you want a visual of some of this, consider the picture at the top of the post. This is the U.S.S. Leutze just after the Kamikaze attack. If I understand what Dad told me correctly, he was manning the guns at the left foreground. He believes that he was the closest sailor to the explosion who wasn't killed. (Parenthetically, how awesome is it that I can type in "Leutze kamikaze attack" on Google Images and in a fraction of a second find this picture, which I don't know if my father ever saw.)

If anyone could have a rational reason not to forgive people of another group, it would be my Dad and the Japanese. Whether he forgave Tojo, or the commander of the Kamikaze force, or the pilot of this plane, I will never know. But I do know that by the time I was old enough to understand, he didn't carry any grudge for the modern Japanese people. He admired their technology, their ingenuity, and the quality of their manufacturing. When he was searching Consumer Reports for the best buy on a TV or a DVD palyer, he never said "Oh, that's a Toshiba or a Sony, I don't want something made by the Japanese in my house." I don't know how Dad would have reacted if someone had given him a piece of paper that said "I forgive the Japanese and I am donating $200 to help them rebuild their economy." But he did essentially that every time he bought a Japanese camera or DVD player. And, those Japanese electronics items eventually represented some kind of reconciliation between the Japanese and their former victims in Singapore, Malaysia, etc..

[Even if Dad had felt that he wanted to stop at the Japanese economic boundary, the market would have made it difficult for him to engage in those preferences. If you don't like, for example, the French, how do you know what French-made items are in your car or computer or in the jet that flies you to Atlanta or San Diego?]

I don't believe that the market is a sacred institution. But I believe that objectively it has properties that I have been discussing. I think that it's important to state this kind of opinion, particularly when there seems to be a strong tendency in Christian circles to bash the market. I know that some people believe that in doing so they are prophetically "speaking truth to power." But who really knows at any one time which prophets are right and wrong. In Israel and Judah, the prophets we read in the Bible weren't speaking to a land with no other prophets; they were speaking to a land in which there were a lot of prophets. Some of them were just off base, even if what they were saying was very comfortable to the religious leaders of the time.

My Tribe

Now that I've gotten the insert picture mode working again, I thought I'd post the four Isaac family cars I mentioned. Which two are not like the others?

(These are Googlephotos, but pretty accurate.)

Reciprocity, Boyo, Is the Key to All Relationships*

I was filled with a sense of wonder when I read P.J. O'Rourke despair that no one under the age of 30 could understand that not all that long ago boys had long discussions about which cars were the best. That brought back memories of discussions at cub scout meetings and sleepovers that I hadn't remembered in years. Back then, families had automobile loyalties that led to Seminole/Gator type discussions. It went without comment that the Byrons (across the street, over one house) were Episcoplians; the fact the they were Democrats was the source of some whispering. But what really got the juices flowing was they were a fudamentalist Ford family (Fix or Repair Daily). The Halsteads drove Oldsmobiles. Neither of my grandfathers, to my knowledge, ever drove anything but a Chrysler product (Grandad Mobbs insisted that only a Plymouth Fury had a trunk worth talking about). I was always disadvantaged by my parents awkward selection of Ramblers, until in 1967 they purchased a GM-patented metal-flaked green Pontiac Catalina, to my mind the second most awesome car they ever owned (the copper and creme 1957 Chevy Bel-Air hard-top convertible still takes the prize).

Nostalgia isn't what it used to be, but I'm sure that 10 year old boys today have something similar to argue about. There's nothing inherently wrong with any of this, but it's a reflection of some basic human tendency towards kinship or tribal identities. Several of the authors in Moral Markets discussed so-called "evolutionary" tendencies towards reciprocity and cooperation in small groups. One stumbling block that we kept having in the discussions was the transition to market values when you aren't trading just with people who live in the same elementary school district or have the same tatoos.

Another problem with kinship and tribal reciprocity is there is no doubt that Biblically it is, standing alone, morally insufficient. Tribal cooperation and reciprocity can be the source of great evil. Warfare is an example of a massive success of in-group cooperation and the suppression of free-riding. Unfortunately, I find that I still have a knee-jerk reaction to stereotype people by the kind of cars they drive. But, reaping what I sow, what if everyone judged me by the boring, practical un-trendy Hyundai that I drive? (OK, even a stopped clock is correct twice a day). If it isn't cars, don't Americans still have a propensity to judge people by their jobs, their cell phones, their clothes, their zip-code? If morality is merely reciprocity among our kin group, it's not enough. (One of the features of the marketplace is that it tends to dampen tribal identities and cooperation that stops at the village gate. Think of that the next time someone makes the argument that we have a moral obligation to "Buy Locally." What would Jesus have said about a Judean campaign to establish justice by refusing to "import" food from the Samaritans?)

Jesus' preachings are a repeated warning against cooperation that is merely reciprocity or love that stops that the zip code boundary. And left to our own devices we are very good at defining and observing group boundaries. My friend Brad Hansen has been posting portions of his sermons on Jonah, which is a screed against tribal restrictions on God's mercy. It's right there in the middle of the prophets of the God who was, in so many ways, defined as the God of Israel. Once again, we see that Jesus came not to overturn the Law and the Prophets, but to complete them.

* The title is from the movie L. A. Confidential. The speaker is inspector Dudley Smith as he is beating information out of Sid Hudgens.

Seeking Dependency

Cleaning my office I came across this note scribbled down, I must have been rushed,

"It is as though I turn to God in my moments of need. Where it was once me asking for a laundry list of prayer requests, now it is me asking for comfort and healing in moments of despair.

The issue however is that while God blesses me with comfort my praises are only temporary and lack longevity. What I have done is made God a safety net to restore me to self sufficiency. He is not my first love.

For people that don't understand, maybe you soon will. Learning to live in dependency is not easy."

This must have been written at least a year ago. How do you live in dependency and grow in faithfulness when independence seems so automatic? And, how is it that God might say, "Sure. One more time around the block on your own steam. If that makes you feel good. I'll still be here when you come back."? His love is greater than my stupidity.

As If By An Invisible Hand...

Right on schedule.

Saturday's Wall Street Journal:

"Wheat Drops More than 7%: Big Exporters Release Grains in Storage to Shore Up Supply, Deflating Price."

"Wheat prices plummeted...." "Farmers across the U.S. released millions of bushels from storage into the global supply chain..."

(I don't publish links to the Wall Street Journal because they are blockaded to non-subscribers.)