Saturday, October 6, 2012

Hume the Cause, Kant the Effect

David Hume
David Hume is one of the most important philosopher of modern era, his work "Treatise on Human Nature" was published when he was 28 and was in France but though it was never well received by audience , he applied in Edinburgh University and though he was refused a place there .Later he started to write books on philosophy , most famous being "Enquiry into Human Understanding" when he was 45. Hume stated that self is nothing but a bunch of perceptions and that self ,knowledge and probability were used in philosophy of Hume and he also published on logic and mathematics .His philosophy is quite different from mainstream philosophy .He stated that our past and present ,our knowledge makes speculation for future. He also suggests that inference of experience is also important in determining cause and effect .Cause and effect underlies experiences and not reasons. Experience may not be logical but only experience gives cause and effect knowledge .He also published the "objective doctrine" and his theory of induction is a creative concept as well.

Emanuel Kant
German philosopher came at time when British Empirists like Locke and Hume were at peak. Kant stated that reason on ideas in knowledge and natural way of thinking on ideas is knowledge and that lack of knowledge is when mind does not think rationally or even in all directions. Kant wrote on Anthropology , political philosophy , moral philosophy, metaphysics and philosophy of aesthetics.Emmanuel Kant is considered the best of modern philosopher , his life was academic and he was influenced by Rousseau , Hume and Hegel.He wrote on science , earthquakes, solar system and natural disasters. He never married and lived a very academic life. Kant's most famous work is Critique of Pure Reason and it remains one of the most important work of philosophy. He states there are 3 proofs of presence of God and that existence of God is metaphysical and that laws of nature give us a clear picture. Reasons he defines are the vital part of knowledge and progress of human thought. Nature of space and time are discussed by Kant in metaphysical way. Kant also published on cause and effect in his philosophy and that time and space have an impact on cause and effect .Time and space/place may alter the cause and so the effect. Events in world of physics vary with time and space concept (just like relativity).He states that Ego which is metaphysical is only the reality of world and from there successors of Kant were Nationalist and stressed on Ego concept and described Germans as the race with best Ego or Will.

Hume the Cause, Kant the Effect
In the Preface to the Prolegomena to Any Future Metaphysics, Kant famously credits his recollection of Hume’s skepticism with being “the very thing which many years ago first interrupted my dogmatic slumber and gave my investigations in the field of speculative philosophy a quite new direction” (Pr 260). From Kant’s perspective, Hume’s skeptical arguments about causality “demonstrated irrefutably that it was entirely impossible for reason to think a priori and by means of concepts [the] combination [of which] involves necessity” (Pr 257). In other words, Hume’s arguments showed that not even the most elaborate and complex chains of a priori reasoning could prove causal connection, i.e. that the existence of A must necessarily give rise to the existence of B (Pr 257). Kant clearly rejected Hume’s skeptical conclusion that “reason [is] altogether deluded” about cause and effect, yet he regarded him as offering “a spark from which light might [be] obtained,” provided that it catches “someinflammable substance” and “its smoldering fire [is] carefully nursed and developed” (Pr 257). Although he does not say so directly, Kant clearly views his Copernican Turn as that flammable substance and himself as the tender of the fire.


Kant’s wholly original solution to Hume’s skepticism about causality is found in the Second Analogy of Experience in the Critique of Pure Reason. The basic purpose of this paper is to critically examine Kant’s account of causality in the Second Analogy, to determine whether it adequately responds to Hume’s skeptical challenge. Notably, Kant’s attempt to ground causality comes late in the Critique—in the interesting sense that it logically depends upon his earlier arguments about time as an a prior form of sensibility in Transcendental Aesthetic, the relationship between the categories and the forms of logical judgment in the Metaphysical Deduction, the categories as necessary for the experience of objects in the Transcendental Deductions, and so on. Apart from that foundation, Kant’s proposed solution to the problem of causality is not merely highly implausible, but also basically incomprehensible. So despite my strong objections to those fundamental elements of Kant’s critical philosophy, this paper will focus solely upon the strengths and weaknesses of the arguments of the Second Analogy as a response to Hume.

