Monday, October 31, 2011

Learning from failure


By Steven Horwitz and Jack Knych
train wreck for knychIn today’s society failure has become something to fear, avoid, and therefore prevent at all costs. Whether it is unemployment compensation, farm subsidies, or bailouts for failing companies, the world seems to view failure as having no redeeming social value. If success is all good and failure is all bad, then it seems as though we should do everything we can to remedy or prevent failure.
But is that so? Without denying the value of perseverance, and recognizing that the slogan “never give up” can be useful in overcoming certain obstacles, we must keep in mind that failure can act as a guide to more worthwhile activities. For example, in 1921 Walt Disney started a company called the Laugh-O-Gram Corporation, which went bankrupt two years later. If a friend of Disney or the government hadn’t let him fail and move on, he might never have become the Walt Disney we know today.
More important than this individual learning process is the irreplaceable role failure plays in the social learning process of the competitive market. When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources. Without failure there’s no economic growth or improved human well-being.
Economists, especially those of the Austrian school, often emphasize how entrepreneurs discover new knowledge and better ways of producing things. But entrepreneurial endeavors frequently fail and the profits thought to be in hand often don’t materialize. According to the U.S. Small Business Administration, over half of small businesses fail within the first five years. But failed entrepreneurial activity is just as important as successful entrepreneurial activity. Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentive to correct them. It’s not that entrepreneurs are just good at getting it right; it’s also that they (like all of us) can know when they’ve got it wrong and can obtain the information necessary to get it right next time.
On this view failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.
The Knowledge Problem
Understanding this point requires a broader vision of the market process. For Austrian economists the fundamental economic problem is not the efficient allocation of given resources to our most valued ends at a given time, but rather how we overcome the “knowledge problem”—the division of knowledge that characterizes the social world. It is more important to figure this out than to master the problem of resource allocation because new knowledge drives economic growth and creates prosperity. If the main task of the market were merely to allocate known resources to their most efficient uses, economic growth would seem impossible, since we would be stuck in a primitive world. Where is there any room for the innovation or change that drives progress and improves our lives? If a plow is deemed the most efficient use of iron and all iron is constantly allocated to making plows, how could iron ever be allocated for a new invention such as a tractor? The answer is that entrepreneurs change the most efficient use of resources by discovering new uses. By understanding the economic problem posed by limited, unique, and dispersed knowledge, we can better understand the role failure plays in coping with this problem.
Competition figures prominently in this system. Competition promotes entrepreneurial activity and the discovery of knowledge by empowering a variety of decision-makers to try to find new and better ways of using resources as well as new ends to achieve. This decentralization ensures that what F. A. Hayek called the local knowledge of time and place will be best used. Centralized planning, like other forms of government allocation, necessarily relies on the knowledge of fewer people, limiting discovery and restricting knowledge-dissemination to fewer channels. Competition is a better way to overcome the knowledge problem.
Failure and Opportunity
We can understand the role of failure if we recognize, as Ludwig von Mises did, that all human action intends to “remove felt uneasiness.” We are always striving to improve ourselves by achieving our highest valued ends as often as we can. On these terms, failure is all around us because no human ever achieves a complete lack of felt uneasiness. We always have unsatisfied ends. Israel Kirzner uses the term “alertness” to describe how the entrepreneurial element of human action identifies which ends to strive for and which means are available. Kirzner says that for market action to occur, entrepreneurs must first be alert to opportunities for profit. The possibility of profit keeps entrepreneurs alert to the ways people strive for ends or make use of means that fail to remove felt uneasiness. Once they’ve noticed this failure in human knowledge, the same opportunity for profit spurs entrepreneurial activity to find a new way to achieve those ends, or to find better ends themselves. So a failure in human knowledge becomes the catalyst for producing new knowledge via the entrepreneurial process.
When entrepreneurs attempt to correct a particular failure in knowledge, they often fail themselves and incur losses because of competition. Although bankruptcy is painful in the short term, such failure is an integral part of how entrepreneurial activity and the market function. Failure in a competitive society informs market participants about which activities or jobs to strive for and which to avoid, lest they waste time and money. Jobs that add value to society should be pursued, while those that fail to add value should be eliminated. Markets help guide market participants far better than any bureaucracy can because bureaucracies lack the market’s key components of competition, profit, and loss, which reveal failures and allow for their correction.
Because competition is a voyage into the unknown, we can only know after the fact what works and what does not. Thus economic failure is not “waste.” Calling entrepreneurial failure a “waste” implicitly assumes that one knew ahead of time what the best use of resources was. Such knowledge is not available to anyone, which is why failure is necessary to provide the needed signals.
The subsidies, bailouts, stimulus packages, and other interventions that now increasingly characterize the U.S. economy disrupt this process. Farm subsidies (including cheap water out west), for example, prevent entrepreneurs from finding and capitalizing on failures of knowledge in farming. While there may be new and better ways to grow food, it is difficult for entrepreneurs to find this out if farmers are kept afloat by the government. Perhaps decentralized, local farming would be discovered as more profitable if larger monoculture farms that are possibly damaging the environment were allowed to fail. By preventing inefficient methods of production from suffering losses, subsidies reduce the degree of failure in agricultural markets and make it harder to know that misallocation has taken place and to correct it.
Not letting Chrysler and General Motors fail during the Great Recession prevented an entrepreneurial response to this misuse of resources. The bailouts created two types of negative incentives. First, the companies were encouraged to keep making cars when their losses showed the resources and labor could better be used elsewhere. Second, the government deterred any new entrepreneur from entering the industry and doing things better. Many politicians defended the bailout because they did not want the hundreds of thousands of autoworkers to become unemployed. But when hundreds of thousands of workers become unemployed they do not disappear. They find different jobs that would contribute to society in a better way than working for a bankrupt auto company. The physical assets of bankrupt companies also get reallocated to alert entrepreneurs looking for bargains. Failure is necessary for learning and for success.
The Keynesian argument for government jobs programs is that any sort of work will restart spending in a recession, even hiring people to dig ditches and fill them up. But do a higher GDP and a job by themselves make society better off? Would it be better to have a 2 percent unemployment rate with 8 percent of the employed population doing jobs that don’t add real value (so around 10 percent of the labor force is not adding real value) or more unemployment with everyone who is working really adding value?
Unemployment
Unemployment is a form of failure, and it involves the same considerations as when businesses fail. If a job no longer contributes value this needs to be made clear so that those workers can find jobs that actually do. Imagine if the disemployment of farmers had been prevented during the transition to an industrial economy. In 1941, 41 percent of the U.S. workforce was in agriculture. In 2011 the portion was 3 percent. Where would industry be today if we had prevented the majority of the 41 percent from losing their jobs and finding new ones? It is right that this sort of “failure” was allowed to occur because the displaced farmers found new jobs in the cities and elsewhere. Those new jobs helped society transition from agriculture to industry to services, creating even newer jobs all along the way. This is strong evidence that learning from failure takes place in labor markets.
Autopoiesis (life’s continuous production of itself) is one of the principal characteristics of life, and constant change is its essence. This applies to the economy as well. For us to maintain or increase a high standard of living we must constantly change how we do things. This change won’t be fueled by lucky guesses or by bureaucratic decrees, but instead often by entrepreneurial activity in the face of failure in the market. Since that activity drives the train of progress, it is in society’s interest that the tracks be cleared of governmental obstacles.

