J. Bradford DeLong's Blog, page 1087
January 24, 2015
Yes. Actual English Politics in the Fifteenth Century Was Weirder than Anything in "Game of Thrones". Why Do You Ask?
"[Richard Duke of] York ran into severe difficulty in early 1456.... His authority was almost visibly ebbing away. In public he was scorned: a display of five severed dogs’ heads was erected on Fleet Street in London in September, with each dog’s dead mouth bearing a satirical poem against York, 'that man that all men hate'...”
--Dan Jones: The Wars of the Roses: The Fall of the Plantagenets and the Rise of the Tudors
Weekend Reading: Marc Andreessen (2011): Why Software Is Eating the World
Marc Andreessen (2011): Why Software Is Eating the World: "August 20, 2011: This week, Hewlett-Packard (where I am on the board)...
...announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I've observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.
In short, software is eating the world.
More than 10 years after the peak of the 1990s dot-com bubble, a dozen or so new Internet companies like Facebook and Twitter are sparking controversy in Silicon Valley, due to their rapidly growing private market valuations, and even the occasional successful IPO. With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, "Isn't this just a dangerous new bubble?"
I, along with others, have been arguing the other side of the case. (I am co-founder and general partner of venture capital firm Andreessen-Horowitz, which has invested in Facebook, Groupon, Skype, Twitter, Zynga, and Foursquare, among others. I am also personally an investor in LinkedIn.) We believe that many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses.
Today's stock market actually hates technology, as shown by all-time low price/earnings ratios for major public technology companies. Apple, for example, has a P/E ratio of around 15.2—about the same as the broader stock market, despite Apple's immense profitability and dominant market position (Apple in the last couple weeks became the biggest company in America, judged by market capitalization, surpassing Exxon Mobil). And, perhaps most telling, you can't have a bubble when people are constantly screaming "Bubble!"
But too much of the debate is still around financial valuation, as opposed to the underlying intrinsic value of the best of Silicon Valley's new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
Why is this happening now?
Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.
Over two billion people now use the broadband Internet, up from perhaps 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 years, I expect at least five billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day.
On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries—without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, Loudcloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon's cloud costs about $1,500 a month.
With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired—the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.
Perhaps the single most dramatic example of this phenomenon of software eating a traditional business is the suicide of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant.
Oops.
Today, the world's largest bookseller, Amazon, is a software company—its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.
Today's largest video service by number of subscribers is a software company: Netflix. How Netflix eviscerated Blockbuster is an old story, but now other traditional entertainment providers are facing the same threat. Comcast, Time Warner and others are responding by transforming themselves into software companies with efforts such as TV Everywhere, which liberates content from the physical cable and connects it to smartphones and tablets.
Today's dominant music companies are software companies, too: Apple's iTunes, Spotify and Pandora. Traditional record labels increasingly exist only to provide those software companies with content. Industry revenue from digital channels totaled $4.6 billion in 2010, growing to 29% of total revenue from 2% in 2004.
Today's fastest growing entertainment companies are videogame makers—again, software—with the industry growing to $60 billion from $30 billion five years ago. And the fastest growing major videogame company is Zynga (maker of games including FarmVille), which delivers its games entirely online. Zynga's first-quarter revenues grew to $235 million this year, more than double revenues from a year earlier. Rovio, maker of Angry Birds, is expected to clear $100 million in revenue this year (the company was nearly bankrupt when it debuted the popular game on the iPhone in late 2009). Meanwhile, traditional videogame powerhouses like Electronic Arts and Nintendo have seen revenues stagnate and fall.
The best new movie production company in many decades, Pixar, was a software company. Disney—Disney!—had to buy Pixar, a software company, to remain relevant in animated movies.
Photography, of course, was eaten by software long ago. It's virtually impossible to buy a mobile phone that doesn't include a software-powered camera, and photos are uploaded automatically to the Internet for permanent archiving and global sharing. Companies like Shutterfly, Snapfish and Flickr have stepped into Kodak's place.
Today's largest direct marketing platform is a software company—Google. Now it's been joined by Groupon, Living Social, Foursquare and others, which are using software to eat the retail marketing industry. Groupon generated over $700 million in revenue in 2010, after being in business for only two years.
Today's fastest growing telecom company is Skype, a software company that was just bought by Microsoft for $8.5 billion. CenturyLink, the third largest telecom company in the U.S., with a $20 billion market cap, had 15 million access lines at the end of June 30—declining at an annual rate of about 7%. Excluding the revenue from its Qwest acquisition, CenturyLink's revenue from these legacy services declined by more than 11%. Meanwhile, the two biggest telecom companies, AT&T and Verizon, have survived by transforming themselves into software companies, partnering with Apple and other smartphone makers.
LinkedIn is today's fastest growing recruiting company. For the first time ever, on LinkedIn, employees can maintain their own resumes for recruiters to search in real time—giving LinkedIn the opportunity to eat the lucrative $400 billion recruiting industry.
Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world. In today's cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations and connects each car to mobile, satellite and GPS networks. The days when a car aficionado could repair his or her own car are long past, due primarily to the high software content. The trend toward hybrid and electric vehicles will only accelerate the software shift—electric cars are completely computer controlled. And the creation of software-powered driverless cars is already under way at Google and the major car companies.
Today's leading real-world retailer, Wal-Mart, uses software to power its logistics and distribution capabilities, which it has used to crush its competition. Likewise for FedEx, which is best thought of as a software network that happens to have trucks, planes and distribution hubs attached. And the success or failure of airlines today and in the future hinges on their ability to price tickets and optimize routes and yields correctly—with software.
