Tuesday, November 22, 2011

The Occupy Movement: A Failure of Democracy

Mass protests imply that democracy has failed. In a genuine democracy, if one seeks a change in policy, one contacts one's representative, and if that agent is not responsive and does not represent the consent of the people, then the voters replace the bum in the next election.

Mass protests arose in the Arab world because they had dictatorships which refused to respond favorably to grievances. The regimes responded with force, because the chiefs sought to preserve their privileged power. But in a democracy, the government is supposed to represent the people and respond to popular desires.

The most powerful weapon of protest is civil disobedience, the refusal to obey unjust laws. During the civil rights movement of the 1960s, the protestors went beyond calling attention to their demand for equal rights. With the refusal to obey segregationist laws, the movement put pressure on the authorities. Mass arrests placed a cost on the authorities and generated sympathy for the cause.

The occupy movements have practiced civil disobedience by putting up tents for a continuous presence in the occupied territory. The police have responded by taking down tents, destroying property, and arresting the demonstrators. This brute-force police reaction will not succeed, because the protestors have a passion for justice on their side, and the political machines have not been responsive. For the most part, the occupy movement has been ignored, dismissed, or disparaged by the political establishment. When democracy fails, the alternative is mass protest.

Mass protests seek to educate the public in addition to putting pressure on authorities. During the War in Vietnam, for example, the protestors made speeches and published literature on why the war was wrong. The majority at first did support the war, and later, both due to the protests and due to the continuing cost in lives and treasure, the public turned against the war.

The problem today is that those seeking change have to convince the majority of the mass of voters, and this persuasion is difficult and costly. But the core of the problem lies in democracy itself. We are used to democracy being our system of mass voting and representation, but there is an alternative democracy, a radical decentralization of power and voting.

Suppose that the political body is divided into tiny cells of a few hundred people. People would only vote for a local neighborhood council. Those councils would vote for the level-2 council, and so on to the top level of Congress or Parliament. If the country was engaged in a war you wanted to stop, the first place to engage in would be your local level-one council. If you could convince your neighbors that the war is unnecessary and unjust, then that council would send representatives to level-two to oppose the war.

The anti-war movement would take place in many neighborhoods, all seeking anti-war majorities in the level-one councils. Thus level-two would also be opposed to the war, and send anti-war representatives to level 3, and so on up to the Congress, which would end the war.

Thus with a cellular democracy, protests might take place to call attention to a cause and to help educate the people, but the push to change the policy would take place within the multi-level system of voting. With just a few hundred people in the level-one neighborhood, one could hold meetings, distribute literature, and just talk to people about the issues. The council would have to be responsive to the majority, otherwise it gets replaced.

If one could not persuade the majority, then so be it. One could just keep trying. If truth is on your side, eventually logic may well prevail. Prejudices may be difficult to dislodge, but most people think they believe in justice and liberty, so pointing out the contradictions in their thinking could well eventually erode their bias. For example, racism was deeply entrenched in western civilization for centuries, yet there was a quick turn in the culture, so that today it would be shocking to hear anyone exclaim racist ideas in American civil discourse.

The failure of democracy illuminated by the occupy movement is not a failure of the concept of democracy but of the misapplication into mass voting. The problems of mass voting are well known in the theories of political science and the branch of economics called "public choice." Everybody knows the perverse influence of the moneyed special interests, and that is one of the themes of the Occupy Movement.

Members of that movement have created an alternative democracy of general assemblies within the protest neighborhoods. If the local assemblies would then send representatives to regional assemblies, which then send members to a national assembly, they would create a parallel democracy. They might then realize that this bottom-up structure should replace some or all the structures of mass democracy. For example, one of the two legislative houses in the states could be elected by cellular democracy.

Mass democracy has failed to sustain prosperity, justice, and liberty. The Occupy Movement is a symptom of mass-democracy failure. Small-group bottom-up cellular democracy would provide a great enough voice to people so that they would no longer feel the need to live in tents and march down the street.