Sunday, October 30, 2011

The endgame will be Hyperinflation


Europe’s Future Comes Into Focus: Hyperinflation
What struck me most when reading the first responses to the EU summit was this: Most of what you get from the mainstream media pundits or from the financial economists on Wall Street or in the city of London not only misses the relevant points, it usually gets things completely the wrong way round. What these analysts suggest is good policy is almost always bad policy and should be avoided under any circumstances.
Let’s go through the salient points:
1. Write-down of Greek debt to 50%
“Private-sector involvement,” aptly abbreviated PIS, is one of those dreadful phrases that conceals more than it explains. The private sector here means, of course, the banks that were stupid enough to give billions of euros to Greek politicians.
We all know what happens under capitalism to lenders who give money to borrowers, who end up being unable to pay: They lose their money. That is how it should be. That’ll teach them and, hopefully, make them more prudent lenders in the future.
Alas, this is Europe, so there is no capitalism. You can negotiate your losses with the political class and agree on the “appropriate” haircut. In July, a 20% write-off was agreed, now this was upped to 50. Either number is entirely arbitrary.
The positively Orwellian phrase “private-sector involvement” makes it sound as if these poor banks were just innocent bystanders — and respectable members of the private sector, for that matter — who got dragged into this unfortunate business at no fault of their own.
For how much should the “private” sector be “involved”? Well, I would say for exactly as much as it chose to involve itself in the first place, by voluntarily lending money to the Greek government. I mean, have the risk managers and credit analysts at the likes of Credit Agricole and Societe Generale ever been to Athens and inspected the bottomless pit in which their loans were dumped? Or have they, from the start, assumed that the German taxpayer or the ECB would cover their losses?
Of course, a haircut of 50%, as now agreed in Brussels, is better than the ridiculous 20% or so “agreed” in July. But looking at Greece’s dire financial situation, the haircut should be at least 60%, or maybe 90 or 100. There is no reason for the Greek citizens of this and future generations to suffer endlessly because of the corruption of their past governments and the stupidity of their bankers. Embrace default! Just stop paying, go bankrupt, shrink your government, role up your sleeves and start from scratch.
After a complete and proper default, the state will not get loans easily again. This, coincidentally, is an additional bonus of a complete government default. It keeps your future politicians honest. That would be the free-market solution. But again, we are in Europe.
An even bigger haircut, one decided not by political horse-trading but by the market and Greece’s true ability to pay, would be more helpful for the Greeks and would, conveniently, discipline the bankers. Why is it not considered?
Well, the politicians don’t like it, because it would shut much of the government bond market down and make it difficult or impossible for them to keep running deficits of their own, and also, because the banks have skillfully booby-trapped the entire financial system with explosive CDS (credit default swaps) that get triggered if the “private-sector involvement” gets too big. The bankers, increasingly, resemble financial terrorists, effectively declaring, “If you don’t bail us out, we blow the whole place up!”
The bottom line: A haircut of 50% is better than 20, but it is still too little for Greece, and the whole idea that the “private” sector negotiates losses with the politicians doesn’t bode well for the future.
2. Fiscal coordination
Nothing specific was agreed at the summit, but this is where we are going, and the mainstream economists are cheering for it.
For years now, we have heard this in endless macroeconomic research pamphlets and newspaper editorials: There can be no monetary union without a fiscal union. This is, of course, utter nonsense. Complete rubbish. And it doesn’t get any more right by repeating it at nauseam.
The money of capitalism, of the free market and global trade, has always been gold (or silver, but I will refer to gold here). A gold standard is the oldest and best currency union imaginable, and I would argue, the only one workable. Under a gold standard, various countries and their governments use the same currency, gold. There is no central bank and no printing press. Governments have to make do with the income they generate from taxing their local population.
In such a system, the state has to live, just like any other entity in society, within its means. Apparently, this is a truly fantastical notion for today’s politicians and mainstream economists. Under a gold standard, the state may also borrow from the market, but it is clear to the lenders that they assume full risk of default. There is no lender of last resort. This is a powerful constraint on government largesse.
The Greek crisis was a good test to see how closely the European fiat money union could resemble the workings of a proper gold standard. In theory at least, and as intended by the original designs for EMU, there should have been no bailout, and the whole mess should have been a local affair between the Greek government and its lenders, just as it would be under a gold standard.