Oil and gas companies were early innovators in supercomputing and data visualization and analysis, which are crucial to today's oil and gas exploration efforts. Agriculture is increasingly powered by software as well, including satellite analysis of soils linked to per-acre seed selection software algorithms.
The financial services industry has been visibly transformed by software over the last 30 years. Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies, such as Square, which allows anyone to accept credit card payments with a mobile phone, and PayPal, which generated more than $1 billion in revenue in the second quarter of this year, up 31% over the previous year.
Health care and education, in my view, are next up for fundamental software-based transformation. My venture capital firm is backing aggressive start-ups in both of these gigantic and critical industries. We believe both of these industries, which historically have been highly resistant to entrepreneurial change, are primed for tipping by great new software-centric entrepreneurs.
Even national defense is increasingly software-based. The modern combat soldier is embedded in a web of software that provides intelligence, communications, logistics and weapons guidance. Software-powered drones launch airstrikes without putting human pilots at risk. Intelligence agencies do large-scale data mining with software to uncover and track potential terrorist plots.
Companies in every industry need to assume that a software revolution is coming. This includes even industries that are software-based today. Great incumbent software companies like Oracle and Microsoft are increasingly threatened with irrelevance by new software offerings like Salesforce.com and Android (especially in a world where Google owns a major handset maker).
In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term "creative destruction," would be proud.
And while people watching the values of their 401(k)s bounce up and down the last few weeks might doubt it, this is a profoundly positive story for the American economy, in particular. It's not an accident that many of the biggest recent technology companies—including Google, Amazon, eBay and more—are American companies. Our combination of great research universities, a pro-risk business culture, deep pools of innovation-seeking equity capital and reliable business and contract law is unprecedented and unparalleled in the world.
Still, we face several challenges.
Every new company today is being built in the face of massive economic headwinds, making the challenge far greater than it was in the relatively benign '90s. The good news about building a company during times like this is that the companies that do succeed are going to be extremely strong and resilient. And when the economy finally stabilizes, look out—the best of the new companies will grow even faster.
Many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There's no way through this problem other than education, and we have a long way to go.
The new companies need to prove their worth. They need to build strong cultures, delight their customers, establish their own competitive advantages and, yes, justify their rising valuations. No one should expect building a new high-growth, software-powered company in an established industry to be easy. It's brutally difficult.
I'm privileged to work with some of the best of the new breed of software companies, and I can tell you they're really good at what they do. If they perform to my and others' expectations, they are going to be highly valuable cornerstone companies in the global economy, eating markets far larger than the technology industry has historically been able to pursue.
Instead of constantly questioning their valuations, let's seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.
That's the big opportunity. I know where I'm putting my money.
Weekend Reading: Peak Moustache of Understanding
John Harwood's claim that Dean Baquet's first priority is turning the New York Times into a trusted information intermediary runs on to and then sinks offshore of the reef that is Thomas Friedman:
Tom Friedman, in #Davos, proves once again he is the emperor of the idiots. This got spontaneous applause! pic.twitter.com/S9TTB3hVIZ
— Felix Salmon (@felixsalmon) January 23, 2015
Matt Taibbi: Thomas Friedman Said Something Awesome at Davos: T-Shirt Contest!: "I've been trying to reach Felix...
...and others over in Switzerland for some kind of explanation, because the more I stare at this passage, the less I understand it. What was the context? Was he sending some kind of signal to his alien commander?
I pulled up Google translate and ran the passage through a series of languages: from English into Slovenian, then into Afrikaans, and on into Basque and Lithuanian and Croatian and a few others before routing it back into English. This is what came out:
Arab Spring nijenedostatak width, but because of the lack of human understanding , which wrought such ad Gera is only when someone is late for breakfast, and hands, thank you for the delay.
I think it's something like this:
If the Arab Spring is 15 minutes late for breakfast, mankind should have enough understanding to say thank you. But it doesn't, and not just because of the Arabs' lack of bandwidth.
Or something. Free 'I Heart Confusing!' T-shirt to the reader with the best translation?
Felix Salmon: What on earth was Thomas Friedman talking about?: "The answer to the first question is that yes...
...it is absolutely real. Tom Friedman really did say this, and it really did elicit a hearty round of applause from the assembled plutocrats.
The answer to the second question is that I don’t honestly know what Tom Friedman was talking about. But at least I can give you a bit of context. Tom Friedman was sitting on a panel at a lunch.... Benioff had already explained... that he is so in awe of Tom Friedman’s intelligence that he felt Tom Friedman should not merely be the moderator of the discussion; he should be a fully-fledged panelist. So Benioff moderated.... Friedman had just explained that he is writing a book called ‘The World is Fast’, a sequel to a previous book of his called ‘The World is Flat’.... The title of the final chapter of his new book is ‘Thank You for Being Late’....
Being important CEO types, Tom Friedman’s friends are sometimes 15 minutes late for their breakfast meetings. And when that happens, Tom Friedman thanks his friend for being late, since his guest’s tardiness has given him 15 minutes of peace and quiet, during which he can think peacefully.... What has any of this got to do with the Arab Spring? That, I’m afraid, I’m going to have to leave as an exercise for the reader. Because I have no idea.
Thomas Friedman Op/Ed Generator
Tom Friedman: The Mideast’s Ground Zero: "It’s the latest version...
of the longest-running play in the modern Middle East, which, if I were to give it a title, would be called:
Who owns this hotel? Can the Jews have a room? And shouldn’t we blow up the bar and replace it with a mosque?
Tom Friedman: The Long Bomb: "So here's how I feel...
...I feel as if the president is presenting us with a beautiful carved mahogany table--a big, bold, gutsy vision. But if you look underneath, you discover that this table has only one leg.
