Tuesday, June 28, 2011

A Late Epilogue to an Earlier Post on Greenbergs and Zuckerbergs

Last month, while reacting to a New York Times article, I wrote about the Greenbergs and Zuckerbers dropping out of college and following each other to entrepreneurship.

As I saw it, the story had two morals, not entirely unrelated. One was the corrput culture at Stanford – and, by extension, U.S. universities – which belittled education and encouraged students to drop out in pursuit of the money.

The other was the long-term effect of this phenomenon. I said imagine the kind of citizens the illiterate rich brats would make and the kind of society they would help build using their wealth.

Meanwhile, I had an exchange with a reader who questioned – or rather, wanted more elaboration on – my comments that finance capital shapes people’s conduct.

Here is the follow up to the story from this weekend’s Financial Times, under the heading Rising college drop-outs hope to learn a lesson from Zuckerberg and Gates:
Professors at MIT, Stanford and UC Berkeley, three universities with a strong tradition in as IT powerhouses, confirm an uptick in entrepreneurial dropouts as students seek to emulate the example of famously successful non-graduates such as Bill Gates at Microsoft, Steve Jobs at Apple and Mark Zuckerberg at Facebook.

About a dozen college dropouts interviewed by the Financial Times said that they knew others who had made a similar choice. All confirmed investor willingness to fund them. “They want to see you believe your story enough to risk everything for it,” said Julia Hu, who left MIT when she got funding to build her sleeping device company. “They don’t like to fund non-committed entrepreneurs.”
You want money? Then prove that you’re committed by dropping out of the school. That is the logical demand from an entity such as finance capital that at all times strives to protect itself. It even turns dropping out into a badge of honor, just like the way serving jail time is made into a badge of honor in the ghettos.
“The environment encourages students to leave,” said Andre Marquis, UC Berkeley’s director of the entrepreneurship center, who had three students drop out of his program last semester. “In Silicon Valley, it’s almost a badge of honour to have left school for your start-up,” Ms Hu said.
Then, in the the very same issue of the FT, on page 2, was this report:
Peter Thiel, a prominent Silicon Valley investor, said the emphasis in US society on having a college degree has created “a bubble in education,” in which the professional value doesn’t match the $200,000 price tag. He is countering that by giving $100,000 each to 24 people under 20, to pursue an entrepreneurial idea in Silicon Valley instead of going to college.”

“We need more innovation,” he said. “There’s a tremendous cost to have the most talented people in society take on enormous debt, then take well-paying but deal-end jobs to service those loans for the next 15 to 20 years of their lives.”
Look beyond Peter Thiel spreading $2,400,000 amongst 24 people in the expectation that one of them would strike gold; that is the standard venture capital model. Ignore his lie that he recruits “the most talented people in society” only to have them develop Facebook applications like Hug Me, Kiss Me and Pillow Fight.

The central point here is this: when a 4-year education costs $200,000, which you have to borrow and after which you’d have no guarantee or even a good prospect of landing a good job, then the appearance of Peter Thiels is natural, necessary and inevitable.

Martin Luther King often said that he knew people's [racist] behavior could not be legislated. But he pushed for anti-discriminatory laws because he wanted to control the conduct. Finance capital bridges that chasm. It shapes the law and the conduct in ways that those unaware of its dynamics could hardly notice or imagine.

Sunday, June 12, 2011

Europeans Not Being Europeans: Now It Is Official

Last year, reading between the lines, I wrote that Europeans will be Europeans no more.

This past Tuesday, the European Commission agreed. Its “reform recommendations” for the 27-member union said pretty much the same thing. The Financial Times succintly capture the spirit of the report under the heading “EU sees vision of new Europe which is rather less European” :
The Europe recommended by the European Commission, the European Union’s executive branch … would look very different to the Europe of only a few years ago.

Pension system would see their retirement ages raised. Long-protected industries would be deregulated. Guaranteed wage increases negotiated long and hard by trade unions would be renegotiated.

In other words, the European economic model or models would look far less European.
I have said many times that just about any thing that is coming your way is reported in your local paper. All you need is to pay attention, which includes reading between the lines.

When a Nobel Prize Isn’t Enough

Last October I wrote about the three stooges who were given the Nobel Prize in economics for their “work” on labor and employment.

I did not mention it then, but one of those stooges was an MIT professor by the name of Peter Diamond. Before he became a Nobel laureate, President Obama had nominated him for a seat on the board of governors of the Federal Reserve. But his nomination got bogged down in the senate; for whatever reason, the Republicans, led by Shelby of Alabama, opposed him. This past Sunday, the professor wrote an Op-Ed piece in the New York Times to announce that he was withdrawing; he’d had it with Beltway politics. The title was When a Noble Prize Isn’t Enough. Take that, Southern hicks.

But I say we owe Shelby one. If nothing else, he provoked Diamond to write the Times piece. It is a document that can teach us a lot.

In Peter Diamond, you see, we have a man who has spent his entire adult life studying labor and employment; I traced one of his papers to 1966. He is a full time professor of economics at MIT, one of the premier institutions of higher learning in the West. And he received a Nobel Prize in recognition of his work and discoveries.

Wouldn’t you be curious to know what this man has learned/discovered in a half century of scholarly work? I would be, for sure. But there is more than one man’s knowledge involved here. According to the Financial Times which blasted Republications for torpedoing his nomination, “Mr Diamond is widely regarded as among the most brilliant economists of his time.”

And according to Paul Krugman, the New York Times columnist who called the Republicans stupid, Diamond “wrote the seminal paper on the whole subject” – the whole subject being the “hot topic” of “whether the apparent shift in the Beveridge curve signals a rise in structural unemployment.”

