Have economists become more open-minded on old-time taboo topics?

Economic preferences have been long taken as premises of any economic model. As Stigler once famously put:

De gustibus non est disputandum.

“There is no dispute on taste itself.”

So does the belief.  Hard to measure and it involves too much subjectivity. So, forget about it.

The profession considered it either uninteresting or a sign of lack of discipline to attribute behavioral patterns or economic outcomes directly to tastes or perceptual reasons.

To some extent, the dislike is understandable. If it simply suffices to say a person smokes because he likes it, or a murder commits the crime because he believes that is the right thing to do. Why bother to seek more fundamental and structural causes?

But it seems that the taboo against exploring themes directly centered around these topics has started relaxed in the past two decades. This has been obviously driven by the rise of behavioral economics, decision science, and experimental evidence.

For instance, the focus on “preference” has become increasingly common, a trend seen across all top journals.

The discussion about belief seems to have just picked up. But there are reasons to think the upward trend will continue.

The interest in expectation, not surprisingly, follows a slightly different pattern. It gained popularity earlier than the other two since the rational expectation revolution. The realization of the importance of expectation predated the emerging discussion and increasing interest in examining if the expectation is truely “rational”. For the latter reason, the focus on expectation seems to have revived. I personally believe it will gain more attention over the next few years.

The takeaway: an exciting time for researchers interested in these topics.  Someone has paved the roads for a while, while the future is promising.

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What do I like about the Netflix Series Money Heist/ La Casa de Papel?

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I did not finish all the episodes, especially season 2. But I love it and appreciate the series so much that I decide to pay a tribute. The series is interesting in multiple aspects, not only from a literary and dramatic point of view but also due to its political implications for our time. And the most relevant to me, it provokes a series of questions along the way that coincidentally or intentionally (depending on if the play writer knows about economics well), corresponds to many classic macroeconomic debates. Well, I am a nerdy economist, do not forget that.

First and foremost, the phenomenal success of the show resonates with some themes of our time. The rebellion spirit deeply embedded in the plot of the show is the ethos that defines the current world. Have not those red raincoats and exaggerated face masks become a symbol of rebels against the powerful and the existing order? More accurately speaking, it is not the “rebellion” spirit, but the “anti-establishment” theme. The establishments used to earn legitimacy easily, But in our current time, it has been questioned a lot. But the sad thing is that we only know we do not like what we are having, but we do not know where we can go. We cannot agree to disagree.

Second, what I found most interesting, is the economics behind the show.

The first idea, “stealing money from the central bank is not stealing”, says the professor, the master architect of the robbery scheme. He justifies their behavior of robbery of the central bank by proposing this classical argument of money neutrality.

But, dear professor: this is not the case actually, especially in the short run. Printing money, only when increasing the price of everything by the same proportion at the same time, thus keeping the relative price unchanged, does not have a real impact on economic activity. If so, yes, printing another extra billion banknotes while holding the hostages within the central bank does not lead to a change in the real economic activity. Thus, your robbery seems morally neutral to the rest of the world.

However, for the reasons of sticky price, menu cost, sticky wage, whatever reasons cited by economists, printing money does have a real impact on the economy. Money is not neutral.

What really was wrong with what the professor said, however, is that printing money in the central bank does not only have a real impact, but also DISTRIBUTIONAL impacts. Monetary policy involves wealth redistribution.

Economists seem to be at unease with the notion of distributional monetary policy for a long time. But then there is increasing evidence that monetary policy, not just fiscal policy, is re-distributional. Borrowers and savers, poor and the rich, the capitalists and labors, are affected by the monetary policy unevenly.

Second, the idea of helicopter money. There is one episode of the show in which the robbers dropped billions of Euro banknotes from a helicopter to the streets in Madrid that caused chaos. Wow, what a vivid illustration, could not be more literarily close to the idea of helicopter money…

Third, the robbers decide to robber the gold, instead of just printing money? It is an interesting metaphor. The fiat money, however essential to the current economic system, remains insufficient to debunk the confidence about the economic system. So the team decided, in season 2. to sneak in the Bank of Spain to rob the gold bar. Aren’t we living in a period that has declared the full victory of the fiat money? Also, the gold standard has been a remote past for a long time. Isn’t our era trumping the success of a decentralized spirit? How come, in the end, we were still left with stealing the symbolic gold? Aren’t the cryptocurrency enough? Those democratic-spirited idealists, we are far from a victory?

