-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- ------------------------------------------------------------------------ Today's Lesson from The Books in My Life by Colin Wilson It was about the time that I was thirteen or fourteen that I began to catch glimpses of an answer to the problem of nihilism that had reduced me to such a state of despair and exhaustion. In a secondhand bookshop, I found the Everyman edition of Goethe's Faust . Even the awful translation could not disguise the tremendous vitality of the poetry . . . But when I came to Faust's opening speech, in his "high vaulted narrow Gothic chamber," I realized with a shock that the young Goethe had experienced my own glimpse of meaninglessness. I have studied, alas, philosophy, And jurisprudence, and medicine, too, And worst of all, theology, With ardent labor through and through. As here I stick, as wise, poor fool As when my steps first turned to school. Master they style me, nay doctor, forsooth And nigh ten years, o'er rough and smooth, And up and down, and acrook and across, I lead my pupils by the nose, And know that in truth we can know--aught! "Das wir nichts wissen konnen"--that we can know nothing: the words made my heart sink. Yet there was also immense comfort in knowing that someone else had recognized the futility of human knowledge. There followed a passage that I soon learned by heart: Would thou, full orbed moon, didst shine Thy last upon this pain of mine. Thou whom from this my desk so oft I watched at midnight climb aloft. O'er books and papers thou didst send Thy radiance, melancholy friend. Ah, could I, on some mountain height, Float onward, steeped in thy dear light, Round mountain caves with spirits hover, Or float the moonlit meadows over, >From fumes of learning purse my soul, Bathe in thy dew, and so be whole. Like Faust, I also felt that I had dehydrated my soul with logic and reason. But whenever I read this passage, I experienced a cooling sensation, like plunging a blistered finger into cold water, and a sense of relaxation and serenity. In fact, Goethe does not use the word "float," but "gehn," which might easily be translated "walk." But this image of floating peacefully over moonlit meadows always brought a tremor of sheer joy. ===== Spy vs. Spy Nuclear Disarmament Chief Was Stasi Secret Agent The commies just keep on coming. A UNIVERSITY professor who was on the national council of the Campaign for Nuclear Disarmament was a communist agent, The Telegraph reveals today. Vic Allen, a retired professor of economics at Leeds University, passed confidential information about CND to East German intelligence officers and manipulated the peace movement into taking a Soviet-friendly line. According to secret files compiled by the Stasi, the East German secret police, Mr Allen provided information on CND leaders and activists for several years during the Eighties and visited the East German Embassy in London. In 1985, he unsuccessfully attempted to succeed Joan Ruddock as the chairman of CND, which then had 400,000 members. The Telegraph has learnt that MI5 had a file on Mr Allen, 77, but it is not known if the security service was fully aware of his activities. He has admitted being an informer but denies betraying his country, acting illegally or receiving payments. He said: "I feel no regrets." Security experts said Mr Allen, who lives in Keighley, West Yorks, would have been regarded as an "agent of influence" by the Stasi. He is the fourth Communist asset to be unmasked within the past nine days - causing embarrassment to the security services and the Government. Robin Pearson, a lecturer at Hull University, was named as a Stasi spy on Friday. The Home Office said yesterday that although he was interviewed by MI5 in 1994, it was decided not to prosecute him as there was no "usable evidence". Yesterday, Ann Widdecombe, the shadow home secretary, demanded that the Government disclose details of all alleged communist spies. She said: "What I want Jack Straw to do is to stop what is now happening, which is that we are only finding out about these things through press revelations." CND, formed in 1958, said it was "appalling and disgusting" that Mr Allen fed information on its members to the East Germans. A spokesman said: "It is deeply concerning that anybody should be passing on information on our members. We were used to being targeted by MI5 and the Ministry of Defence, but now we find that former Soviet states were after information on us." Mr Allen, who packed CND meetings with Soviet sympathisers, aimed to promote Moscow's unilateral cause within the organisation, urging that Britain alone disarm its nuclear weapons. Rival factions wanted the Kremlin to disarm too. In an interview with BBC2's The Spying Game to be broadcast next month, Mr Allen admits that he provided information to East Germany. He said: "It was perfectly legitimate that I should do that as the faction I belonged to was the