Friday, 21 August 2009

Fooled by Randomness: David Cameron

Tory leader David Cameron does not have a big reputation for intellectual gravitas. Indeed, intellectually he's probably on a par with Blair, and that's not a great thing.

So curious it was to see Cameron share a platform with Nassem Nicolas Taleb, provocative intellectual and author of Fooled by Randomness and The Black Swan.

I hear many anecdotal stories indicating there is some truth in critics' claims that Cameron lacks solidity in his policymaking, and is prone to cherrypick inconsistently.

So it was hardly surprising that Labour -- moving back to a anti-intellectual position -- seized the opportunity of Cameron's Taleb meeting to smear one with the other.

A Guardian front page story highlighted Taleb's thought crimes ("Cameron's guru"), including his apparent denial of man-made climate change and his strong position on the need for banks to face the reality of insolvency. Larry Elliott then weighed in with his own clearly unbiased view ("economics editor" indeed!).

Here's a reasonable overview of the issue.

Columnists: creating an imaginary world

A fine piece this, about the dynamic between news and comment in tabloid newspapers.

"What the tabloid columnist usually does is act as Greek Chorus for the paper they appear in. The tabloids set the scene with their constantly repeated stories, with exagerrated figures, distorted coverage of reports that aim to invert their meaning and opinion dressed as fact - that happen to fit the targeted narratives they've created.

But these will often be flawed by the balance that must be inserted (and mostly is) with a quote toward the end, or the inclusion of actual figures that readers might spot aren't quite as scary as the paper wants them to believe they are. So here the columnist pipes up and shows the reader what their ideal reaction should be.

Want to imply that most crime is carried out by foreigners, but are hampered by the fact that they're not? A columnist doesn't worry about facts, so with a throwaway line, Richard Littlejohn can help by saying, in a complete fabrication, "Most of the robberies in this country have been carried out by Eastern European gangs."

Want to exaggerate how much immigrants get in benefits but find it difficult to get away with it in news stories because they don't get very much? Someone like Carol Malone can make the fatuous claim that they get free cars. Yes, free cars. Columnists take the false claims made in news stories that extra step to help create a version of Britain for their readers that rely even more on imagination.

Wednesday, 19 August 2009

Left Vacant

Revisiting 'leading' Leftist thought -- through my encounters with Klein's shaky polemic -- proved a reminder of an old belief of mine that the Left could do so much better.

Naive belief in grand unworldly politics ("a world parliament"), peaceful revolution ("throw out capitalism") and little or no engagement with the reality of politics (producer interests, identity politics, etc etc), there remain true believers willing to roll out the same old lines.

A rather thin article in the Guardian earlier this week about the vacant Left prompted letters from such die-hard fanatics.

Amidst the usual self-congratulatory nonsense came this:

"It is a mistake to think the left can flourish independently of the rest of the working class. It is out of the living resistance of workers themselves that the left will renew itself."

Living resistance huh? It's all a battle I guess to some. All or nothing. Total dedication or else. For me, a bit of engagement by lots of people would be welcome enough. For the ideologues, nothing but 110% belief is enough. Actual politics with actual people? Less of a priority.

Also ... the letters selectively miss Paul Ormerod's point:

"The left just gave up on economics," says the economist Paul Ormerod, who retains sympathy for the cause. "Marx and Keynes cast such long shadows. There was too much of the left saying, 'It's all there in the old masters.'" Marx died in 1883 and Keynes in 1946; by the 80s – some would say much earlier – the world economy had changed sufficiently to invalidate some of their ideas. Yet the left was more interested by then, Ormerod argues, in other issues such as race and gender and sexuality. Lawson agrees: "We've had a hollowed-out generation of economic thinkers.""

Edited to add: a grand piece of Marxist nonsense from the SWP! If you ever wanted to see the religion of modern-day Marxism, here's a good example.

I find it hard to take such people seriously. they are marxism's quants - enablers of complex nonsense.

Friday, 14 August 2009

Other takes on Shock Doctrine

I clearly have been reading the Guardian too long, and listening to the BBC excessively, because in the end I found some critics of Klein able to put aside bias and examine her arguments.