All this nonsense about the falling apart of the euro was, of course, needless but politically motivated scaremongering. When a government defaults under a gold standard, there is no reason why any other government should give up gold as a currency. Had the no-bailout provision been adhered to, there would equally have been no reason why a Greek default should have affected the acceptance and the usability of the euro in any of the other countries, nor for the Greeks themselves. A currency union does not require a fiscal union.
But EMU is no gold standard, and it already failed its first test of whether it could even be a currency union of some discipline. The gold standard was abandoned globally, precisely so that governments would not have to live within their means. The euro is political paper money, fiat money. It is issued to allow persistent fiscal irresponsibility, as is any other paper currency. Central banks have always been created to fund the state and the banks. The ECB is no different.
This is the global picture in 2011: After 40 years of complete paper money, public debt around the world has reached such momentous dimensions that the major central banks are now increasingly funding the state directly. This is what is happening in the U.S., the U.K. and increasingly, the eurozone. It is either accepted with suspicious equanimity or enthusiastically supported by bank economists and the inflationistas in the mainstream media. The trend is the same pretty much everywhere. It is only that, within the eurozone, it is less clear which government has first call on the printing press. In other paper money economies, this can be done more straightforwardly.
To assume that some form of institutional framework for fiscal coordination will discipline the European governments and reduce the desire for ongoing central bank debt monetization is at least naive. Maybe outright stupid. All governments in Europe are fiscally irresponsible, even the German one.
In the run-up to EMU, Germany imposed the Maastricht criteria on her European partners. Anyone remember the 60% debt-to-GDP limit? Laughable. Today, Germany is at 83% and rising, which may look relatively prudent if compared with Belgium or Greece, but if Germany has to pay up on its already-agreed-upon commitments under the European Financial Stability Fund, she will go above 90% in one giant leap, roughly where Ireland was when her creditors said, “No mas!” Germany may have the lowest unemployment rate in 20 years and, last year, had the highest GDP growth in 20 years, but she is still running deficits, accumulating debt every year, just like anybody else in Europe.
On a long-enough timeline, everywhere is Greece!
The bottom line: We will see a plethora of treaty changes, top-level EU summits and other pointless boondoggles. All to no avail. To assume that governments will not collectively resort to the printing press and that they will, instead, discipline one another, when all of them are long-standing, habitual and incorrigible fiscal offenders, is beyond ridiculous! If you believe it, call me, I may have something I want to sell you!
3. “Unlimited firepower” courtesy of the central bank
I guess you might argue that it could have been worse. Merkel could have given in to demands by Sarkozy to use the ECB straight away to leverage the €440 billion bailout fund. Seems like she didn’t, and Sarkozy will have to go, hat in hand, to the Chinese and see if they have some change to spare. However, this is not a long-term solution, and once Italy and Spain are in trouble, the bailout fund will be depleted.
One of the most shocking aspects of this crisis is how acceptable it has become for the mainstream economists and the pundits in the media to point toward the “unlimited resources” of the ECB. True, a fiat money central bank can print unlimited amounts of paper and electronic money to bail out everybody, the government, the banks, the pension funds, etc. It is just that such a policy used to be advocated only by suicidal cranks. That’s likely because it is a sure recipe for complete currency annihilation.
Today, established and supposedly highly regarded economists point out the importance of “keeping the ECB engaged,” because only the ECB has the “unlimited” resources to underwrite the boundless fiscal profligacy of modern democratic governments and their vote-buying political elites, and to underwrite the gargantuan debt pile.
As the hysterical calls by the inflationistas for a bold ECB policy get ever shriller, Mario Draghi, the new money-printer-in-chief for Europe, has already signaled his support for the ECB’s debt monetization policy, that is, ongoing buying of depressed and ultimately worthless government bonds with the help of the euro printing press.
Anyone who has any savings stored in the euro-area should be extremely concerned about what is going on here, and in particular, about the tone of the debate. When the mainstream speaks of “unlimited” resources of the ECB, they do in fact mean unlimited. The creation of new euro-currency units will be without ANY LIMIT. And the remaining inflation will also be without limit.
The bottom-line…On the face of it, the German position has won: deeper haircuts and no use of the ECB for leveraging the EFSF for now. But from where is the money for the larger EFSF going to come? Italy and Spain will remain under pressure. Nobody has the money to save them or to recapitalize the banks again when the big deficit countries lose access to the market and fail.
The ECB is not off the hook. Resorting to the printing press has become a global policy theme for the past three years, and sadly, such thinking is now part of the mainstream. The balance sheet of the ECB will not shrink; it will grow. There is no exit strategy. Pressure for further and accelerated monetization of debt, of budget deficits and bank balance sheets, will continue and intensify.