Tom Friedman: Imbalances of Power: "The next president will have to...
...manage these new rising states and these new rising individuals and networks, while wearing the straightjacket left in the Oval Office by Mr. Bush. ‘Call it the triple deficit,’ said Mr. Rothkopf:
A fiscal deficit that will soon have us choosing between rationed health care, sufficient education, adequate infrastructure and traditional levels of defense spending, a trade deficit that has us borrowing from our rivals to the point of real vulnerability, and a geopolitical deficit that is a legacy of Iraq, which may result in hesitancy to take strong stands where we must.
The first rule of holes is when you’re in one, stop digging. When you’re in three, bring a lot of shovels.
Thomas Friedman: If Not Now, When?: "What’s unfolding in the Arab world today...
...is the mother of all wake-up calls. And what the voice on the other end of the line is telling us is clear as a bell:
America, you have built your house at the foot of a volcano. That volcano is now spewing lava from different cracks and is rumbling like it’s going to blow. Move your house!
Tom Tomorrow: Thomas Friedman, Private Eye:
Tom Friedman: "I think [the Iraq War] was: unquestionably worth doing, Charlie. And I think that looking back that I now certainly feel I understand what the war was about. And it’s interesting to talk about it here in Silicon Valley because, I think, looking back at the 1990s I can identify there are actually three bubbles of the 1990s:
There was the Nasdaq bubble
There was the corporate governance bubble.
And lastly there was what I would call the terrorism bubble
And the first two were based on creative accounting and the last two were based on moral creative accounting.
The terrorism bubble that built up over the 1990s said flying airplanes into the World Trade Center, that’s Ok. Wrapping yourself with dynamite and blowing up Israelis in the pizza parlour, that’s Ok. Because we’re weak and they’re strong and the weak have a different morality. Having your preachers say that’s OK? That’s OK. Having your charities raise money for people who do these kinds of things? That’s OK. And having your press call people who do these kind of things martyrs? That’s OK.
And that built up as a bubble, Charlie. And 9/11 to me was the peak of that bubble. And what we learned on 9/11 in a gut way was that bubble was a fundamental threat to our society because there is no wall high enough no INS agent smart enough no metal detector efficient enough to protect an open society from people motivated by that bubble.
And what we needed to do was to go over to that part of the world and burst that bubble. We needed to go over there basically uhm, and, uh, uhm take out a very big stick, right in the heart of that world and burst that bubble. And there was only one way to do it because part of that bubble said ‘we’ve got you’ this bubble is actually going to level the balance of power between us and you because we don’t care about life, we’re ready to sacrifice and all you care about is your stock options and your hummers. And what they needed to see was American boys and girls going from house to house, from Basra to Baghdad and basically saying:
Which part of this sentence don't you understand. You don't think that we care about our open society? You think this [terrorism] bubble fantasy, we're just going to let it grow? Well, suck on this!
Noted for Your Morning Procrastination for January 24, 2015
Over at Equitable Growth--The Equitablog
Barry Eichengreen: Hall of Mirrors
Chris Mooney: The Midwest’s Climate Future
Mark Wilson: The Upshot
Nick Bunker: Weekend reading
Nick Bunker: A look at the near-term future of unionization rates
Elizabeth Jacobs: President Obama’s “middle-class economics”
Plus:
Things to Read on the Morning of January 24, 2015
Must- and Shall-Reads:
Barry Eichengreen: Time to get serious about bank reform: After the financial crisis, governments staved off a second Great Depression - too well. This triumph let them duck tough reforms
David Edwards: GOP Rep. Tom McClintock: Keep minimum wage low ‘for minorities’ who aren’t worth more than $7 an hour
John Kasich: Medicaid Expansion
Dan Lyons: Unicorn Bloodbath: VC Bill Gurley Sounds The Alarm, Again
Cory Doctorow: GOP senator Joni Ernst who boasted about her family's self-reliance received $460K in federal subsidies
Barry Eichengreen: Hall of Mirrors [Audio] :: London School of Economics :: Public lectures and events
Chris Mooney: The Midwest’s climate future: Missouri becomes like Arizona, Chicago becomes like Texas
Mark Wilson: The Upshot
And Over Here:
Weekend Reading: James Meade: On John Kenneth Galbraith's "New Industrial State". Via David Glasner
Liveblogging World War II: January 24, 1945: The Red Army races across Poland to the German border
For the Weekend...: Don Giovanni Statue Scene
Liveblogging 300 BC: Spring: Founding of Antioch on the Orontes
Barry Eichengreen: Hall of Mirrors [Audio] :: London School of Economics :: Public lectures and events
Chris Mooney: The Midwest’s climate future: Missouri becomes like Arizona, Chicago becomes like Texas: "The bipartisan trio of climate risk prognosticators for the business community--Michael Bloomberg... Hank Paulson, and... Tom Steyer--are back.... A higher prevalence of extremely hot temperatures could severely impact corn and wheat production, the report warns, unless we take serious evasive action.... By 2100... the more likely range for losses, says the document, is 11 to 69 percent..."
Mark Wilson: The Upshot: "That's the power of The Upshot, an online news and data visualization portal on the New York Times' website... entrust[ed]... to the paper's former Washington bureau chief and economics columnist David Leonhardt.... To Leonhardt, The Upshot is more of a laboratory where he can lead a team of 17 cross-disciplinary journalists to rethink news as something approachable and even conversational. The goal: to enable readers to understand the news and by extension, the world, better. publisher. But we live in the puppy-GIF era..."