Here are some of my favourites, in order of pokiness:

NYT (a short triumphant slam)

"In the end, I suspect that Ms. Klein’s goal in writing “The Shock Doctrine” is not so much to persuade others to join her anti-globalization, anti-corporatist cause as it is to reinforce the dreams of those already convinced of its righteousness.

“We did not lose the battles of ideas,” she said in a recent speech to the American Sociological Association. “We were not outsmarted and we were not out-argued. We lost because we were crushed. Sometimes we were crushed by army tanks, and sometimes we were crushed by think tanks. And by think tanks I mean the people who are paid to think by the makers of tanks.”

That must be a comforting thought. If only it were that simple."

The New Republic, Jonathan Chait (probably definitive take-down, most close to my own ideas)

"Klein repeatedly implies that there is something immoral about using crises to advance the right-wing agenda without explaining why this is so. After all, Friedman wanted to overhaul the New Orleans public education system because he believed, rightly or wrongly, that vouchers would work better. If you thought your house was horribly designed, and a tornado flattened it, would you rebuild it exactly as before?The notion that crises create fertile terrain for political change, far from being a ghoulish doctrine unique to free-market radicals, is a banal and ideologically universal fact."


"With the pseudo-clarity of a conspiracy theorist, Klein dismisses out of hand the possibility of incompetence. There were memos warning the Army of looting, she ominously notes--scanting the possibility that bureaucratic lethargy, rather than conscious intent, prevented the memos' warnings from being acted upon at ground level. That widespread bungling and mismanagement also followed Hurricane Katrina strikes Klein as proof of intentionality. "The fact that exactly the same errors as those made in Iraq were instantly repeated in New Orleans," she remarks, "should put to rest the claim that Iraq's occupation was merely a string of mishaps and mistakes marked by incompetence and lack of oversight."


"The other piece of data that Klein cites to support her charge that Bush administration officials profit from the disasters that they cause is Vice President Cheney's holdings in Halliburton. "When he leaves office in 2009 and is able to cash in his Halliburton holdings," she charges, "Cheney will have the opportunity to profit extravagantly from the stunning improvement in Halliburton's fortunes." This is a spectacular accusation--that the driving force behind the Iraq war stands to gain millions of dollars from it. You might wonder why John Kerry did not make this an issue in 2004, or why liberal pundits have not crusaded against Cheney's blatant self-dealing. The answer, of course, is that it is completely untrue. Cheney has signed a legally binding agreement to donate to charity any increase in his Halliburton stock. (Honest-- you can look this up on Lord knows Rumsfeld and Cheney have committed enough actual misdeeds not to need indicting with imaginary ones."


Klein's strength as a writer is her interest in the ground level of things. Free-trade advocates rely heavily on abstract theory, lecturing us on comparative advantage and the relative virtues of Portuguese wine versus English wool; but Klein, no armchair radical, jets off to wretched places in the Third World and paints a picture of the reality of free trade in chilling detail. That picture ought to give pause to the most committed free-trader, even if she is hardly the only one to have noted these consequences. Yet when it comes to the right-wingers who constitute her book's main subject, Klein's reportorial spirit is nowhere to be found.


"What makes Klein's thesis so odd, and so awful, is that in fact there is an unlimited supply of raw material, an abundant basis in reality, for the sorts of arguments that she wants to make. The last two decades certainly have seen the global spread of absolutist free-market ideology. Many of the newest adherents of this creed are dictators who have learned that they can harness the riches of capitalism without permitting the freedoms once thought to flow automatically from it. In the United States, the power of labor unions has withered, and prosperity has increasingly come to be defined as gross domestic product or the rise of the stock market, with the actual living standards of the great mass of the population an afterthought. Corporations, which can relocate nearly anywhere around the world, have used their flexibility as a cudgel against workers, who do not enjoy the privileges of mobility. Domestic policy has aggressively sharpened income inequalities, and corporations have enjoyed unfettered influence to a degree not seen in a hundred years. And the president did start a war without paying the slightest bit of attention to the country that he would be left occupying or how its people would react.