Demography is destiny

The Conquest of the West
By Patrick J. Buchanan 
On Oct. 31, the U.N. Population Fund marks the arrival of the 7 billionth person on Earth and raises the population estimate for the planet at mid-century to 9.3 billion people.
There is a possibility, says the United Nations, that, by century’s end, world population may reach 15 billion. What does this mean for Western civilization?
It may not matter, except to identify who inherits the estate. For while world population is exploding, Western peoples are dying. Not a single European nation, except Muslim Albania, has a birth rate that will enable it to replace its present population.
By mid-century, Western man will be down to 12 percent of world population. By century’s end, he will be a tiny fraction, roughly equal to the white population of Rhodesia when Robert Mugabe came to power.
The demographic winter of the West has set in.
Between now and 2050, Russia, a nation of roughly 140 million, down from nearly 150 million at the breakup of the Soviet Union, is on schedule to lose an additional 24 million people.
“Hypermortality” is a word demographers use in discussing Russia.
Germany is to lose 8 million of her 82 million people. Ukraine has lost 6 million people since liberation in 1991 and will lose another 10 million by 2050. The population of Lithuania, Latvia and Estonia, 8 million in 1990, will by mid-century have fallen by 30 percent to 5.7 million.
Britain, however, is to add 12 million. But since emigration from Britain is bleeding the population and the birth rate of her native-born has been below zero population growth for 35 years, the U.N. has to be factoring in immigration from the old colonies in the Caribbean, the Middle East, the sub-Sahara and South Asia.
With the median age of European nations rising toward 50 and above, and a growing share of the population over 65, the continent is going to need millions of young immigrants to maintain the labor force and cope with seniors and elderly in retirement centers, assisted living facilities and nursing homes.
Where will they come from? Continents and countries with population surges and surpluses.
By 2050, Africa’s population will double from 1 billion to 2 billion people. Where today the six most populous Islamic nations — Indonesia, Egypt, Bangladesh, Pakistan, Nigeria and Turkey — have a combined population of 885 million, by 2050 their populations will have increased by 475 million to 1.36 billion. Of the 48 fastest-growing countries in the world, 28 are majority Muslim or have Muslim populations of more than one-third of the national population.
And since it is the Muslim nations of North Africa and the Middle East that are closest to Europe, with easiest access to the continent, Muslims will likely furnish most of the multitudes who are coming.
What will this mean for Europe? Religious and racial conflict.
On Sept. 11, 2001, after the twin towers fell and Germany expressed her anguish and solidarity with America, a strange event occurred. In the Turkish districts of Berlin, bottle rockets were fired all night in celebration.
In the banlieues around Paris and other French cities, Arab riots, assaults on police and mass arson of vehicles regularly occur. This summer in London, the immigrant enclaves exploded and poured out into the city night after night.
Angela Merkel of Germany, seconded by David Cameron of Britain and Nicolas Sarkozy of France, declared multiculturalism had “utterly failed.”
What is the future of Europe? What is the future of Western man? Houari Boumedienne, Algerian revolutionary and president of his country, predicted it at the United Nations in 1975.
“One day, millions of men will leave the Southern Hemisphere of this planet to burst into the Northern one. But not as friends. Because they will come in to conquer, and they will conquer by populating it with their children. Victory will come to us from the wombs of our women.”
Boumedienne’s words were spoken just as European and Western birth rates plunged below ZPG.
What, then, is the future?
A Russia with not one-tenth China’s population will not hold on to a continental nation twice China’s size. Already the Russian Far East is being invaded by Chinese crossing the Amur and Ussuri rivers to work, even as Mexicans cross the Rio Grande to reoccupy lands torn away from their ancestors in 1836 and 1848.
What is the future of the West?
China will retrieve all the lands lost to Russia in the 19th century and slices of Russia that China never owned. Mexicans and Hispanics will dominate from the Floridas to the American Southwest the lands Spain and Mexico lost to the United States in the 19th century.
Africans, whose lands were colonized and exploited by Europeans, and Muslims and Arabs, whose ancestors were turned back at Poitiers and Vienna, will succeed in the final conquest of Europe.
Demography is destiny.