Kant’s Interpretation of Hume’s Skepticism
In his commentary on Hume’s arguments about causality in the Prolegomena, Kant chastises some of Hume’s critics for wholly missing the thrust of his skeptical arguments. These philosophers of the “common sense” school erred in “taking for granted that which [Hume] doubted, and demonstrating with zeal and often with impudence that which he never thought of doubting” (Pr 258). Kant aims to set the record straight: Hume never questioned that “the concept of cause was right, useful, and even indispensable for our knowledge of nature,” but instead denied that causality “could be thought of by reason a priori, and consequently whether it possessed an inner truth, independent of all experience, implying a more widely extended usefulness, not limited merely to objects of experience” (Pr 258-9). While Kant is certainly correct that Hume never doubted the usefulness of the principle of cause and effect, his own summary of Hume’s skepticism leaves much to be desired. As an empiricist, Hume would have been perfectly content with a well-grounded principle of causality which was “limited merely to the objects of experience” (Pr 259). His skeptical doubts were rooted in the difficulties ofjustifying ordinary causal claims, not any rationalist desire to extend the principle of causality beyond possible experience. In this way, Kant’s interpretation of Hume is all-too-conveniently suited to Kant’s own project of transcendental idealism. Nonetheless, the critical question at hand is whether the theory of causality that Kant develops in the Second Analogy of the Critique constitutes an adequate answer to Hume’s skeptical arguments. So let us briefly survey those arguments before considering Kant’s response to them.

In the discussion of causality in the Inquiry Concerning Human Understanding, Hume first divides “all the objects of human reason or inquiry… into two kinds,” namely “Relations of Ideas” and “Matters of Fact” (Inquiry 40). Relations of ideas include “every affirmation which is either intuitively or demonstrably certain” and which is “discoverable by the mere operation of thought, without dependence upon what is anywhere existent in the universe,” such as the principles of mathematics (Inquiry 40). Matters of fact are empirical truths, the opposites of which “never imply a contradiction” and can be “distinctly conceived by the mind” (Inquiry 40). In Kantian terms, relations of ideas are all a priori, analytic, and necessary, while matters of fact are all a posteriori, synthetic, and contingent. Hume develops his skeptical arguments within this general framework in two basic stages: (1) causal connections are not relations of ideas because they cannot be known a priori, (2) all empirical claims about necessary causal connections are unjustified (Inquiry 42-57).

David Hume
First, Hume effectively demolishes the notion that our ideas of causal connection are relations of ideas on the grounds that particular causal connections are only known by experience. He observes that “Adam, though his rational faculties be supposed, at the very first, entirely perfect, could not have inferred from the fluidity and transparency of water that it would suffocate him, or from the light and warmth of fire that it would consume him” (Inquiry 42). Effects are not conceptually contained in their associated causes in the way that “unmarried” and “male” are contained in the idea of “bachelor.” In fact, “the effect is totally different from the cause, and consequently can never be discovered in it” (Inquiry 43). Without the benefit of experience, we could coherently conceive of “a hundred different events” that could result from one billiard ball moving rapidly toward another (Inquiry 44). As far as reason alone is concerned, the billiards might repel or attract like magnets, disintegrate into a fine powder, or transmogrify into Plato and Aristotle. So although we are “apt to imagine that we could discover [causal] effects by the mere operation of our reason without experience,” such is clearly impossible upon further reflection (Inquiry 43). Thus our ideas of causal connection cannot be a priori relations of ideas.

Second, Hume rules out the possibility of developing any necessary and universal causal laws from experience given that the senses only provide a “continual succession of objects, and one event following another,” not the “the particular powers…by which all natural operations are performed” (Inquiry 56). So upon observing one event follow another, claiming a causal connection would be hasty because “their conjunction may be arbitrary and casual” (Inquiry 56). Even the observation of events “constantly conjoined together” offers us no insight into the “secret power by which one [event] produces the other” (Inquiry 56). So although we regard gravity as the cause of a rock falling to the ground, perception only tells us that such bodies fall, not why they do so. Perhaps invisible, speedy, and overweight fairies who like to sit upon floating objects are the “secret power” at work. Even experiments carefully crafted to reveal “a connection between the sensible qualities and the secret powers” of some entity cannot justify universal causal claims because such inferences presume “that the future will resemble the past, and that similar powers will be conjoined with similar sensible qualities” (Inquiry 50-1). So even if we regularly experience necessary causal sequences of events, any claim to empirical knowledge of them will be unjustified.