All right. those are all about economics.

Actually, none of these above is my favorite part of the series. What I truly love about the show is that each character is named after a city. A great idea. The city is not a concrete location, but a concept that inspires imaginations… Each baby, in my opinion, should be named after a city. Our memories of our lives are coded by the places and by the cities.

The cities mentioned in the show are Lisbon, Tokyo, Rio, Helsinki, etc. Who are those others? Oh, Denver, a seemingly ruthless and scarred-faced but kind-hearted in his nostalgia with his gangster-partner father, who has always been looking for some mature love that fills the blank left by his dead mom. There is the guy, who is a true gentleman with good taste of art and histories, who is spontaneous enough but disciplined enough to be trusted as the leader of the plan, a truly talented combination of a human being. He died during the standoff. He had a brother, another talent. I forgot their names.

The highlight, my favorite, is the song, Bella Ciao.

My view of life

Sometimes I feel I deliberately throw myself into the randomness of the world to prove something that is not that random. The world is a dice tossed again and again. Some people simply believe the chance of a certain result is high. Some people do not see it as a dice toss at all and believe the effort will make random things happen as if it is certain. I am neither of these types. I fundamentally believe in the randomness of the world is beyond our imagination, but I still try to survive in this world by coming up with some deterministic life principles. Very occasionally, I ask myself, why cannot you live a simpler life by simply going after certain things as others do and achieve well-defined goals. Why do you always like to throw yourself in an uncertain situation where you have no full control. I take myself as an experiment, one of the data points and one of the little white mouses in the laboratory. I test my imaginations using my own life experience and time. 

I always avoid counting my happiness and life choice solely on one or a few things. I learn to live a life that is always open to different possibilities at any point in time. If anything is predetermined and things move along the way I think, I feel surprised and disappointed. I have preservation of the things I want to pursue and leave some space unfilled to chances and the drama. I liberate my spirit by educating myself to take things lightly instead of seriously. I don’t think there is a lot of “have to be” and “must be” in my life. I refused to pursue things that I want to pursue to show the attitude, only to find I miss many chances.  I care, but I make myself not care even before the efforts. 

I don’t know how to make a choice. I love the world, I love many things. I also love many people. I am truly unable to make a so-called best choice of  one over the other. I hand the decision to live itself, to the world, and to circumstances. Life many times solely depends upon situations. I refuse to accept that certain predefined strategies can be carried on in any meaningful sense. We are different every day, the world around us and the life situations always change from now and then.  I restrict my life choice thanks to life itself, luck and destiny. I respect that randomness and I am some times too obsessed with it.

I am an ordinary person but maybe sometimes I want to be the god. I respect the possibilities of life with great and genuine awe. But also I am seeking a more light-hearted joking attitude toward life. Laughter is the best response. I rarely think I do things wrong. I refuse to admit I am wrong. I am arrogant and blind. 

A default, not by default 

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Two moments of history. Argentina’s government announced to honor the previously dollar-denominated debt in local pesos, and the United States abrogated all gold clauses in debt contracts and paid in the U.S. dollar instead. What’s the difference between the two?

This is not a senseless comparison. But actually the two cases have been rarely put together.

As a regular reader about the history of sovereign defaults, I have long assumed that over the past century only emerging and developing economies have suffered from painstaking and bitter histories of defaults and its sequels with a few rare recent exceptions like Greece, Cyprus and so on. But the book American Default, the Untold History of the FDR, Supreme Court and Battles over Gold by a UCLA professor Sebastian Edwards, re-reads the winners-told narratives from a refreshing perspective.

As the title reveals, the book portrays the abrogation of gold-standard by the FDR in the peak of the Great Depression as a subtle but gradually unfolded process of default.