Should Be Aware of:
Danielle Kurtzleben: How working women, cheap cars, and Starbucks killed carpooling
David Corn: "Romney appears to have been body-snatched—perhaps by the ghost of Ted Kennedy.... What's next? Supporting gay rights, gun control, and abortion rights? (Or, in his case, going back to supporting gay rights, gun control, and abortion rights)...":
The Earl Grey Tea House
Tim Urban: The AI Revolution: Road to Superintelligence
Orin Hatch: Why the Plaintiffs in King Are Wrong: "A third constitutional defect in this ObamaCare legislation is its command that states establish such things as benefit exchanges, which will require state legislation and regulations. This is not a condition for receiving federal funds, which would still leave some kind of choice to the states. No, this legislation requires states to establish these exchanges or says that the Secretary of Health and Human Services will step in and do it for them. It renders states little more than subdivisions of the federal government."
Lizardbreath: Back On The Veldt, People Who Didn't Attribute Innate Personality Differences To Gender Were All Eaten By Wolves. What Were Wolves Doing On The Veldt? Who Can Tell?: "The Atlantic... an article... 'The Secret To Smart Groups: It's Women'. Researchers... quantifying the 'intelligence' of small groups... found... it was less strongly related to the individual intelligence of the group members than the average... capacity to understand what other people are feeling.... Women are on average better at social sensitivity.... Look: I completely believe that social sensitivity is terribly useful in making a group accomplish anything.... I'm also perfectly ready to believe that women are on average much better at it. But come on.... If you want a smarter group, you want more socially sensitive members, not more women... just choosing women blindly isn't--I know some deeply socially insensitive women.... The researchers themselves say this kind of sensitivity is a learned skill.... Could the headline of the article maybe be about how this is a skill people should be focusing on improving, rather than about how one gender is just better at it than the other? Feh. (It is kind of relaxing, for once, to come up with a stereotypical gender difference where I personally come up feminine, though. While I'm deeply socially awkward in general, I kick ass at... 'what emotion is this set of eyes expressing'... I do spend a fair amount of time at work massaging other people's states of mind so as to keep the work progressing...)"
Links:
Lizardbreath: Back On The Veldt, People Who Didn't Attribute Innate Personality Differences To Gender Were All Eaten By Wolves. What Were Wolves Doing On The Veldt? Who Can Tell? http://www.unfogged.com/archives/week_2015_01_18.html#014354
Barry Eichengreen: Hall of Mirrors [Audio] http://pca.st/qB0F?utm_content=buffer9f3cb&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
David Corn: "Romney appears to have been body-snatched—perhaps by the ghost of Ted Kennedy.... What's next? Supporting gay rights, gun control, and abortion rights? (Or, in his case, going back to supporting gay rights, gun control, and abortion rights)..." http://www.motherjones.com/politics/2015/01/mitt-romney-progressive-champion
Danielle Kurtzleben: How working women, cheap cars, and Starbucks killed carpooling http://www.vox.com/2014/10/28/7070835/what-ever-happened-to-carpooling
*Dan Lyons
: Unicorn Bloodbath: VC Bill Gurley Sounds The Alarm, Again http://valleywag.gawker.com/unicorn-bloodbath-vc-bill-gurley-sounds-the-alarm-aga-1681119294
Chris Mooney: The Midwest’s climate future: Missouri becomes like Arizona, Chicago becomes like Texas http://www.washingtonpost.com/news/energy-environment/wp/2015/01/23/the-midwests-climate-future-missouri-becomes-like-arizona-chicago-becomes-like-texas
John Kasich: Medicaid Expansion http://www.greatfallstribune.com/videos/news/2015/01/21/22129775
Tim Urban: The AI Revolution: Road to Superintelligence http://waitbutwhy.com/2015/01/artificial-intelligence-revolution-1.htmlCory Doctorow: GOP senator Joni Ernst who boasted about her family's self-reliance received $460K in federal subsidies http://boingboing.net/2015/01/23/gop-senator-boasted-about-her.html
Mark Wilson: The Upshot http://www.fastcodesign.com/3040817/the-upshot-where-the-new-york-times-is-redesigning-news
David Edwards: GOP Rep. Tom McClintock: Keep minimum wage low ‘for minorities’ who aren’t worth more than $7 an hour... http://www.rawstory.com/rs/2015/01/gop-rep-keep-minimum-wage-low-for-minorities-who-arent-worth-more-than-7-an-hour
Barry Eichengreen: Time to get serious about bank reform: After the financial crisis, governments staved off a second Great Depression--too well. This triumph let them duck tough reforms... http://www.prospectmagazine.co.uk/features/time-to-get-serious-about-bank-reform
Tim Duy: Policy Divergence http://economistsview.typepad.com/timduy/2015/01/policy-divergence.html
Paul Krugman: Insiders, Outsiders, and U.S. Monetary Policy http://krugman.blogs.nytimes.com/2015/01/22/insiders-outsiders-and-u-s-monetary-policy/?_r=0
The Earl Grey Tea House http://www.howickhallgardens.org/earlgreyteahouse.php
Weekend Reading: James Meade: On John Kenneth Galbraith's "New Industrial State". Via David Glasner
James Meade: on John Kenneth Galbraith's New Industrial State "This argument for a national indicative plan is strangely overlooked by Professor Galbraith...
Indeed, there is a great hiatus in his analysis of the economic system as a whole or, perhaps more accurately, in his implied analysis of what the economic system as a whole would be like when virtually the whole of it was controlled by large modern corporations. Professor Galbraith asserts that each modern corporation plans ahead the quantities of the various products which it will produce and the prices at which it will sell them; he assumes we will discuss this assumption later that as a general rule each corporation through its advertising and other sales activities can so mould consumers’ demands that these planned quantities are actually sold at these planned prices. But he never explains why and by what mechanism these individual plans can be expected to build up into a coherent whole....