All these things are true. And all these things are enormous outrages and significant problems. It's just that they are not the same outrage or the same problem. And Naomi Klein's relentless lumping together of all her ideological adversaries in the service of a monocausal theory of the world ultimately renders her analysis perfect nonsense."

TLS, Paul Seabright (great political economist, tries to engage but ends up slamming her)

"Cherry-picking the evidence is particularly important for Klein's favoured strategy of guilt by association, when she implies, for instance, that since many torturers have been keen on free markets, free-market ideology leads intrinsically to the use of torture. It is not clear what, on this theory, explains the use of torture by Communist or otherwise anti-capitalist governments. Since she never mentions it, she may not be aware that it has ever happened."

LRB (long, academic, sympathetic but damning)

"She claims that economic ‘reform’ in 1990s Russia was ‘one of the greatest crimes committed against a democracy in modern history’, thwarting an ‘authentic democratic revolution’. Here she is making the same mistake of which she rightly accuses Friedman. She is confusing the absence of obstacles with the presence of preconditions. Authentic democracy will not spontaneously emerge simply because tyranny has been knocked down and all the ‘distortions’ have been removed.

Klein might defend herself by saying that the ‘democracy’ she apotheosises is exclusively a democracy of protest, never a democracy of governance, and therefore invulnerable to criticism for unfairness, stupidity or abuse of power. But this response would not sit well with her understandable but unrealistic hope that ordinary citizens around the world will soon ‘become the authors of their national destinies, at last’.

Wednesday, 12 August 2009

Uncertainty principle: Shock Doctrine 150 pages in

The shock of The Shock Doctrine comes largely from its walloping, great big bias. My worry is that few of the readers of this book will notice the very many sins of omission, the suggestive sleights of hand and the unsupported assertions. Moreover, I fear many readers of this book will not care.

My concerns began on the second page, where quotes of American politicians are run alongside the accusations from “ordinary” people. The Americans sound evil and manipulative, and we are left with the belief – though no evidence is offered – they are likely murderers.

The other shock is that of deja vu: there's little on the first 150 pages you won’t find elsewhere.

In particular, I remember reading many of the same accusations and quotes about 1970s Chile when first a student 15 year ago. Indeed, Klein’s core thesis derives from arguments made by Chilean politician Orlando Letelier, murdered in Washington by the Pinochet regime in 1976.

Letelier said the right-wing, monetarist policies applied by the Pinochet government were a part of the administration's murderous repression; the two should not be separated.

This is one theme of Klein’s book: right-wing monetarist policies can only work if they are backed by state violence. Providing some shock treatment of her own, Klein indulges in pages and pages of gruesome depictions of torture (so long as the torturers can be associated with the US government; torture chambers of other dictators are relentlessly ignored.).

While Klein may force the reader to wade through pages of torture, she spares detailing any evidence if it does not back her thesis. As a historian, she makes George W. Bush seem sophisticated.

Readers are treated to a history of Pinochet’s rise, and Allende’s overthrow, that eliminates all complexity and can be summarised in the following statements: US corporations dictate American foreign policy; US corporations objected to Allende’s election; the American government engineered Allende’s overthrow; the American government, and corporations, used Chile as test bed for experimental right-wing economic experiments.

Given such simplicities, I ended up reading Klein’s work on Chile in close proximity to the internet, as I felt I was being told only half the story. For instance, I find it curious to read about US foreign policy in the 1960s and 1970s and not find a single mention of either the Cold War, other than a couple of lines dismissing the conflict in Latin America as an American scam.

Now, I am no expert at Chilean history but I do like to be treated like an adult. I can cope with complexity and I think other people can as well. Klein must think otherwise, for she declines to tell readers that Allende received payments from the KGB, and omits any mention of the difficulties Allende faced when ruling the country. Instead, she blames all of Allende’s problems at the feet of American governments, and those nasty U.S. corporations.

There is a peculiar form of colonialism that emerges from such an analysis. The Chilean people are mere pawns in a great game presided over by grand schemers in Washington. Even when Chilean people act, they are merely puppets on strings pulled by Kissinger, Nixon and others in Washington (Read this as a healthy corrective). Ideologically, the Chilean people have no control over their own affairs: instead the evil genius of Milton Friedman, himself a puppet of US corporations, engineered the failure of the mighty Chilean economy and the accompanying death of torture of thousands of people.