pro-Soviet faction, the pro-GDR faction . . . I have no shame. I feel no regrets about that at all. My only regret is that we didn't succeed and in the end we lost our influence in CND." A senior adviser to the Home Secretary said Mr Straw would not agree to Miss Widdecombe's demand to issue a list of names of those suspected of treachery. He said: "Hundreds of people have been investigated over the years and it would bring their identities into the public domain. We don't know who the press is going to name." London Telegraph, Sept. 19, 1999 International Bureaucracy IMF Under Fire for Failed Policies You mean . . . again? THE patients span the globe from Vietnam to Venezuela. The doctors face each other across 19th Street in Washington and dispense their medicine together. Their remedies, dubbed the Washington consensus, include tight fiscal and monetary policies, freer trade and capital flows, and privatisation. For much of the 1990s, these were accepted as the best ways to make the transition from poverty to prosperity and from communism to capitalism. The consensus�s sponsors, the International Monetary Fund (IMF) and the World Bank, stood unchallenged as the world�s top economic doctors. No longer. After a series of financial crises from South Korea to Brazil, and an economic meltdown in Russia, the consensus has broken down. Many traditional prescriptions have been discredited and the doctors are at loggerheads with each other. Joseph Stiglitz, chief economist of the World Bank, who was vocal in his criticisms of IMF economic advice in Asia last year, is now equally vocally lambasting the Fund�s record in transition economies. Although he is not officially speaking for the World Bank, it is widely believed that the Bank�s boss, James Wolfensohn, shares his views. Partly, the fracas is the inevitable result of apparent failure. But it also has a more subtle cause. In recent years the Fund and the Bank have been hijacked by their major shareholders for overtly political ends. Whether in Mexico in 1994, Asia in 1997 or Russia throughout the 1990s, the institutions have become a more explicit tool of western, and particularly American, foreign policy. Only this week the two bodies were using their economic muscle to pressure the Indonesian government into accepting an international peacekeeping force in East Timor. Such politicisation, many feel, threatens their credibility in handing out disinterested policy advice. The focus of a lot of criticism is the IMF�s record in Russia. Almost a decade after reforms began, the place is a mess. Around 60m people, almost half the population, live below the poverty line. Income inequality has risen; life expectancy has plummeted. Corruption is massive and endemic. Mr Stiglitz says much of this dismal performance stems from the intellectual inadequacies of the previous approach. There was, he argues, too much emphasis on macroeconomic stabilisation at the expense of institution-building. Privatisation was pushed too far too fast, and, without the right regulatory framework, was bound to fail. Western advisers wrongly thought that privatisation would create a demand for protection of property rights. Instead, new owners stripped the assets and transferred the money abroad, helped by a misguided liberalisation of capital flows. The result was a country riddled with cronyism and corruption. It would have been better, argues Mr Stiglitz, to have proceeded more slowly�building a regulatory framework before privatisation, and concentrating on strengthening the rule of law and on creating effective institutions, such as courts. He likens the misguided zeal with which Russian reformers and their western advisers set about changing a society overnight to that of the Jacobins and, yes, the Bolsheviks. It is as if many western advisers thought the Bolsheviks had the wrong textbooks but not the wrong approach, he writes. These comments have caused a furore. Anders Aslund, of the Carnegie Endowment for International Peace, an early adviser to the Russian government, says mildly, �Stiglitz is a striking embarrassment to himself and the World Bank. Without knowing anything, he mouths any stupidity that comes to his head.� Officials at the Fund and the Treasury are more circumspect in public, but there is little doubt that they too are furious. Mr Stiglitz is plain wrong, these critics claim, to argue that nobody emphasised the importance of building institutions. The World Bank itself sent dozens of teams to help with legal reform, training judges and so forth. But the process is complicated and slow. Reformers did not have the luxury of waiting until it was complete. Most reform veterans also reject Mr Stiglitz�s policy prescriptions. Few accept that collapsing post-communist governments could have prevented the looting of assets. In a recent paper*, John Nellis, a privatisation expert at the Bank, argues that, globally, privatisation has been a success. Governments that