In short, if all individual plans are to be simultaneously fulfilled they must in the first instance be consistent. But Professor Galbraith never considers this problem. It is a strange oversight in a modern professional economist-to overlook the problem of general, as contrasted with particular, equilibrium. (pp. 377-78)
Professor Galbraith writes always as if planning meant deciding in advance what should be produced and sold, in what quantities, at what cost and at what prices, and then taking effective steps to ensure that quantities and prices of inputs and outputs developed in precisely this way, and as if the market mechanism meant taking no thought for the morrow, taking no initiative in planning ahead the introduction of new products and processes, but just waiting for consumers to come to the firm and order a new car of such-and-such a bespoke design. It is by silly contrasts of this kind that Professor Galbraith pokes fun at his professional colleagues. (p. 382)
In the modern complex economy there are two major forces at work. One of these is that which Professor Galbraith rightly emphasises, namely the increased need for careful forward planning in a system which involves the commitment of large resources to inflexible uses over long periods of time.
But there is a second and equally important trend, which he entirely neglects: namely, the increased need in the modern industrial economy for a price mechanism, that is to say for reliance on a system of prices as a signaling device to indicate to producers and consumers what is and what is not scarce. This increased need for a price mechanism arises because in the modern industrial system input-output relationships have become so complex and the differentiation between products (many of which are the technically sophisticated inputs of other productive processes) has become so manifold that simple quantitative planning without a price or market mechanism becomes increasingly clumsy and inefficient. Moreover, this increased need for a signaling system through prices is occurring at a time when advances in mathematical economics and in the electronic and other technologies for measuring and metering have made a great extension of the price mechanism possible. Public authorities begin to make serious quantitative cost-benefit studies where previously pure hunches would have had to serve; and we nowadays seriously consider as, for example, in electronic metering devices for charging for the use of road space by motor vehicles-extensions of the use of pricing which would previously have been considered technologically impossible.
The particular brand of conventional wisdom which Professor Galbraith promotes in his recent book overlooks all these increased needs and opportunities for the use of the price mechanism. But many of the planned socialist societies are not falling into this error. Experiments which they are making in such devices as setting the maximisation of profit as the success criterion for the managers of socialised plants, in the direct use of the free market as in Yugoslavia, and generally in an increased reliance on price-mechanism indicators for many decentralised decisions constitute an undoubtedly significant development. The use of the price mechanism is, of course, not the same thing as the use of a market mechanism. A completely planned socialist economy could theoretically be run without any markets at all but with a complete system of ‘shadow prices’ to measure relative scarcities and to be used as the decisive indicators for the adjustments to be made in the economy’s quantitative planned inputs and outputs. But in many, though not of course in all, cases an actual market mechanism will be found to be institutionally the best way of operating a price mechanism. There are many degrees and forms of such extensions of the market; for example, in some cases the prices at which transactions take place might be centrally controlled and adjusted, while in others they might be freely determined by supply and demand in the market. But in one form or an-other increased reliance on a price mechanism does imply increased reliance at least on something closely analogous to a market mechanism.
Professor Galbraith expressly denies that recent developments in the socialist countries have any significant connections with the use of the market as a controlling device. This denial would, by the uncouth, be called drivel-if I may be permitted to use Professor Galbraith’s own expression. But he has to hold this view simply because the socialist countries continue to plan while he, drawing no distinction between the price mechanism and a market mechanism, believes that one can have either planning or a market-price mechanism but not both. In fact, ‘planning and the price mechanism’ not ‘planning or the price mechanism’ should be a central theme of every modern economist’s work. (pp. 391-92)
And David says: "Galbraith believed that the book he published in 1967...
...The New Industrial State was going to demonstrate the market economics was a snare and a delusion, because both the Soviet Union and the US were moving toward an economic system dominated by huge enterprises that engaged in long-term planning and were able to impose their plans on unwilling consumers and workers.
The most devastating review of Galbraith’s book was published in the June 1968 edition of The Economic Journal by James Meade... a kind of market socialist, or a self-described LibLaberal. The entire essay is worth reading....
Marcus Nunes informed us a few days ago that Meade explicitly advocated targeting nominal GDP writing as follows:
I have told this particular story simply to make the point that the choice between fiscal action and monetary action must often depend upon basic policy issues which should certainly be the responsibility of the government rather than of any independent monetary authority. Perhaps the best compromise is an independent monetary authority charged so to manage the money supply and the market rate of interest as to maintain the growth of total money income on its 5-per-cent-per-annum target path, after taking into account whatever fiscal policies the government may adopt....
Was Meade right or left? And was he on the winning side or the losing side?
Liveblogging World War II: January 24, 1945: The Red Army races across Poland to the German border
World War II Today: The Red Army races across Poland to the German border: "
On the 24th January they reached the river Oder, the modern day border between Poland and Germany, they were now only 60 miles from Berlin. There was post war controversy between Soviet Generals as to whether they should have pushed on to Berlin at this point and smashed the Germans while they were in disarray. There were still very substantial German formations on their flanks, however, which led to the order to halt and consolidate.
The dramatic advances again raised expectations that the war might end very soon. The BBC, the principal source of ‘independent’ information for most of Europe issued a memo about not raising expectations. They contented themselves with quoting from earlier Nazi propaganda, when the German claim was that the war was being fought well away from Germany:
September 3rd, 1943: ‘If we have to fight hard in the East today, at least we do not have to do so at Breslau but 1,000 kilometers from our frontier.’
August 14th, 1943: ‘It is all too easily forgotten that this battle is not being fought in the suburbs of Tilsit or on the banks of the Oder but on the Upper Donetz and in the suburbs of Leningrad. That is the way of looking at things which we prefer.’