As history, it’s bunkum. As economics, it's appalling. Klein treats any leftist economic programme as a success, and any right-wing economic view as awful, if not evil. Her economic analysis is restricted to stylised sneers and a footnote on page 83.

But like Chomsky, who loves attacking journalists who don’t toe his line, Klein’s focus is on the messenger. This is an ideologue fighting an ideological battle, rather than an educator trying to explain what happened. Through a succession of paraphrases, selective quotes, sleights of text and inappropriate comparisons, Klein pours most of her scorn on an academic. Friedman is like a torturer, she says at one point. Like the Nazis, at another.

This is left-wing populism at its worst, for at least Chomsky’s polemics have some originality. After 150 pages of this intellectual abuse, I wonder why I should read on. I fear that most readers of the book thrill to that the "secret" history of the twentieth century has been "revealed", whereas all that's happened is another schlock hack has made another buck.

Tuesday, 11 August 2009

Uncertainty principle: Klein review intro

Like many of the finest mothers, mine worries. One of her worries is about what I do in my job. She knows I write about companies going bankrupt and worries that I may say or do something that gets me into trouble. To help her sleep, I try not to tell her about how many billionaires I’m writing about who are losing their fortunes.

I tell her not to worry because after a dozen years in the business, I know how not to make mistakes. And as long as I stick to the lessons I have learned, then my stories are impervious to even the most assertive of lawyers.

Another defence mechanism is my employer’s rule that any mistake, however small, must be publicly corrected. This humiliating process helps keeps a lid on the number of mistakes made – no-one wants their mistakes, slips and errors listed for all to see.

Moreover, every claim we make in an article must be “sourced”. I cannot simply say, for instance, that the world is going to hell in a handcart. Instead, I must say the world is going to hell in a handcart, said Milton Friedman (for example). And that’s “said” rather than “according to” because “according to” suggests the journalist might be questioning the opinion of the source.

Given all of this, reading Naomi Klein’s “The Shock Doctrine” was itself a shocking experience.

Monday, 10 August 2009

Uncertainty principle: fisking Klein (1)

Klein's Shock Doctrine book is the new poster child of the Left but it is a weakly-argued polemic taking readers down a dangerous blind alley. It would likely take many days to pick apart her mistakes so I'll detail them in error-themes. The first is context.

+ Klein provides no context for her theory, preferring instead to cherry-pick to fit the thesis. She appears to have decided her thesis -- likely after thinking about George Bush and Iraq -- then carefully chosen events over the last few decades to back it up.

A fair-minded historian would point to many more events in recent decades that do not fit the Klein's theory. My belief is Klein's ideas are almost laughably crude and rely on evasive writing and selective history to make any kind of sense.

1) Her claims about a nightmarish "corporatist state" rising make no sense if one remembers that we have actually had a corporatist state solutions, and this was 40 years ago. The influence of the monolithic corporate is actually less today than it was then.

2) Her claims about the terrible roll-back of the state, designed by Friedman's evil genius, needs to be put into historical context. Through the course of the 20th Century, the state hugely increased in size in all Western countries, and this continued in the second half of the century, ie during the 50 year (or 30 year, NK claims both) campaign waged by Friedman.

In the UK, chosen by Klein as one of the countries where the SD has been applied, public spending did not drop throughout the 1980s and increased by the end of the 1990s into the 2000s. How does that fit the theory?

3) Financial capitalism has exploded in size and significance over the last 30 years, leading up to the credit boom and crunch of the first decade of the millennium. Does Klein's thesis engage with this process?

4) The recent experience of Venezuela, as well as the earlier Cuban revolution and elsewhere, show that violent revolutionary politics was commonplace in South America in the latter half of the 20th Century. It is curious that Klein does not seek to make contextualise Chile in the 1970s.