botched it were equally likely to botch the management of state-owned firms. He points to Ukraine, which is in even worse straits than Russia, as evidence that the Stiglitz strategy of going more slowly would not have worked. The evidence from Eastern Europe is that the speed of �shock therapy� has delivered better results than gradual reform. Third, nobody denies that reform in Russia and elsewhere has had to contend with political constraints. There were clear risks in rapid privatisation. And there were unsavoury aspects to Russia�s reforms, particularly the 1995 policy of handing over shares in lucrative state jewels to the financial oligarchs in return for short-term loans. But the political environment�the chance of a return to communism, a collapse into fascism or even the disintegration of a nuclear power�justified some risk-taking. The record of the Bretton Woods institutions should be considered against this background. These arguments are not wholly convincing, however, not least because the Fund did offer mistaken policy advice to some transition economies. Among the most successful countries have been those which, although strongly reformist, ignored the IMF on important questions. Estonia, for instance, successfully reintroduced its pre-war currency, the kroon, in place of the rouble in 1992, when the IMF was still calling for a single currency from Tallinn to Tashkent. And regardless of political constraints, the IMF, an overbearing organisation with a well-thumbed book of macroeconomic-policy nostrums, may have been unsuited as an institution to handle the murky, stricken economies of Eastern Europe in the first place. �Would you have wanted the IMF running the Marshall Plan in Western Europe after the war?�, asked Yegor Gaidar, Russia�s first radical reforming prime minister, at a recent conference in Stockholm. Still, the political and strategic arguments help to explain why economic considerations often became secondary. That was why the Fund tolerated the loans-for-shares scheme; why it relaxed lending criteria before the Russian election in 1996; and why the Fund blew nearly $5 billion trying to prop up the rouble up in July 1998. Political and strategic considerations have also played a role in the IMF�s recent reactions to financial crises elsewhere in the developing world. Starting with the massive bailout for Mexico in 1994, via the enormous support packages for Thailand, South Korea and Indonesia and ending with its failed attempt to prop up Brazil�s currency, the real, in 1998, the Fund�s programmes have reflected its strategic as well as economic priorities�and those of its major shareholders. There have been economic miscalculations too. Most people now agree, for instance, that defending fixed exchange rates for too long is a mistake. It is broadly accepted that private creditors should share the burden of unwinding economic crises; and that big public bailouts may create moral hazard, increasing the risk of future crises. This week, a task-force sponsored by the Council on Foreign Relations published a report that urged countries to avoid fixed exchange rates and to discourage short-term capital inflows, and called on the IMF to return to its old policy of smaller bailouts. But if the political role the two institutions are being asked to play is part of the problem, that needs to be addressed too. Another recent study* argues that, just as independent central banks have proved better at fighting inflation, so a more independent IMF might be more effective at promoting international financial stability. Such reforms, the authors say, would insulate the IMF from short-term political pressures, making its advice more credible and more effective. Pretending to be economic handmaidens while in fact being political social workers is a recipe for failure. On the other hand, the converse might also be awkward: officials would no longer be able to blame political constraints when their economic medicine doesn�t work. The Economist, Sept. 18-24 1999 Japanese Policy Head of Central Bank and Finance Minister Meet in Hotel Room Did they have sex? Picture the scene. A darkened room, minders huddled by the trouser-press, two men talking in hushed tones - perhaps over a drink from the minibar. It is neutral ground. But it is not a rendezvous between Moscow mobsters. The location is Tokyo. As the yen soared close to �103 against the dollar this week, Kiichi Miyazawa, the Japanese finance minister, and Masaru Hayami, governor of the Bank of Japan, called a meeting. In a hotel room. Neither wanted to go to the other's office. It must have been an interesting chat. Fiscal pump-priming has done what Japanese consumer demand could not: a recovery is under way. The economy expanded 1.1 per cent in the year to June. The stock market is up 25 per cent this year. Foreign investors have piled in. And the yen has risen. Those who placed their faith in a recovery play, and in current account