Death by regulation


Anti-drilling hysteria

New York state just announced another delay in what has become a more-than-four-year process to approve widespread natural-gas drilling. Over that time, the state has lost tens of thousands of jobs and millions of dollars of business -- and the opposition to drilling has only gotten more entrenched and radical.
Gov. Cuomo should not be swayed by such hysteria.
An Oct. 6 New York Policy Forum panel on gas drilling is a case in point. At it, Binghamton Mayor Matthew Ryan participated in a discussion of hydro--fracking, the process of extracting natural gas from shale rock. He argued that New York doesn’t need natural gas to power its economic future.
“You can do other things ... You can save so much energy just by switching to wood pellets,” Ryan claimed. “If you combine that with retrofitting all the rural properties ... you’ll produce thousands of jobs.”
Wood pellets.What century does Ryan think this is?
Cuomo has pursued a slow and steady approach to natural-gas development. Department of Environmental Conservation Commissioner Joe Martens issued draft drilling-permit rules in September. The industry is now assessing the draft regulations, with the public-comment period open for 90 days. Martens also announced on Oct. 25 that a procedural change would postpone permitting indefinitely.
But as soon as the draft regulations were published, green groups began complaining, and they haven’t stopped -- criticizing everything from a lack of health and flood-plain protections to insufficient waste-water disposal. Cities including Albany and Buffalo, meanwhile, have banned fracking. Opponents of gas drilling are hoping that a groundswell of opposition will sway Cuomo to reject hydrofracking.
That seems unlikely. But the obstructionists may push the administration to write such stringent regulations that large-scale drilling never materializes.
The New York Policy Forum chose panel participants to represent both sides of the hydrofracking debate: those who support extraction with proper regulation and oversight and those who have serious environmental concerns. What they got was one reasonable set of arguments and then a lot of irresponsible rhetoric.
Ryan wasn’t even the most extreme voice. Former New York City Department of Environmental Protection Commissioner Albert Appleton put it simply: “Gas fracking is the mortal enemy of green energy.”
Mortal enemy? Natural gas is a green energy. Burning cleaner and more efficiently than oil or coal, it doesn’t emit as much greenhouse gases and is cheaper. Now that we can cost effectively extract natural gas from the Marcellus shale, which sits under West Virginia, Ohio, Pennsylvania and New York’s Southern Tier, it is plentiful. So plentiful, in fact, that the federal government estimates that natural gas could provide all of the nation’s energy needs for more than 100 years -- maybe more.
Appleton’s argument that fracking materials could spill into the environment and cause “some public-health emergencies” has been refuted by US Environmental Protection Agency chief Lisa Jackson, who told Congress that no such contamination has occurred because of fracking, which has been going on for decades.
Marcellus shale expert Terry Engelder and Stuart Gruskin, a former executive director of New York’s Department of Environmental Conservation, tried to counter Appleton calmly, stating, in Gruskin’s words, that “the fact that there can be those impacts doesn’t mean that there will be those impacts” and that “the regulator’s responsibility is to do an objective and comprehensive review to assess the impacts.”
That’s exactly what the Cuomo administration has been doing. But even a meticulous approach isn’t enough for drilling opponents.
Meanwhile, New York is losing business because of the years of delay. S. Dennis Holbrook, executive VP of Buffalo’s Norse Energy Corp., said recently that his firm’s plans “to double [its] staffing and employ more than 100 people directly with hundreds more indirect jobs” are on hold.
Lamented Holbrook: “Now, instead of additions, we have been forced to subtract -- reducing our workforce by more than half since the beginning of the year -- because expected opportunities went unrealized.” Great.