Twenty one year old Lieutenant Evgeni Bessonov was an officer in a Guards Unit of the Red Army. He commanded a platoon of men who rode on the Soviet tanks, fighting as infantry when the situation arose. From the 12th January to the 24th-25th they advanced over 600 kilometres, as they punched through the German resistance not caring whether they overtook retreating columns of Germans:
It was good that the enemy’s air force was not there, and we could march both during day and night. As a rule, during the night we would stop once for two or three hours. We tried to get into houses, into a warm place.
There were almost no stops during the day, and even if we had them, breaks were short, no more than one hour. It was rare that we stopped for a long time to warm the soldiers. We only had food twice a day — morning and evening; if the kitchen was there, the food was hot.
Thus, in order not to be hungry during the day, we made do with trophies — mostly German tinned meat and hard tack. Sometimes we saw small loaves of black bread in plastic; the bread was not too hard, but it was tasteless. We did not really like it, but we ate it anyway. Our Russian bread would also freeze in our back-packs in the frost, if you did not eat it on time.
[…]
There were cases when I slept so well during the night that I did not even wake up during the small night clashes with the Germans that occurred in some villages. The soldiers sympathized with me and did not wake me up; the squad leaders could manage by themselves — if necessary, they fired on the move.
During the day we sometimes ran into horse-drawn supply columns. All the personnel and their escorts were dressed in German uniforms. Among them there were all nationalities except for the Russians — Kalmyks, Uzbeks, Tatars,Kazakhs, people from the Caucasus and Poles. Apparently, the Germans did not trust the Russians and did not ‘allow‘ them to serve in supply units.
We had different attitudes towards those men, but we did not show cruelty, did not abuse them and did not execute them. I think once we fought a supply column of Kalmyks and soldiers of other nationalities, as they tried to resist — they lost their heads and opened fire on us, and my soldiers did not like it.
War is war. I never saw Russians or Ukrainians in supply columns, but met Vlasov’s men in battle many times. [Vlasov was the Soviet General who had switched sides after being captured by the Germans in 1942 and formed the anti-Soviet Russian Liberation Army from Russian POWs.] They always put up stubborn resistance and besides that shouted all kinds of offensive curses at us. They knew that there would be no mercy, and we did not give it — we never took them prisoners. Besides, they never surrendered, unlike the Germans.
Sometimes tanks broke down and had to stop for small repairs. In such cases the tank riders would as a rule stay with the tank. But if a tank needed more serious repair, the tank riders would travel along on another tank. One of our tanks broke down, and Sergeant Nikolai Savkin with his squad stayed in that village.
Retreating Fritzes entered the village after we left and burnt the tank in battle. Savkin himself was killed, along with his men, among them Bespalyuk, Polischuk and others… That’s how it was, there were no major engagements, but platoons had fewer and fewer soldiers left…
We went through the whole of Poland fighting constantly. Sometimes the enemy put up stubborn resistance, while sometimes our arrival in a city or a village was totally unexpected for the Germans.
One village still had electric lights and even a policeman on a street crossing when we drove in. At first he did not understand which tanks these were, but as soon as we drove closer, he realized who we were and ran away from his post, he was off like a flash. I have already mentioned that Germans run very fast.
See Evgeni Bessonov: Tank Rider: Into the Reich with the Red Army.
January 22, 2015
Liveblogging 300 BC: Spring: Founding of Antioch on the Orontes
Wikipedia: Antioch:
Antioch on the Orontes.... Two routes from the Mediterranean, lying through the Orontes gorge and the Beilan Pass, converge in the plain of the Antioch Lake (Balük Geut or El Bahr) and are met there by the road from the Amanian Gate (Baghche Pass) and western Commagene, which descends the valley of the Karasu River to the Afrin River, the roads from eastern Commagene and the Euphratean crossings at Samosata (Samsat) and Apamea Zeugma (Birejik), which descend the valleys of the Afrin and the Quweiq rivers, and the road from the Euphratean ford at Thapsacus, which skirts the fringe of the Syrian steppe. A single route proceeds south in the Orontes valley.
After Alexander's death in 323 BC, his generals divided up the territory he had conquered. Seleukos I Nikator won the territory of Syria, and he proceeded to found four 'sister cities' in northwestern Syria, one of which was Antioch, a city named, according to Suda, after his son Antiochus.... An eagle... had been given a piece of sacrificial meat and the city was founded on the site to which the eagle carried the offering.... Antioch soon rose above Seleukia Pieria to become the Syrian capital...
Noted for Your Nighttime Procrastination for January 22, 2015
Over at Equitable Growth--The Equitablog
An Inadequate Note on Nick Bunker on Bank Leverage...
A Note on Carter Price's: What Have We Learned About the ACA Over the Past Year?
Dean Baker: Betting Against Subprime Mortgages Was a Good Thing
Tony Yates: ECB QE. Much too Late and Not to Be Counted on
Joseph Heath: Why People Hate Economics, in One Lesson
Elizabeth Jacobs: President Obama’s “middle-class economics”
Carter Price: What have we learned about the ACA over the last year?
Plus:
Things to Read on the Evening of January 22, 2015
Must- and Shall-Reads:
Mario Draghi: "There must be a statute of limitations for those who say there will be inflation..."
Seumas Milne: The Davos oligarchs are right to fear the world they’ve made
Russ Britt: "Roughly 6.3 million people... will drop their Obamacare coverage or face using as much as half of their income for health insurance if a Supreme Court ruling dismantles subsidies in states that haven’t established their own exchanges... nearly two-thirds of those who lose subsidies are white Southerners, and nearly half have full-time jobs..."