5) Klein also fails to contextualise Thatcher's decision to smash socialism in the 1980s. Thatcher was a right wing leader of a party previously ejected from power after coal miners went on strike (Heath, 1973). This fact provides some useful context on why Thatcher went after coal miners in the 1980s. It is again a failure of Klein's perspective she chooses not to mention this, instead focusing on the Falklands War that does fit the thesis.

Sunday, 9 August 2009

C&B: extending the range

+ First proposition: we know a lot less about the world then we think. Uncertainty is the only realistic position to take. In the midst of this chaos and confusion there are people.

1. It is certainty that moves societies forward. Groups gather with a purpose and reshape the world around them. There are some very certain people out there. They get things done. They take ideas, make them flesh through families, groups and institutions. They find money and get power. Their certainty leads them to cross the paths of other people, pursuing different paths with equal certainty.

This is the world of politics, of economics, where groups with ideas, money, backing, friends, families collide or coalesce. Just as waves on the sea gather and build only then to break apart and reform, so it is with people.

+ Second proposition: people operating in this uncertain environment sometimes are very certain indeed, and this is often works very well for them.

2. Certainty operates in a world where the only truth is uncertainty. I make a bet but I do not know if I will win. What is to stop the horse I backed from tripping over at the last fence? My certainty that it is the best horse is no guarantee of a successful passage. Certainty might often be the best strategy to adopt but it is not a crystal ball.

Much of human civilisation has developed to overcome uncertainty. Religion is a most wonderful human institution to help manage uncertainty. All those structures, all those magnificent buildings! What statements we made about our certainty in the unknowable, the ineffable. What confidence we placed in those that wanted – needed – to take away our doubts. How else were we to cope?

When we instead focused on what we could only know, we created new belief systems, new myths. Dreams of the future in a war-ravaged world. Interplanetary fantasies. Concorde. 2001. While we might not be jetting off to far-flung planets living off protein pills, our society moves on, endlessly changing, transforming.

According to Malcolm X: “the future belongs to those who plan for it today”.

+ Third proposition: the certainty of people can come from the Right -- where it overlaps with power -- or the Left. Neither seem comfortable with uncertainty, and instead prefer profitable consensus, unverifiable assertions or self-righteous accusations.

3. Plans come from all quarters. Most societies are open to ideas, but most are biased one way or the other. They lie open to some ideas more than others. Some believe in aliens but not evolution. Others prefer pixies over politics. But all are susceptible to the influence of individuals. A single person able to draw together a society’s likes and dislikes under one umbrella is a powerful force.

Telling people the bald truth is rarely popular. “I don’t know” might be honest but rarely helps lead to a conclusion. Trying to embrace all of life’s uncertainties in a single answer is often not possible. The challenge of modern life is to simplify accurately without losing sight of the complex.

There are traps and blind alleys along the way. Many people blame others for endemic human problems. A single individual, or a group of people, are not solely to blame for world poverty, for instance [as implied in Klein, The Shock Doctrine, and much of the “Radical Left]. Poverty has always been a part of human existence, as has war. These are not unique products of uniquely evil groups and individuals.

While the Left may find themselves led up the cul-de-sac named “blame”, the Right too often find themselves lured into being the intellectual cannon fodder for the wealthy. Freedom is a wonderful thing, one (literally) worth fighting for, but sometimes freedom for one is something that deprives others of their liberties.

+ Fourth proposition: in this environment the media frequently does not help people understand the world around them.

+ Fifth proposition: we have to be careful of confirmation bias - only believing the things we want to believe. Most of the western Left has now fallen into this trap.

+ Sixth proposition: it is often easier to believe in simple explanations rather than complex. We seem predisposed to believing events can usually be explained by the actions of one or two individuals ("great man theories"), rather than as part of wider processes.

+ Seventh proposition: the less we know about something, the more likely it is we will accept a over-simplistic explanation for it. (Look at how the ancients explained the occurrences in the heavens.)

+ Eighth propostion: to write a strong polemic often requires a selective reading of history.

Saturday, 8 August 2009

C&B: one general thesis

+ First proposition: we know a lot less about the world then we think.

+ Second proposition: people operating in this uncertain environment sometimes are very certain indeed.