Saturday, October 29, 2011

A turn for the worse


Reflections on Education
by Albert Jay Nock
Albert Jay NockI was greatly interested in seeing that our system of free popular instruction was producing results, both negative and positive, which were quite different from those which its original designers expected it to produce. As Herbert Spencer has shown, no man or body of men has ever been wise enough to foresee and take account of all the factors affecting blanket measures designed for the improvement of incorporated humanity. Some contingency unnoticed, unlooked-for, perhaps even unforeknown, has always come in to give the measure a turn entirely foreign to its original intention; almost always a turn for the worse, sometimes for the better, but invariably different. It is this which predestines to ultimate failure every collectivist scheme of "economic planning," "social security" and the like, even if it were ever so honestly conceived and incorruptibly administered — which as long as Epstean's law remains in force, no such scheme can be.
Our system was founded in all good faith that universal elementary education would make a citizenry more intelligent; whereas most obviously it has done nothing of the kind. The general level of intelligence in our citizenry stands exactly where it stood when the system was established. The promoters of our system, Mr. Jefferson among them, did not know, and could not know, because the fact had not been determined, that the average age at which the development of intelligence is arrested lies somewhere between twelve and thirteen years. It is with intelligence as it is with eyesight. No oculist can give one any more eyesight than one has; he can only regulate what one has. So education can regulate what intelligence one has, but it can not give one any more. It was this unforeseen provision in nature's economy which wrecked the expectations put upon our system. As for raising the general level of intelligence, the sluicing-out of any amount of education on our citizenry would simply be pouring water on a duck's back.
Aside from this negative result, I saw that our system had achieved a positive result. If it had done nothing to raise the general level of intelligence, it had succeeded in making our citizenry much more easily gullible. It tended powerfully to focus the credulousness of Homo sapiens upon the printed word, and to confirm him in the crude authoritarian or fetishistic spirit which one sees most highly developed, perhaps, in the habitual reader of newspapers. By being inured to taking as true whatever he read in his schoolbooks and whatever his teachers told him, he is bred to a habit of unthinking acquiescence, rather than to an exercise of such intelligence as he may have. In later life he puts this habit at the unreasoning service of his prejudices. Having not the slightest sense of what constitutes a competent authority, he tends to take as authoritative whatever best falls in with his own disorderly imaginings.
Thus a system of State-controlled compulsory popular instruction is a great aid in making Homo sapiens an easy mark for whatever deleterious nonsense may be presented to him under the appearance of authority. One does not have to go farther than the account which the Pickwick Papers give of the great election at Eatanswill to see how this is so. The spread of literacy enabled Mr. Pott of the Gazette and Mr. Slurk of the Independent to approach the credulousness of a greater number of people than they could otherwise reach, and to debauch their credulousness much more effectively. It enabled Mr. Pott to play upon the meanest prejudices of the Blues, and Mr. Slurk to inflame the worst passions of the Buffs; and thus to keep alive the feud of ignorant partisanship, like the feud of the Greens and Blues in Rome and Byzantium so long ago, or the feud of Whigs and Tories, Democrats and Republicans, Black Shirts and Red Shirts, in more recent years.
Mr. Pott and Mr. Slurk knew as well as the editor of today's newspaper knows, that what best holds people together in pursuance of a common purpose is a spirit of concentrated hate and fear. They knew that their constituents, Blue and Buff alike, were a mere mob, intellectually as irresponsible as the wild dogs of Algiers, and that an appeal to intelligence would be vain, nay, embarrassing. "Mere reason and good sense," said Lord Chesterfield, "is never to be talked to a mob. Their passions, their sentiments, their senses and their seeming interests are alone to be applied to. Understanding, they have collectively none." I am reminded here of an acute French critic's remark made almost a century ago, that this observation of Lord Chesterfield constitutes one of the most serious arguments against representative government. In my opinion it is by far the most serious argument; indeed, I believe a century of experience has shown that it is the only argument needed. One may confidently rest one's case on it.
I observed that the course of our educational revolution had followed the regular pattern common to all revolutions; but knowing the inflexible laws which prescribe that pattern, I was not disappointed or taken aback. "The sense of the inevitable" which Mr. van Loon speaks of had warned me that the inevitable upshot of other revolutions would be the inevitable upshot of this one. As soon as the system was on its way to become a going concern with the taxing power of the State behind it, the path of least resistance lay open to a rapidly increasing flow of persons whose interest in education was secondary. These were careerists of sorts, impelled by the fundamental law of conduct, that man tends always to satisfy his needs and desires with the least possible exertion.
Then the general estimate, the currency value, of education — the generally-accepted idea of what education is and ought to be — was set by the worst form in circulation, a form which had virtually nothing to do with education, but only with training; and those forms which had more to do with education were forced out. Then finally, after the system had passed a certain point of development in size, power, and prestige, the percentage of net profit (putting the matter in commercial terms) began to show a steady decline.
Furthermore, the curiously composite public character of the system, as I observed it in the late '20s, interested me as having likewise come out inevitably according to pattern; the pattern set in earlier times by the Church, and now by the State. As a State-controlled enterprise maintained by taxation, virtually a part of the civil service (like organised Christianity in England and in certain European countries) the system had become an association de propaganda fide for the extreme of a hidebound nationalism and of a superstitious servile reverence for a sacrosanct State.
In another view one saw it functioning as a sort of sanhedrim, a levelling agency, prescribing uniform modes of thought, belief, conduct, social deportment, diet, recreation, hygiene; and as an inquisitional body for the enforcement of these prescriptions, for nosing out heresies and irregularities and suppressing them. In still another view one saw it functioning as a trade-unionist body, intent on maintaining and augmenting a set of vested interests; and one noticed that in this capacity it occasionally took shape as an extremely well-disciplined and powerful political-pressure group.
During my brief and unserviceable career as an instructor of youth I had a good many hearty laughs whenever I thought of the quiet fun one might have with Mr. Jefferson if he could return to the Republic and see what his pet project of universal popular instruction had come to. I had studied his character rather carefully, and could not make out that the great and good old man had been blessed with an over-keen sense of humour. Apparently he had enough to go on with, but not much more, and what he had was of a dry type. I think, however, he would have risked a wry smile at the spectacle of our colleges annually turning out whole battalions of bachelors in the liberal arts who could no more read their diplomas than they could decipher the Minoan linear script.
He might also find something to amuse him in the appearance of eminent shysters, jobholders, politicians, and other unscholarly and unsavoury characters, on parade in gowns and hoods of the honorary doctorate. Yet it would probably occur to him that academic misdemeanours of evil example were not unknown even in his own day. Only some half-dozen years after Mr. Jefferson's death, Harvard College admitted to its doctorate a man whom John Quincy Adams very properly described as a barbarian, incapable of putting a grammatical sentence together, and barely able to spell his own name—Andrew Jackson.
One can not be sure that Mr. Jefferson would look with the eye of humour upon certain other results of the system's working. I suppose that in the whole country today one would have to go a good long way to find a boy or girl of 20 who does not automatically take for granted that the citizen exists for the State, not the State for the citizen; that the individual has no rights which the State is bound to respect; that all rights are State-created; that the State is morally irresponsible; that personal government is quite consistent with democracy, provided, of course, it be exercised in the right country and by the right kind of person; that collectivism changes character according to the acceptability of the peoples who practice it. Such is the power of conditioning inherent in a State-controlled system of compulsory popular instruction.
When it came to matters like these, Mr. Jefferson was an extremely serious and outspoken person. I doubt that he would be in the least amused by the turn which his pet project has given them since his time; and not only in his own country, but in all countries where his project has taken root. On the contrary, I believe he would regard the entire exhibit with unstinted disgust and contempt.