Carter Price: What have we learned about the ACA over the last year?
Rob Valetta: Higher Education, Wages, and Polarization
Paul Krugman: "Obama wasn’t exactly able to claim morning in America... but he was able to talk about success and moving forward.... Why the difference?... On the secular stagnation front... the euro area’s working-age population peaked in 2009.... Aggregate euro-area fiscal policy has been substantially tighter than in the US.... On the monetary side Europe zagged when America zigged... behaved throughout as if debt and inflation were the overwhelming risks.... Europe’s woes are no mystery, although it’s hard to allocate the blame; policy did everything wrong, so it’s hard to tell which wrongness mattered most..."
Stuart Kemp: Economist Appoints Its First Female Editor
Robert Skidelsky: The Fall of the House of Samuelson
Joseph Heath: Why People Hate Economics, in One Lesson
Dean Baker: Betting Against Subprime Mortgages Was a Good Thing
Tony Yates: ECB QE. Much too Late and Not to Be Counted on
And Over Here:
Over at the London Economist: May Zanny Minton Beddoes Do as Well Relative to John Micklethwait as Barack Obama Has Done Relative to George W. Bush
Stuart Kemp: Economist Appoints Its First Female Editor: "Zanny Minton Beddoes has been appointed editor of the Economist, the first female to land the role in the publication’s 170-year history..."
Robert Skidelsky: The Fall of the House of Samuelson: "[Paul] Samuelson was a convinced Keynesian... in a limited sense. He dismissed most of Keynes’s attack on the orthodox economics of his day as unnecessary, writing ‘had Keynes [started] with the simple statement that he found it realistic to assume that money wages...were sticky and resistant to downward movements... most of his insights would have remained just as valid.’ For Samuelson, Keynes’s real contribution was the tools he gave governments to prevent depressions. Reading The Samuelson Sampler, it is extraordinary to realize just how confident economists of his generation were that the New Economics... had solved the problem of depression and mass unemployment. As Samuelson put it in his 1973 introduction, ‘the specter of a repetition of the depression of the 1930s has been reduced to a negligible probability.’... Because governments knew how to stop depressions, voters would insist that they use this knowledge. ‘If printing bits of green can save banks and business from ruin,’ he argued in 1966, ‘today’s electorate will ensure that either party in power will [so] act.’ This was irrespective, Samuelson thought, of the ideological preferences of those in power..."
Joseph Heath: Why People Hate Economics, in One Lesson: "What is wrong with this?... Tabarrok and Cowen are trying to communicate... ‘incentives matter’... a methodological point... [that] should be presented in... as platitudinous [a way] as possible.... There are many ways of doing that, since the problem with the public... is not that they think incentives don’t matter... it’s just that they underestimate the[ir] power of incentives, or they don’t see some of the unexpected ways.... The right way... is to say ‘here’s something that we can all agree upon--but have you thought through the consequences of it? Perhaps not. That’s what economists do.’ But Tabarrok and Cowen are unable to restrain themselves..."
Dean Baker: Betting Against Subprime Mortgages Was a Good Thing: "Billionaire Robert Burns... richly deserves to be ridiculed... [for] want[ing] people to get used to lower living standards.... People are wrongly attacking Burns when they complain about his betting against subprime mortgage backed securities.... The securities were in fact bad. Burns betting against them made that clear in the markets somewhat sooner than would have otherwise been the case, bringing down the bubble earlier and more rapidly. This is good... fewer people were caught up in it than if the bubble had continued.... It would have saved people an enormous amount of pain if there had been lots of Robert Burns betting against subprime mortgage backed securities in 2003-2004.... Burns was acting out of greed, not a desire to help the economy and society. But this is a case where greed was good..."
Tony Yates: ECB QE. Much too Late and Not to Be Counted on: "The slow, drawn out, reluctant, piecemeal way that the ECB has handled the crisis... and the disputes that have raged about whether and how to do QE... minimise the bang per buck.... Second, in so far as QE works by signalling intentions about future central bank rates, there is now little to be got.... Third, in so far as QE acts through lowering term, liquidity or other premia, it’s too late for that too. Something has squeezed those premia out in Northern countries. And the risk that the remaining premia in the South reflect is not going to be taken off the local sovereign balance sheet..."
Should Be Aware of:
Emily Badger: Now we know how many drivers Uber has, and how much money they’re making
Paul Krugman: "Hubbard is defending... the 2003 cuts in tax rates on dividends and long-term capital gains... all it did was boost payouts to shareholders.... Two-thirds of the benefits from the dividend tax cut went to the top 1 percent..."
Justin Fox: CEO inanity, at the Davos World Economic Forum and beyond
A Moderate House Republican: "Week one, we had a Speaker election that didn't go as well as a lot of us would have liked. Week two, we spent a lot of time talking about deporting children, a conversation a lot of us didn't want to have. Week three, we're debating reportable rape and incest--again, not an issue a lot of us wanted to have a conversation about. I just can't wait for week four..."
Scott Lemieux: High Broderism, Once Influential Conservative Democrat Edition: "Bill Galston, the prescient analyst cryogenically frozen at a 1991 DLC meeting, has some Deep Thoughts about the SOTU: 'Still, as Mr. Obama began speaking, a key uncertainty remained: What balance would he strike between the desire to shape the political terrain for 2016 and the imperatives of governing in 2015? The former required bold initiatives, of a kind likely to evoke sharply negative reactions from Republicans who command majorities in both the House and the Senate. But successful legislating this year will require compromise with those very majorities. Could he thread the needle, making the Democratic political case for next year without undermining the possibility of legislative progress this year?' Yes, in 2015 it’s very, very hard to tell if congressional Republicans would be willing to pass sensible middle-of-the-road compromises. But either way, I think that we can agree that whether it will happen will depend on the precise wording of the State of the Union address..."