The key difference, however, was that the whole process was guarded by a (perhaps perceivably)credible political decision-making and judiciary system, and the decision was very much self-justified by the urgency of the particular historical episodes.

Here are some interesting exempts I took down.

  • Mr. Lippmann thought the FDR was an underdog.
    Walter Lippmann wrote that FDR was “a pleasant man who, without any important qualifications for the office, would very much like to be President.”

 

  • A failed assassination attempt.
    At 9:35 a loud thud was heard; it was followed, in rapid succession, by four additional bangs that sounded like controlled explosions. Some though that they were fire crackers in celebration of the nation’s next chief executive. But they weren’t. Giuseppe Zangara, an unemployed bricklayer from New Jersey, had shot at FDR. Thanks to an alert woman who at the last second jerked his hand, he missed the president-elect. However, he critically wounded Mayor Cermak, who died a few days later. 

 

  • The ambiguity of political rhetorics.
    Roosevelt’s Inauguration Address had a brief and oblique reference to the gold standard and the dollar. He said that “there must be a provision for an adequate but sound currency.”

 

  • A small trick.
    The Emergency Banking Act had three key provisions. The first allowed the Federal Reserve System to issue “bank notes” to meet deposit withdrawals from those banks opened after the banking holiday. The difference between these “bank notes” and “Federal Reserve notes” was that the former were not backed by gold holdings, while the latter had bullion as collateral …This, he told Ray Moley, made them very different from the infamous Civil War–era Treasury greenbacks, which had a distinctive look that clearly informed the public that they were a special—and less valuable— kind of money.

 

  • The reason the FDR gave for abandoning gold standard
    The president argued that the gold standard was abandoned because there was not enough gold in the world to honor all contracts written in “gold coin.”

 

  • Most foreign governments followed the steps of the U.S., but the Swiss was an exception
    Swiss government announced that in spite of the abrogation of the gold clause in the United States, it would pay its sovereign dollar-denominated debt in gold or gold-equivalent. 

 

  • Some conjecture of future replay of history.
    One possibility, of course, is that at some point in the not too distant future the U.S. government will be forced to restructure its debt, and renege on its promises. How the courts will react to this eventuality, is unclear. There is one thing, however, that we do know: in the American judicial system precedent is very important, and the gold cases analyzed in this book provide an important precedent, one that suggests that in case of necessity it may be acceptable for the government to restructure debts and change the nature of contracts retroactively.

 

  • Relevance to Greece
    Consider the case of Greece, a nation that since 2012 has been tempted to leave the Euro Zone and reintroduce its own currency, the drachma, at a depreciated level. Those that favor this policy argue that with a currency of its own and exchange rate flexibility Greece would gain competitive- ness, increase exports, and move rapidly towards recovery. This view, however, ignores the effect of such a policy on contracts. Every contract in Greece is written in euros: labor contracts, suppliers’ con- tracts, debt contracts (private and public), service contracts, investment contracts, and so on. …In principle, the legislation that would reintroduce the drachma could also state that con- tracts originally written in euros would be converted into new drachmas, at a depreciated exchange rate relative to the level at which Athens joined the Euro Zone. Creditors, however, will cry foul, and will turn to the courts in an effort to receive payments according to the original contracts, in hard and convertible euros.

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Something common between economists and artists

Milan Kundera: there is the possibility of exporting poets by Czech to the rest of the world in exchange for engineers.

Should the poems written by a French in the United States be taxed by France or the U. S.?

I was told today that there are so many economists produced in Egypt. But they are no use to the economy. What really helps economic development are engineers and scientists.

Cuba now, China then

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I am not old enough to have experienced the ages before China opened up and liberalized a previously central planned economy in the late 1970s. This is why throughout my new year trip to Cuba, one of the few so-called socialism countries in the current world, I could not help connecting dots I have seen in the country to my scattered imaginations about the old times of my own land. No matter however the Communist Party calls it, for the purity of ideology and legitimacy, China by no means remains a socialist country. So I went to Cuba to see a more authentic version of socialism, as I joked with my friend.