Europe runs out of money


Forgive Us Our Debts
By Christopher Caldwell
As they do every few weeks, the leaders of the European Union met in Brussels on Wednesday, October 26, to solve their finance problems once and for all. As the sun rose on Thursday they emerged with a document that resembled an Obama budget—crystal-clear about its aims and aspirations, opaque about how it intends to achieve them. There is a reason for that. It is that these aims and aspirations are growing less and less realistic.
Back in 2010, when the crisis seemed confined to the Greek government’s inability to repay its lenders, the Europeans thought they could fix things by having its various neighbor countries chip in 45 billion euros ($65 billion) to throw at the problem. Eighteen months later, the crisis is as complicated as a Rube Goldberg machine and more dangerous. The particular corner of it they dealt with last week has three intertwined aspects, and to solve one of them is to exacerbate the other two:
(1) Greece is so totally bust that it required not only a fresh bailout totaling $185 billion but also a 50 percent “haircut” imposed on its creditors. In other words, if you lent the Greeks money by buying their government’s bonds, you lost half of it. (But don’t feel too bad—a lot of Greeks got to retire at 60 with pensions you paid for.) That “solves” the Greek solvency problem for a time, but it is a dangerous remedy.
(2) It is dangerous because it means that loss of confidence in Europe’s institutions moves from the periphery (Greece and Portugal, say) towards the core (France and Italy, say). If Greece can stiff its creditors and stay in the euro, might that not be a tempting option for other countries? Consider Italy, the third-largest economy in the eurozone, with a debt-to-GDP ratio over 100 percent. “Contagion” is the word for the presence of nervous thoughts like these in bondholders’ heads, and the only way to protect against its spread is to build a “wall of money” around the least reliable-looking debtors. Unfortunately, Europe is out of money. The only “wall of money” it can erect is a virtual wall of borrowed money.
(3) And that adds to a danger that is already present in the Greek bailouts. European banks hold a lot more sovereign debt (government bonds) than U.S. banks do. If some of that is going to get paid back at 50 centimes on the euro, then these banks are neither as wealthy nor as stable as they appear to be. That means banks are going to have to revise their business models. What European authorities insisted on this week was that they raise their capital ratios to 9 percent. There are two ways banks can do this. They can either hold more money or lend less. Europe’s leaders pretend they’re going to hold more. But since Europeans have already tapped every domestic source of capital, there is no place to get more. That means banks are going to lend less. Which in turn means the risk of recession has just risen significantly.
A lot about this deal makes it likely that Europe’s leaders will be back at the negotiating table before their seats have cooled.
For one, the debt of Greeks and others seems to be, as the Germans grumble, a “barrel without a bottom.” A European economist told me in the summer of 2010 that a Greek default was inevitable, and that the European bailout was designed to keep the country afloat until it could get back into “primary balance”—i.e., paying its bills except for its interest payments—in 2013. But this new bailout, haircuts and all, does not envision Greece reaching primary balance for a decade, and then only with the help of the most grinding austerity program enacted in our lifetime. At that point, in the 2020s, the country will be back to a situation where its debts are “only” 120 percent of GDP. Is that politically sustainable in a riot-prone democracy like Greece’s? One suspects not.
Another problem is that the deal is not having the desired effect in Italy, the primary candidate for contagion. Bond yields in most European countries fell in the immediate aftermath of the agreement, but not in Italy. Italy has the third-largest bond market in the world—almost $3 trillion—and over the summer the European Central Bank bought tens of billions’ worth of Italian bonds to keep Italy’s borrowing costs down.
Working up an austerity plan for the Italians was a top priority at last week’s summit. Silvio Berlusconi’s coalition partners have resisted it, and in one sense they are right to see the demand as unfair—at about 4 percent, Italy’s budget deficits are low by comparison to the rest of the European Union (and far lower than the United States). And there is one boast that Italians can make that few other countries can—its finances are roughly in the same shape they were a decade ago. Under Berlusconi, Finance Minister Giulio Tremonti was a highly capable economic steward. His reputation in Italy has something in common with that of Paul Volcker in the United States. What spooked bond markets over the summer was Berlusconi’s quarreling with Tremonti, not the “bunga-bunga” (to use his term) that he indulged in with young women.
At last week’s meetings, Europe invited a new player into its finance crisis: China. Europeans have talked about “levering up” their $625 billion European Financial Stability Facility (EFSF), established last year to prevent a Greek contagion. It has been topped up and tapped into since and now has only about half its original lending power. In order to obtain the funds necessary to shore up Italy’s bond market, the Europeans reckon they need to more than double the size of the EFSF. Levering up means using the money they have in the EFSF as security to raise even more on the capital markets. In the present depressed state of the world economy, “the capital markets” means China. With an astonishing lack of sangfroid, Klaus Regeling, the head of the EFSF, landed in Beijing on Thursday afternoon to press his case. He must have headed straight for the airport the moment the agreement was signed.
Years ago, China might have fallen for the trick that Europe intends to pull, basically trying to get money for Greece and Italy by waving around the triple-A credit rating of Germany and other countries that have stocked the EFSF. But today it is likely that China will insist on guarantees that it be paid before European taxpayers in any default scenario. In an interview with the Financial Times the day after the agreement, Li Daokui, a member of the central bank monetary policy committee, gave evidence of a real canniness. “The last thing China wants,” he said, “is to throw away the country’s wealth and be seen as just a source of dumb money.” Li indicated that the Chinese might ask European leaders to refrain from criticizing Chinese economic policy as part of the deal.
Perhaps Europe has reached the point where its only route out of bankruptcy is this kind of vassalage. To escape a debt crisis, an economy needs to be capable of growing. It is far from clear that Europe can do that. It has two problems. One is technological. Much of Europe lacks the technological wherewithal to claim an ever-increasing share of the world economy. Spain, for instance, during its long, construction-based boom, developed a good deal of national expertise in .  .  . what? Pouring concrete? 
A second problem is demographic. Italians have one of the lowest birthrates known in any society since the dawn of time; what it will look like in 40 years is anybody’s guess, but one fairly conservative demographic projection shows its population decreasing by 10 percent, to 54 million, at midcentury. Debt, alas, is contracted on a per-country, not a per capita basis, and this kind of population loss (especially when accompanied by rapid aging) can render debt impossible to pay down. 
Europe’s leaders are welcome to congratulate each other on finally resolving their debt crisis. They will likely have many more opportunities to come up with such “final resolutions” in the months and years ahead.