fundamentals, have made a killing. The yen was at �120 three months ago, and at �135 this time last year: �103 is the highest level since early 1996. A weaker dollar/stronger yen is exactly what the Japanese government does not want. The finance ministry is desperately worried that an overvalued yen could choke-off the fragile recovery. As the yen soared this week, the stock market sold off. It is not all a story of yen strength. This week's US current account figures prompted a dollar slide. The deficit was a record high of $81bn in the second quarter, an 18 per cent increase on a deficit of $69bn in the first three months of the year. Consumers are spending like there is no tomorrow. Their savings rate is negative. There is no sign of the spending spree slowing. Retail sales rose 1.2 per cent in August, up 10.6 per cent year-on-year. The US Federal Reserve, which raised interest rates by a cautious quarter point in July, and again in August, is going to have to keep raising rates if domestic demand continues to outpace the economy's growth rate. Despite the prospect of higher interest rates, worries about the gaping US current account deficit seems to be what is moving the market. Money supply Back to the hotel room. Worried about a too-strong yen, the Japanese finance minister can tell the central bank to intervene in the foreign exchange market. But the BoJ is jealous of its control over the money supply. Throughout the year, when it has been told to intervene the BoJ has followed instructions, creating yen to buy dollars. It has then immediately taken the extra yen back through the money market, with no net change in the money supply. Economic theory says that "sterilised" intervention should have no effect. Japan has provided the evidence. Joint intervention On his way out of the hotel, Mr Hayami made clear that he had not budged an inch. With the BoJ refusing to play ball, the government has set its sight on joint intervention with the US, and on next weekend's meeting of G7 finance ministers and central bankers in Washington. On Friday, rumours of a deal in the making brought the yen back below 106 (a significant fall, but still too high for Japan's comfort). Past experience suggests that the US may do a little to help - perhaps Europe too. But not very much. Investors may feel a sense of d�j� vu. The yen has been repeatedly overvalued over the last 20 years. Investors have experienced a great deal of volatility. Japan has a structural trade surplus, and a structural excess of domestic savings over investment. The goods have to go somewhere (a lot of them go to the US). The money generated has to go somewhere too. The exchange rate does not just move in response to the trade account and interest rate differentials. It is also driven by capital flows. The trade surplus sucks in dollars. Japanese investors either buy assets abroad or the exchange rate rises sharply - as has been happening. At the moment, US assets look overvalued to Japanese investors, and the current account deficit makes the dollar look vulnerable. Some investors are biding their time, keeping their money at home. If everyone waits for a dollar fall/yen rise, it can be self-fulfilling. A short, sharp bout of joint intervention with the US might break the bandwagon effect. But the strong yen is largely a Japanese problem for the moment. A really big dollar slide, or a Japanese collapse, would change attitudes in Washington. But the US does not have much in the way of foreign reserves to play with. This means that the BoJ may well be forced to swallow its pride, and increase the money supply, to stop the yen strangling growth. From a policy perspective, this is the right thing to do. Combined with an inflation target, to cap inflationary expectations as well as counter deflationary ones, that would also be good for Japanese equities. The Financial Times, September 18, 1999 Digital Society New Laws of Economics? The increasing returns to hot air. TWO sorts of claim are made about the �new economy�. The first says that technology is spurring growth so dramatically that old assumptions about productivity, inflation, profits and so on no longer hold. This is a bold position, but it poses no great challenge to orthodox theory: old-fashioned �neoclassical� economics can comprehend it very well. The second claim is different. It says that orthodox economics itself needs to be revised wholesale to take account of the way the new economy actually works. The �new theorists�, let us call them, say that technology-driven market failures are now pervasive. The chief culprit is increasing returns. In a world where unit costs fall without limit as output rises, monopoly thrives: a bigger firm can always undercut a smaller one. Industries based on knowledge, the argument goes, are especially prone to increasing returns, and hence to monopoly. Think of software. The costs are largely fixed and upfront; once they have been incurred, production