+ Third proposition: the certainty of people (second proposition) can come from the Right -- where it overlaps with power -- or the Left. Neither seem comfortable with uncertainty, and instead prefer profitable consensus, unverifiable assertions or self-righteous accusations.

+ Fourth proposition: in this environment the media frequently does not help people understand the world around them.

+ Fifth propostion: we have to be careful of confirmation bias - only believing the things we want to believe. Most of the western Left has now fallen into this trap.

Thursday, 6 August 2009

C&B: what's it worth?

I have spent much of the week in court listening to highly-paid lawyers argue about company valuations. In the trial, both the plaintiff and defendant hired expensive advisers to tell them how much the company is worth. For one side, it is better that the company is worth more, on the other side, it is better the company is worth less.

By some strange coincidence, the report for the side that wishes the company to be worth more says the company is worth a large amount more than the report for the other side, wishing the company to be worth less.

Both of these long, detailed, reports were put together by well-known financial analysts using apparently objective approaches - the usual graphs, numbers, complex breakdowns of weighted average cost of capital, discounted cashflow analysis, etc - yet still the clients' needs appear to have dictated the outcome of the valuations.

On my desk is a large book titled "Analysing Companies & Valuing Shares". It is not a high level book aimed at market professionals, instead it is aimed at people like you and me, the curious generalist. But I suspect it will remain on my desk unread for many months to come, as piles of more immediately useful paper gets stacked upon it.

One reason why this no doubt fascinating book will remain undisturbed is that I am not convinced a book can tell me how to value a share. I have a suspicion the best the book can offer me is an insight into what people who buy a lot shares think about when they decide to buy shares. This is nearly - but not quite - the same thing as the value of a share.

Judging value is both simple and complex. The simple answer to the question of what something is worth is to reply simply: "Whatever someone will pay for it." In the jargon of finance, this can sometimes be done through a "market test" by putting the asset up for sale and seeing what someone is willing to offer.

The complex mechanisms involve trying to determine an asset's intrinsic value, and - if you are quite modern - trying to understand the psychology of buyers and sellers. The latter is sometimes known to academic economists as "behavioural finance". Value then becomes a mix of a formal calculation about the asset's value - often linked to the income it will provide - with the likelihood of people buying it.

Given the uncertainties around both these subjects, it is hardly surprising even sophisticated people often revert to the simpler valuer methodology, suggesting that value is only a product of someone's willingness to pay.

Next: beating the market, managing the economy

Sunday, 2 August 2009

C&B: the FTSE 100

The world is full of explanations. Millions of words in newspapers, books and – of course – the internet means we are the best informed people the world has ever known. But this massive growth in availability of information is a mixed blessing. Just because we have the information does not automatically mean we understand the world any better, and in some cases makes it worse.

This is one reason I have for writing this book (and for this book to be read). Because while some stories can be understood at a glance – a football score, for instance – others, like finance, take more explaining.

The dangers of confusing finance for a simple story can be easily demonstrated. There is a convention that part of the evening's television news broadcast in Britain is to read out the closing figure of the FTSE 100, a leading index of London shares.

Few people know a great deal what this number means, what the index consists of, or why they should care. What they do know is that it has something to do with shares, and it kind of matters in some way to the British economy whether it is up or down.

The truth of the matter is that the day’s FTSE 100 result rarely matters to the millions of people watching the news. Viewers’ money might be invested in many of these shares, but the day-to-day result of one index of these shares will rarely tell us much, apart from on very occasional days.

It is a little like reporting football by reading out the total number of people that attended a match that day. Interesting, but not usually what you want to know.

Unfortunately, it is possible that the convention of reading out a near-meaningless number of a share index does more harm than good. For this daily incantation of a figure tells many people three things about finance: it is incomprehensible, it is full of numbers and it is something about shares.

By the end of this book, I hope that you will see that finance is none of these things. It is pretty easy to understand, it is largely about people and the things they do, and it is not really about shares at all.

And yes, there is a functional reason to read this book, other than for pure education: by the end of the book you will be much better equipped to read the financial press and know who to trust with your money.

Next: values, managing the economy and beating the market.