Of course, It is not an accurate analogy. It is for a long while that Cuba has not suffered from turbulent political movements like the decade-long Cultural Revolution in China, which disrupted the whole economy and ruined all social norms. I did not either feel the disorder and fatigue that I believed that usually followed disillusioned communism fantasies. Internet and information remain a luxury, less due to tight totalitarian control of political power, more of economic difficulty.  Cubans being as passionate as other Latinos, I did not feel so much “magical realism”, but I felt only realities.

The reality is struggling with a shortage of necessities for many families. The reality is a marketless economy that has just started allowing buying and selling stuff as taken for granted by people in the rest of the world. The reality is lukewarm entrepreneurship budding through loopholes of the pervasive government control of the economy. It was only a few years ago that it was illegal to rent the casa (private houses) to foreign tourists. Taxi drivers and private restaurants were not legal until the early 2010s. Now they were allowed to run in some tourist cities by paying a thirty-percent tax or fee to the government.

Cuba has a dual-track economic system typical in pre-communist countries. On one hand, the government is in charge of allocating life necessities to households by headcounts. It was distributed in a local allocation station with a booklet called Libreta de Abastecimiento. I was told that each person gets only a few pounds of rice per month. This minimum supply is far from enough to anyone, of course. On the other hand, most goods are foreign imports that have to be bought using convertibles of foreign currency. One unit of foreign currency convertible is equal to 24 local pesos. Over time, more and more goods have to be bought by foreign currency convertibles, overtaking the role of local pesos. It is obvious that the unification of the dual-track economy will be a headache. Hyperinflation is unavoidable.

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A typical worker in most jobs earns about 20 dollars per month, as far as I interviewed. It is approximately equal to the cost a tourist pays for one single decent meal. There is no huge wage difference between a truck driver and a school teacher, a sign of egalitarian spirit withheld by the socialism regime at the cost of necessary incentives for prosperity. Most goods sold in supermarkets and shopping malls are overly expensive to locals. A box of cookies, for instance, costs 3 dollars. A bottle of Havana Rum( my favorite) costs 4 dollars.

At the same time, the loosening control of the economy gives rise to arbitrage opportunities to basically anything. Cubans take all chances to make money outside of their formal job. As long as one has access to any goods that are within the reach of the central-planned system, it is profitable to exchange it for more money people are willing to pay. The black market is everywhere. Street vendors like to approach a tourist and sell cigars they obtained through all “illegal” means. They sell it secretly in their houses.

I suppose that these arbitrage activities, as shown in many other transition economies’ history, will give rise to bribery and corruption rarely seen before the transition. I also believe that there will be a period during the transition in which the completely legal merchant activities will be stigmatized by the government as a crime usually named something like “speculation and profiteering” (in Chinese, toujidaoba, 投机倒把).

Foreign currency is in shortage due to the limited trade the county has with the rest of the world. The U.S. embargo for six decades put the island in economic isolation and difficulty. Venezuela, Canada, and China have been the biggest three trading importers from Cuba. But Venezuela, the once generous neighboring patron of Cuba is now having its own trouble. China gradually took over. The major source of foreign exchange comes from tourists all over the world. The government offers an obviously overpriced exchange rate between CUC and U.S. dollar, around one-to-one. The extra penalty fee is charged for dollar transactions to prevent over-reliance on it.

 

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Despite a decades-long feud between the two countries, I did not feel overwhelming hostility toward U.S. imperialism among ordinary Cubans. I have even seen portraits of Obama a few times in local book stores and streets. Many Cuban people thought the U.S. opening up to Cuba as pushed by the Obama administration would have created many possibilities to change. But unfortunately, Trump administration did not think in the same way. Everything reversed now.

To most of the tourists, Cuba is no different from other destinations they have been to. But to me, every corner of the country has a story. Besides the friendly Cuban people. decent state-run restaurants, Hemingway’s bars, and the beautiful beach in Varadero, this trip vividly brought me back to around the 1980s in China. I shared the struggle of people to make a living. I felt people’s hope for change after decades-long political suppression. Two street singers I encountered in late-night in Varadero said to me: “my friend, this tourist beach city is not real Cuba, you need to see people’s real life.”