@lorcanrk: On ECB QE: "€60 billion a month including: Sovereign Debt; Super-national (read EIB/ESM) debt; Asset-Back Securities; Covered Bonds. It does NOT include Corporate Bonds. (or equities..) It will buy bonds with remaining maturity between 2 and 30 years. It will buy inflation linked bonds. Purchases will start in March (in six weeks, when that month's reserve maintenance period starts) and will continue until at least September 2016. The breakdown of purchases will be by Central Bank capital key, with the ECB itself accounting for 8% of purchases. So, if you want to work out how much each national central bank will buy, get the banks capital share here (be sure to adjust to 100% total), multiply that by €60bn, then multiply that by 0.92. Interestingly, there is nothing in the guidelines stopping an NCB buying the sovereign debt of another euro-area country, although it would be doing so at its own risk. I've written here about why the non-risk sharing is probably a good thing. But, also, I think ECB QE buying at this level is most likely to work more to weaken the € currency than necessarily have a positive portfolio effect. Overall, this is good news. It would be churlish to ask for more, at the moment."
Henry Farrell: The Peripheral: "A blogpost on the William Gibson book of the same name, with copious spoilers... his best for some time; maybe, depending on your druthers, the best novel that he’s ever written.... Gibson... wants, I think, to talk about the relationship between the 99% and the 1%, using science fiction to turn the social relationships that Piketty and Saez talk about into a kind of ontology. The farther future is one in which the 1% has won and become a global ruling class.... The nearer future timeline is set in a rural America where the real economy has collapsed, leaving illicit drugs and dead end jobs working for the homeland security.... In this timeline, we don’t see the 1%, although they’re there in the background. Instead we see the kind of people who are about to be left behind and perish in the Jackpot..."
Links:
Mario Draghi: "There must be a statute of limitations for those who say there will be inflation..." http://www.calculatedriskblog.com/2015/01/draghi-there-must-be-statute-of.html
Seumas Milne: The Davos oligarchs are right to fear the world they’ve made http://www.theguardian.com/commentisfree/2015/jan/22/davos-oligarchs-fear-inequality-global-elite-resist
Stuart Kemp: Economist Appoints Zanny Minton Beddoes Editor http://www.theguardian.com/media/2015/jan/22/economist-magazine-appoints-its-first-female-editor
Henry Farrell: The Peripheral http://crookedtimber.org/2015/01/22/the-peripheral
@lorcanrk: On ECB QE https://ello.co/lorcanrk/post/4SkTXpBu3bkxky3g-E4qJQ
Carter Price: What have we learned about the ACA over the last year? http://equitablegrowth.org/news/learned-aca-last-year
Joseph Heath: Why People Hate Economics, in One Lesson http://induecourse.ca/why-people-hate-economics-in-one-lesson
Russ Britt: "Roughly 6.3 million people... will drop their Obamacare coverage or face using as much as half of their income for health insurance if a Supreme Court ruling dismantles subsidies in states that haven’t established their own exchanges... nearly two-thirds of those who lose subsidies are white Southerners, and nearly half have full-time jobs..." http://www.marketwatch.com/story/how-obamacare-ruling-could-slash-enrollment-2015-01-22
Dean Baker: Betting Against Subprime Mortgages Was a Good Thing http://www.cepr.net/index.php/blogs/beat-the-press/betting-against-subprime-mortgages-was-a-good-thing
Paul Krugman: "Hubbard is defending... the 2003 cuts in tax rates on dividends and long-term capital gains... all it did was boost payouts to shareholders.... Two-thirds of the benefits from the dividend tax cut went to the top 1 percent..."
Paul Krugman: "Obama wasn’t exactly able to claim morning in America... but he was able to talk about success and moving forward.... Why the difference?... On the secular stagnation front... the euro area’s working-age population peaked in 2009.... Aggregate euro-area fiscal policy has been substantially tighter than in the US.... On the monetary side Europe zagged when America zigged... behaved throughout as if debt and inflation were the overwhelming risks.... Europe’s woes are no mystery, although it’s hard to allocate the blame; policy did everything wrong, so it’s hard to tell which wrongness mattered most..." http://krugman.blogs.nytimes.com/2015/01/21/euroblunders
Robert Skidelsky: The Fall of the House of Samuelson http://www.project-syndicate.org/commentary/paul-samuelson-economic-crisis-by-robert-skidelsky-2015-01
Rob Valetta: Higher Education, Wages, and Polarization http://www.ritholtz.com/blog/2015/01/higher-education-wages-and-polarization
Tony Yates: ECB QE. Much too Late and Not to Be Counted on https://longandvariable.wordpress.com/2015/01/21/ecb-qe-much-too-late-and-not-to-be-counted-on/
Emily Badger: Now we know how many drivers Uber has, and how much money they’re making http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/22/now-we-know-many-drivers-uber-has-and-how-much-money-theyre-making
Justin Fox: CEO inanity, at the Davos World Economic Forum and beyond http://www.bloombergview.com/articles/2015-01-22/ceo-inanity-at-the-davos-world-economic-forum-and-beyond
A Moderate House Republican: "Week one, we had a Speaker election that didn't go as well as a lot of us would have liked. Week two, we spent a lot of time talking about deporting children, a conversation a lot of us didn't want to have. Week three, we're debating reportable rape and incest--again, not an issue a lot of us wanted to have a conversation about. I just can't wait for week four..." http://talkingpointsmemo.com/edblog/rape-abortion-charlie-dent?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+tpm-news+(TPMNews)
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