Thursday, November 17, 2011

Nobel Prize in Economics for 2011

The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy."

Thomas Sargent is a professor at New York University in New York City and a senior fellow at the Hoover Institution at Stanford, California. Christopher Sims is a professor at Princeton University, New Jersey. Their research on the economy has investigated questions such as the effects of changes in interest rates, tax rates, and government borrowing. They create models that apply econometrics, the application of statistical analysis and quantitative techniques, to discover trends and to make forecasts.

Thomas Sargent uses structural macroeconometrics to analyze changes in economic policy. This involves an equation which discovers how the dependent variable is affected by the independent variables. The coefficients of the variables tell their economic significance, and the statistical significance tells how well that variable affects the dependent one. If there is much variation in an independent variable, then it will not predict the action of the independent variable. For example, if we examine the effect of education on income, the coefficient would be something like income going up by twice the amount of education expense, and this would have statistical significance only if most of the time, higher education would raise income, rather than often less education being correlated with more income.

Sargent also helped develop and apply the theory of rational expectations, by which people form expectations not just from recent events but also by analyzing the likely future changes in the economy and expected government policy. So for example, if people anticipate the expansion of money by government, that policy will not increase output, as prices and nominal interest rates will rise at that time, to prevent the erosion of income and wealth that would happen if the inflation were unexpected.

Christopher Sims developed vector autoregression techniques to analyze how the economy is affected by changes in economic policy and by shocks to the economy. A “regression” is a line trend that best fits some relationship such as between income and education. “Auto” means “self,” and an autoregression includes the results of previous dependent variables as new independent variables. For example, the value of a dollar today depends to a great extent on the value of a dollar yesterday. A “vector” is a set of numbers such as “1, 2, 3.” Vector autoregression (VAR) measures the interdependencies among several regressions. Each variable has an equation explaining its changes based on its own lags and the lags of all the other variables in the model.

The models developed by these two prize winners are used by the Federal Reserve and other central banks and other policy makers to analyze the effects of changes in tax and interest rates and other variables. Earlier simpler models failed to take into account the complicated relationships that are included in the models by Sargent and Sims.

A major principle of science is that correlation is not causation. When variable A is correlated with variable B, the data will not tell you which is cause and which is effect. It requires theory to determine this, and the techniques of Sims and Sargent apply theory to arrive at a cause-effect conclusion.

Sargent and Sims have done excellent work in generating conclusions from a mass of data. But basic economics can be understood with three very simple concepts. First, people respond to incentives, doing more when the cost is lower, less if the cost is higher. Second, the knowledge of how to produce is so spread out throughout the economy, much of it not written down, and often changing, that a government planner cannot possibly do better than the decentralized decisions of the local actors. Third, prices and quantities move towards equilibrium, meaning that profits induce more output, losses less output; a surplus reduces prices, while a shortage increases prices; all moving production and consumption towards harmony.

Thus the best policy is to let producers and consumers choose their action without interference from government. Get government revenue without increasing the cost of production and consumption, by tapping a resource that is not produced but already here, land, whose rent is a surplus beyond costs, and a free gift to humanity to use to pay for community services.

The work of Sargent and Sims is useful in determining the result when there are shocks to the economy, but really, it does not require statistical analysis to understand that taxation imposes an unnecessary shock. Tapping the rent for public revenue will have a transitional, temporary shock, which we can minimize by compensating for net losses, but forever after, it will allow people to invest, produce, and consume according to their own subjective desires.

My dream is that Sargent and Sims will apply their powerful techniques to analyze the effects of switching from today’s punitive tax system to an efficient system of public revenue from land rent, pollution charges, and voluntary user fees. History would then award these two economists with a prize much greater than that of the Sveriges Riksbank, the honor of having helped to achieve a lasting universal prosperity for humanity.