It was right before I left for Havana that Raul Castro announced to step down as president and the country will have the first election over the past six decades.  Some Cubas I talked to saw this a time window for more positive changes in the country. But I am not very optimistic. I know well that any political and economic reform takes time.  But I wish the best for Cuban people. I will bring more dollars to the island to support people there. I care about them.

 

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Are rational expectations simply rational?

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Disclaimer: I started writing this blog in a casual and jargon-frree tongue. But it turned out be more academic than I expected.  Apologies for general readers who found it somewhat hard to understand.   

What is Rational Expectation?

Assume starting from today, I start going to the gym and working out really hard. My friend sees this and tells me: man, you must be going to lose weight since you work out so hard. But the reality is that, I myself recognizing I start going to the gym everyday, also start eating more than before. I incorporate the new fact that I start working out more and change my other behaviors accordingly. So three months later, I am still as fat as I used to be. The action thought to cause changes does not really make a difference.

This daily example explains why it is important to consider the role of expectation in predicting people’s behaviors. So is it in macroeconomics. Over a long span of time, economists saw the macro economy as a machine. Fed with inputs, it gives outputs. The relationship between the inputs and outputs are governed by some objective law that is considered stable and independent from the people’s subjective understanding of system. Policy makers believe that they could simply change the economies by changing certain policies in the same way as in the past.

What was missing from this line of thought here, however, is that the economic machine is not really a machine. Instead, a dynamic system composed of human beings who keep interacting with the system. The output from the system is not simply generated from a one-shot game. Rather, it is from a series of feedback loops between people and the system. If this is the case, the same inputs fed into the system could still lead to entirely different outputs depending upon people’ responses.

This idea was, for first time, well articulated by Bob Lucas in 1970s. And it was famously labeled as Lucas Critique in the history of economic thought. How the economy reacted to the same policy in the past will not be repeated in the future if that past lesson was already expected by the market.

In general, incorporating expectation might make things more complicated, as there was no good way to measure and study how people’ expectation are exactly formed. But one simple but powerful thought suddenly made things much easier. That is, let the expectation be the realized reality.

As simple as this statement looks, the development of the thought behind this idea was not that straightforward. It takes a few steps of thinking in the following thought experiment.

First, let us treat economy as a feedback loop between people and the rest of the system, each person is making the optimal decision based on her belief about the rest of the system.

Second, the economy responds to the person’s action with a certain outcome. The person responds to the outcomes again with a new action based on the updated beliefs.

Third, the feedback loops repeats itself till the expectation and the realized responses converge to each other.

Economists call this as a fixed point. The name literally speaks to its meaning. The very thought of equilibrium of the system as a fixed point of the repeated interactions between expectation and responses lies in the center of rational expectation.  [Footnote 1]

To break it down, rational expectation requires two things. The first one is individual rationality based on a given belief. The second is that the belief has to be consistent with the reality.

Therefore, a better name of rational expectation should be “identical and consistent expectation”. The word “identical” implies people share the same expectation.  “Consistent” implies the expectation is confirmed by the reality eventually.

It is such a seemingly trivial but powerful idea that led to a decade-revolution in macroeconomics. Rational expectation took over the whole field and beat other competing theories within a decade. [Footnote 2]

It was not till rational expectation revolution that economists started caring about expectations in the analysis. For example, adaptive expectation, namely that today’s expectation depending upon the past, was one of the existing ad hoc approaches to expectation. What marked the intellectual shift was the specific restrictions imposed on expectation I have described above.

Critiques and Clarifications 

Although I recognize its beauty and usefulness, I also often times feel great tension in taking the whole assumption for granted.  Over the past ten years after financial crisis,  many economists have come to a view that embracing rational expectation came with various unpleasant effects, which prevents us from understanding the important reality.

First, expectations are just not identical among people. There are amounting empirical evidence showing a wide range of heterogeneity exists in households and firms’ opinions about the economy.

Second, people do not have complete information that is required for their decision. The information available to everyone is different due to environmental restrictions. While this is not a direct attack to the rationality assumption, it touches upon the key underlying assumptions needed for the rational expectation to hold.