These are the Establishment voices. Their approval of, and admiration for, Peter Diamond is what got him nominated to the Federal Reserve Board in the first place. He is, in other words, “one of them”. So in learning about his ideas, we would learn about the mainstream views on joblessness in America – “mainstream” being precisely what is espoused by outlets such as the Financial Times and the New York Times which is now also the official view because they have a friend at the White House.

Let us go then, you and I, and see what this brilliant economist of our time has to offer by way of solution to the economic ills that have befallen his country:

“In reality, we need more spending on some programs and less spending on others, and we need more good regulations and fewer bad ones,” he wrote in the Times.

All articles in the opinion pages of the New York Times are edited by the professional editors, which is another way of saying that the thoughts in them are presented in the best possible light. So when you read drivel, it is not the writing but the thought.

Who would write “we need more good regulations and fewer bad regulations” or “we need more spending on some programs and less spending on others”?

Why, any 12-year old who had to meet the 500-word minimum requirement in his composition assignment knows the answer: someone who had nothing to say.

But how could a seventy-something Nobel laureate with a lifetime of research not have enough material of substance to fill a newspaper column?

The answer is that his lifelong research is junk, as exemplified by his “seminal paper on Beveridge curve”.

Formally, i.e., in terms of form (which is always mathematical), a Beveridge curve can sustain a university career. It lends itself to being studied in depth for its shape, equation, slope, upward and downward shift, rotation, tangents – you name it. Imagine the papers you could publish, seminars you could attend and prizes you could win.

But conceptually, there is nothing there; where the content ought to be, there is a vacuum. Look at what it is about the labor market that the man has been trying to understand:
“Understanding the labor market – and the process by which workers and jobs come together and separate – is critical to devising an effective monetary policy.”
The process by which workers and jobs come together. I mentioned in the Stooges post that these labor economists of our time think of employment as a dating game where jobs and workers “come together” and then this one – say, the worker – dumps the other for a better, higher paying relation. Or that one – the job – dumps the worker in favor of a cheaper worker in China. Just like couples do in real life.

How does one think such nonsense, you ask? How could a logical adult mind take the goings on in the dating scene and apply them to the labor market? Are these people fools?


While they might be either or both, the immediate cause of this nonsense is desperation rooted in the breakdown of one’s knowledge base; Greenspan called it the "the collapse of the whole intellectual edifice". When the theory you have spent your lifetime building and studying fails to explain the events taking place around you, you must either go back on what you have done and implicitly admit that you have wasted you life – or resort to drivel.

The latter is an easier option, especially if the people around you take the drivel as the sign of your brilliance and bestow prizes on you.

“If much of the unemployment is related to business cycles – caused by a lack of adequate demand – the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural – caused by mismatch between the skills that companies need and the skills that workers have – aggressive Fed action to reduce it could be misguided”.
Our Nobel laureate thinks that there are two causes for unemployment. One is “business cycles”; the other, “structural”.

By business cycles, he means booms and busts; the fat years followed by the lean years. He thinks that they are caused by “inadequate demand”, which is correct in the same way that all the world’s problems could be said to be due to “human folly” and all plane crashes due to the gravity.

Why has housing collapsed in much of the West?

No adequate demand.

Why is the spread on the Greek sovereign debt rising?

No adequate demand.

Why are the sand dunes in the Sahara not expensive – in fact, worthless?

No adequate demand.

Why is the world annual passenger car production 60 million and not 60 billion?

Why, no adequate demand. If all the fishes drove cars, there would be no unemployed auto or steel workers. The tire companies around Akron would go on hiring binge.

This is the stuff Diamond teaches at MIT.

Why does demand drop – why does demand drop across all sectors at the same time, which is what recessions are all about and as a result of which the joblessness in the nation as a whole rises – does not interest him.

In the past several decades, though, something strange began to happen in the U.S. Corporations produced record profits. Demand across all the sectors seemed to be strong. Stock market boomed. And unemployment went up. A new expression entered the lexicon: jobless recovery. Commenting on it, I wrote here:
In the phrase “jobless recovery”, the news pertaining to the people is grim; there are no jobs to be had. Yet it contains “recovery”. So, what is it that is being recovered? The answer is: the agreeable rate of return of capital. The “data” measures the pulse and performance of capital, which the university professors study and comment about without ever understanding the larger issue surrounding it.
What was an unemployment expert to do? How could one explain that?

Enter the “structural” explanation, which Diamond defines as the “mismatch between the skills that companies need and the skills that workers have.” Any matchmaker would shake her head in agreement.

Where did the idea come from?

Here is the businessman of our time and a human lodestar to the American economists, opining in the Wall Street Journal last year:
If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms. For example, we have a gross mismatch of available skills and demonstrable needs. Businesses struggle to find the skills and talents that are needed to compete in this new world. Millions drawing the dole to sit around should be in training for the jobs of the future that require higher educational skills.
That is the foundation of Prof. Diamond’s “structuralism”.

He does not ask himself, Peter, you horse’s behind, how exactly does the word structural explain persistent joblessness? The word is an adjective. Its dictionary definition is “of, or relating to, structure”. What structure are you talking about when you say that the unemployment is structural? Are you talking about the structure of workers’ brain? The structure of the U.S. economy? If so, what does that mean?

A mind is a terrible thing to waste.

But no matter. Wasted minds have their uses. They make good stooges, a stooge being “a subordinate participant in a comic act”. They must only be presented as profound thinkers.

Peter Diamond would make a Fed governor.