can be expanded without limit at very little cost. Increasing returns in the form of �network effects� can affect consumption as well as production. A common feature of the new technologies, it is argued, is that their value to any user increases in proportion to the number of users. The result is that, once a product is established in the market, demand for similar products will collapse: consumers get �locked in�. And if they get locked in to a bad product, you have another market failure to compound the first one. The classic example of the �bad standard�, or of �path dependence� as this syndrome is called, is the QWERTY keyboard: the layout makes no sense, it is claimed, but by an accident of history it has established itself and there is no getting rid of it. Our Economics focus of April 3rd discussed �The Fable of the Keys�, a paper by Stan Liebowitz and Stephen Margolis, which showed that the QWERTY story was wrong, because the standard layout is not in fact demonstrably worse than the alternatives. This cast doubt on the whole new-theory movement. Now the authors have brought out a book, �Winners, Losers and Microsoft� (published by the Independent Institute). It includes the keyboard paper but moves on from that, by way of a close look at the software industry, to a broader and deeper attack on the would-be heretics. By a long way, it is the best single thing to read on this tangle of issues. The book reviews the new theory carefully and in language accessible to the general reader, and then subjects it to a detailed empirical examination. At the end, very little of the fashionable critique of neoclassical economics is left standing. To begin with, the authors question the theoretical appeal of the path-dependence paradigm. Network effects are real, and it follows that lock-in is a possibility. But note that lock-in is inefficient (that is, it is a kind of market failure) only if the inferior product survives despite the fact that the benefits of switching would exceed the costs. If the inferior product survives because the costs of switching are high, that is as it should be: in that case it would be inefficient to switch. (Recall that the point of the bogus QWERTY story was that the benefits of switching would be great and the costs low: the market failure consisted in the difficulty of making a co-ordinated jump to the new layout.) Taking switching costs into account immediately narrows the extent of plausible market failures. The new theory needs to be qualified in another way, too. Where lock-in is a factor, it is wrong to suppose that consumers and producers will blunder on as if it were not. On both sides of the transaction, there is an incentive to find ways round the problem. On the demand side, groups of consumers can get together and co-ordinate their choices. On the supply side, producers can start by selling their superior new product at a loss: if it really is superior, the market will adopt it and move across. Or they can spend heavily on advertising. Or they can help newcomers to switch by promising compatibility, as when cable-television companies offer to convert old televisions to the new system. With these and other strategies, it becomes an empirical question whether inefficient lock-in is as common as is often supposed; it is certainly not self-evident. Turning to the actual evidence, the authors find no such cases at all. Again and again they show that good products win. The standard lock-in stories are examined and, like QWERTY before them, debunked. Betamax was not beaten by an �inferior� VHS video format: at the time, reviewers were divided over which system offered better quality, and VHS offered the unambiguous advantage of longer playing-time. The triumph of DOS over the Macintosh operating system is equally explicable. Macs cost more, and Apple had developed a reputation for changing operating systems so as to make earlier software redundant; until Windows 2000, Microsoft�s successive operating systems were consistently backwards-compatible (a feature that explains many of the problems that some Windows users complain of, but which is prized by many others). The book gives example after example of software that came and went, at one time dominating the market but then giving way to a better newcomer: throughout, reviewers� ratings of the products explain market-share. Unsurprisingly, in view of all this, the authors take Microsoft�s side in the firm�s battle with the Justice Department. Their view of that endlessly complicated issue, set out in an appendix, is not so much a resounding acquittal as �case not proven��but they would say this should suffice. Be that as it may, the case they make against the path-dependence paradigm as a way to see the world could hardly be stronger: it is a big idea that simply fails to stand up. The Economist, Sept. 18-24, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. 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