Third, we are not capable enough of processing all the information we need for an optimal decision. Instead, they are either consciously or unconsciously inattentive to things around them. As a result, expectation might be sticky.

Fourth, people are after all not rationally behaving agents as the model assumes. We could be stupid and make systematic mistakes. This line of argument embeds a broader array of deviations from the rational behaviors assumed by the conventional wisdom. Behavior economics has done a great amount of work on this front.

Many orthodox-minded people in the field argue against these critiques by saying all of them are necessary evil. After all, what a powerful idea it has been to allow all kinds of elegant analysis that flourished in macroeconomics.

I don’t agree. But I do believe that there is a tendency to simply criticize every aspect of the convention all together based on simplified misperception. Rational expectation is not simply rational. One needs to give a great care when it comes to specific aspect of the assumption, namely, what are those assumptions we need to relax, and what are those that should be maintained.

For instance, I see more urgency to modify or abandon the idea of identical expectation and (implicitly representative agent) assumption than the individual rationality for many questions in the macroeconomic contexts. This is not to disregard the great work by behavior economists. Instead, it is to choose a feasible strategy to incorporate the behavior limitations of human beings, in a minimized but most efficient way, to account for macroeconomic phenomenon.

All in all, I see great opportunities to step beyond the conventional paradigm and do more interesting things. It is exciting to me as a young researcher.

[Footnote 1]: My first year of PhD study made me realize what a central role the Fixed Point Theorem has played in the development of economics the late 20th century. Dots get connected.

[Footnote 2]: I have recently read Herbert Simon’s autobiography “My Models of Life”, in which he recalled, in great detail, the intellectual “battle” before rational expectation took over. Herbert Simon led the campaign of “Bounded Rationality”, while somewhat ironically, it was Lucas and Muth, two young assistant professors in the Industrial School of Carnegie Melon, Herbert Simon himself helped founded, that later became the flagmen of the rational expectation revolution.

The economics (and more importantly, politics) behind Bitcoin

 

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This is becoming a too hot topic to bypass as a student in the field of economics. Let me start by saying I am in agreement with most academic economists that bitcoin is a bubble, despite the unpleasantly ambiguous definition of “bubble” in the profession and especially in the serious theoretical literature. A bubble is only well defined if there is a so-called fundamental value of an asset. But the problems around bitcoin is that no one knows what its intrinsic value is. Or I should at least say no one agrees on what its true value is. Many of the debates so far have been associated with this point. I will elaborate on the discussion shortly after.

Without a good understanding of its fundamental value, can we say it is a bubble? Yes. A bubble should be something whose price goes extremely high due to speculative reasons. A bubble is a bubble because it will burst someday. The high price has no way to be sustained at such a level.

As we have seen over the past two months, the price of bitcoin witnessed an unprecedented skyrocketing boom never seen in history. Such a rise has turned it into a highly speculative asset. The price also went up and down with extremely high volatility. In the meantime, the liquidity of the transaction is not as high as many think. The market is highly concentrated in a small group of people. The price is not built to last partially for these reasons.

But one of the most stylized features of a bubble is that without exception, it is for a novel thing, a new concept, and a new story. It is associated with all kinds of open-ended interpretations. These new stories inspire our imaginations and fuel our excitement. It may be a good thing in the beginning, and some Idealistic people believe in its value for some legitimate reasons. But whatever greater good the new thing is for, it always ends up encouraging the corrupted and greedy nature of human beings. There were always people who simply try to manipulate and exploit uninformed people to make money. There were systematic frauds involved in any bubble of history. It is exactly on this aspect that there is no difference between bitcoin and its predecessors. What rings the bell of bitcoin is not necessarily going to be a sudden realization of its overvaluation. It is simply someone who is found to have fled with other’s money. That will be the doom day of bitcoin.

What makes bitcoin slightly a different look from tulip is that it is identified and marketed as a form of money. Many people believe, after all, bitcoin is a coin that deserves to be treated as some valuable medium of exchange plus storage of value. Especially, why could not bitcoin become gold in the digital age? Why should not people, in the end, believe the value of bitcoin in the same way as they mysteriously value gold over thousands of years of history?