We are about to find out


Can America survive without its backbone, the middle class?
 
As the gaps within the classes widen, American society is starting to fracture.
By Anne Applebaum
My friend J grew up in Chicago, but spent his summers in a small town on a Michigan lake. His family, because they came from the city and because they were “summer” visitors, were slightly more privileged than those who lived in the town. Nevertheless, the town considered itself “middle class” and the children observed no social distinctions playing together. J told me recently that he had been back to that town and found it utterly changed: shops were boarded up, houses were being repossessed, cars were old. He no longer had much in common with people he had known as children, some of whom were now unemployed, all of whom had far lower incomes than he.
J isn’t a hedge-fund manager or a plutocrat, but he is a member of the American upper-middle class, a group which is now sociologically and economically very distinct from the lower-middle class, with different politics, different ambitions and different levels of optimism. Thirty years ago, this wasn’t the case. A worker in a Detroit car factory earned about the same as, say, a small-town dentist, and although they might have different taste in films or furniture, their purchasing power wasn’t radically different. Their children would have been able to play together without feeling as if they came from different planets.
Now they couldn’t. Despite all the loud talk of the “1 per cent” of Americans who, according to a recent study, receive about 17 per cent of the income, a percentage which has more than doubled since 1979, the existence of a very small group of very rich people has never bothered Americans. But the fact that some 20 per cent of Americans now receive some 53 per cent of the income is devastating.
I would argue that the growing divisions within the American middle class are far more important than the gap between the very richest and everybody else. They are important because to be “middle class”, in America, has such positive connotations, and because most Americans think they belong in it. The middle class is the “heartland”, the middle class is the “backbone of the country”. In 1970, Time magazine described middle America as people who “sing the national anthem at football games – and mean it”.
“Middle America” also once implied the existence of a broad group of people who had similar values and a similar lifestyle. If you had a small suburban home, a car, a child at a state university, an annual holiday on a Michigan lake, you were part of it. But, at some point in the past 20 years, a family living at that level lost the sense that it was doing “well”, and probably struggled even to stay there. Now it seems you need a McMansion, children at private universities, two cars, a ski trip in the winter and a summer vacation in Europe in order to feel as if you are doing minimally “well”. You also need a decent retirement fund, since what the state pays is so risible, as well as an employer who can give you a generous health-care plan, since health care is so expensive.
I’m not going to argue about the economics of this shift in definition of “middle”, or the morality (of course, no one with a small suburban home and a car is “poor” by global standards). The point is that people’s perceptions have changed. Many who used to feel secure in “middle America” now feel, rightly or wrongly, left behind, and they don’t think they will ever catch up. Meanwhile, many of those who used to feel proud of coming from “middle America” now feel, like my friend, that they have little in common with their “heartland”. If this turns out to be a permanent change, the implications for American politics, even for Western politics, will be profound. For the past 50 years, Western democracy has flourished alongside the assumption of upward mobility: everyone could participate in the political system; everyone had a chance at improving his status; and everyone could hope, at least, that his children would live better than his parents had, in Britain, France and Germany as well as America. But if Americans are no longer “all in the same boat”, if some of them are now destined to live better than others, then will they continue to feel like political equals? If Britons, Frenchmen and Germans no longer have much in common with their countrymen, will they still want to take part in the same national debates? We don’t know yet – we’ve never lived without a “middle middle class” before – and we are about to find out.

Poetry staff


Amazing NASA Video of a Decade of Earth's Fires


By Mark Perry
"NASA has released a series of new satellite data visualizations that show tens of millions of fires detected worldwide from space since 2002. The visualizations show fire observations made by the MODerate Resolution Imaging Spectroradiometer, or MODIS, instruments onboard NASA's Terra and Aqua satellites.

NASA maintains a comprehensive research program using satellites, aircraft and ground resources to observe and analyze fires around the world. The research helps scientists understand how fire affects our environment on local, regional and global scales."