The simple answer is that gold survived in crisis in history, not just once but many times. But it took a thousand years, a process that is the best to be explained as an evolutionary equilibrium of multiple factors. Gold made itself into a family of the medium of exchange for its limited supply and stable chemical properties. It had a long history of recognition by the legitimate government either as circulated money or with an anchor of paper money. The fact it could be jewelry and sign of social status also adds to the psychological value it is associated with. There are also other factors I won’t list here. We need a better theory as to why gold survives in crises, but the bottom line is clear, human being’s treatment of gold cannot be easily repeated.

The analogy between bitcoin and fiat money is also problematic. The case that a piece of the banknote has no intrinsic economic value but people believe in its value from pure trust, does not justify the same argument for bitcoin. The point missed here is the political economy. What backs the so-called value of the paper note is violent gunboat power and a set of institutions of the political regime. It is the monopoly of the government. It seems mysterious why the government simply prints pieces of paper to make it valuable. The reason is that it collects tax denominated in the currency that it prints in monopoly power and it claims to be the only legal lender. Don’t get me wrong. There is an economic logic here determining the value of a currency ( think about Zimbabwe, now). The supply and demand still matter. But what really matters, in the end, is the monopoly of political power. People trust the value of banknotes because they believe others believe that they believe in their value. But it is the trust we lend to the institution and the regime under which we live.

The value of Bitcoin, as a form of currency, will be constrained by the political framework I just described. Whether it is compatible with the existing political structure, whether it will be seen as a threat to the legitimacy of the monopoly of government, matter a lot for its destiny. There is a bigger political debate here. I won’t go into it, though.

The So-called “Benevolent Social Planner”

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In almost every model in economics, there is a so called benevolent social planer. This is as if the all-power god allocates all candies and bread across you and me, across today and tomorrow so that altogether all of us feel happiest. The god not only cares about us alive in today, but also our kids and future generations. The god is selfless and far-sighted.

Economists invited the social planer to find the optimal allocation of resources as a thought experiment. But whenever I came across them, I always lost my focus of the paper, and my minds could not help being filled with myriad of irrelevant thoughts.

Maybe benevolent planner is just another name to a sincere dictator. All dictators in this world declare themselves to be benevolent social planners dedicated to the best of all people. They are like our parents, who always justify all of their actions by a single phrase: “I am for your good”, or ” we do this only because we love you”. It is so difficult to turn down their kindness as they look so full-hearted. They believe good intentions could justify any actions.

I think they would be more lovely if they simply admit they are not always for us but also for themselves. Parents cause harms in the name of love all the time. Same as many so called benevolent social planners. What’s worse is that they cause harms to millions of people. Some well-intentioned sincere social planners cause big harms, not mentioning those more hypocritical  ones.

Too many examples in the history.

There are many narratives and theories rationalizing a benevolent social planner. Democratic societies replace their leaders so often that the politicians are making myopic decisions. This is becoming a more serious issue, especially in the world today. Therefore some people turn to alternatives. One of such examples is the so called political meritocracy. The systems pick smart, diligent and selfless elites to administrate the country. They are held in power forever so that they are more accountable. They take longer perspectives and make decision with far-sightedness.   You won’t have a five-year plan of the national economy in a true democracy.

Fair? I won’t dispute with the general assertion, but I always ask a very simple question: okay, let us assume the emperor has all benevolent intentions and sincerely seek the so called public interest, so what? The problem is not just whether the single dictator or employer is not seeking the general welfare or not, it is even though he has it, what can he achieve? He is nice personally, but he cannot make sure other people in the hierarchical system have the same incentive as he has.

The real problem with handing all our power to the single benevolent social planner has nothing to do with their sincerity. It only has to do with the implementation of it. One huge difference between naivety and maturity is to distinguish intention from ability, language from action, what’s said and what is done.

A sincere social planner needs all(or maybe most) people working for him to be benevolent. This is simply not the case in real world.