An Enquiry Concerning Human Understanding by Hume
Ultimately , Hume explains our propensity to make causal connections between events as the product of the force of custom or habit, which just means that for some unknown reason the “repetition of [the act of drawing causal connections] produces a propensity to renew the same act… without being impelled by any reasoning or process of the understanding” (Inquiry 56-7). Before turning to Kant’s alternative account of causation, we ought to note that Kant wrongly frames the skeptical worries raised by Hume in terms of the concept of causality itself. He writes that “Hume’s problem… was a question concerning the origin of the concept [of cause]” which, if answered, would have “determined as a matter of course” the “conditions of its use and the sphere of its valid application” (Pr 259). But as we have seen, Hume’s skeptical doubts did not concern the origin of the concept of causality at all, but rather the possibility of justified claims of causal connection.

The Determination of Temporal Order
In his introductory comments on the three analogies of experience in the Critique, Kant sketches the basic challenge posed by the current stage of his not-yet-complete critical philosophy to be overcome by the analogies. Like in the Transcendental Deduction, the threat of a chaotic sensory manifold must be defused by appealing to some necessary order imposed by the mind. Yet in this case, the particular focus is not on the unification of the sensory manifold in a single subject by pure apperception, but rather the necessary temporal connections between perceptions generated by the pure regulative concepts of subsistence, causality, and community. Significantly, those three analogies are not independent principles but rather connected elements in Kant’s attempt to render temporal relations between perceptions objective. Kant rather cryptically describes the general problem to be solved by the analogies as follows: “In experience, …perceptions come together only contingently, so that no necessity of their connection is or can become evident in the perceptions themselves, since apprehension is only a juxtaposition of the manifold of empirical intuition, but no representation of the necessity of the combined existence of the appearances that it juxtaposes in space and time is to be encountered in it” (CPR A176/B219). Let us unpack that basic problem. Given the structure of the mind so far developed in the Critique, perceptions are merely jumbled together in time, not temporally connected to one another in determinate way. The manifold of empirical intuitions
cannot provide any necessary temporal order because “time itself cannot be perceived” (CPR B219). More simply put, the particular events in our flow of experience are not stamped with some particular number from an Intrinsic and Universal Time Scale. Instead, we are mired in a subjective temporal order of experience, one which routinely fails to correspond to the objective temporal order of the world. The subjective temporal order of our experiences depends upon us, as in the progression of individual parking meters seen in the course of walking down a street. In contrast, the objective temporal order depends upon the objects of our experience, such as the spray of water which erupts from a fire hydrant upon being struck by a car. The challenge that we face lies in distinguishing between objective and subjective temporal order—given that perception offers us no means to do so.

The Critique of Pure Reason by Immanuel Kant

Sebastian Gardner notes the importance of this task in writing that “if we are to think of objects as distinct from our representations, then we need to be able to think of them as existing in time, as a matter over and above the inner flow of our representations.”1 For Kant, such a task is necessary for any empirical knowledge at all, since such involves perceived objects not merely “juxtaposed in time” but rather “objectively in time” (CPR B219). Ultimately, the mere possibility of experience presupposes that we somehow differentiate between the idea of an “objective time-order, in which objects exist with determinate temporal locations” and that of our “subjective time-order in which our representations succeed one another.”2 Since perception offers us no distinguishing features from which to work, that differentiation “can only come about through [the] combination [of objects] in time in general,” which in turn requires the three analogies of experience as “a priori connecting concepts” (CPR B219). The analogies (i.e. subsistence, causality, community) are regulative “rules of general time-determination” under which “all empirical time-determinations must stand” corresponding to the three modes of time (i.e. persistence, succession, and simultaneity) (CPR A177/B219-20). The basic principle common to all the analogies is the one stated by Kant at the outset: “Experience is possible only through the representation of a necessary connection of perceptions” (CPR A176/B218).

Kant VS Hume

The Origin of the Concept of Causation
The first analogy concerns the persistence of substance underlying change, in that “all change (succession) of appearances is only alteration” of a single substance (CPR B233). Building upon that foundation, the second analogy focuses on the necessary connections between that succession of appearances. In the course of perceiving successive appearances, we are aware that A exists, followed by non-A (CPR B233). For the general reasons already indicated, Kant claims that such awareness is “not the work of mere sense and intuition, but is here rather the product of a synthetic faculty of the imagination” (CPR B233). However, the mere temporal connection of two appearances, A and B, contains no necessity; A might follow B or B might follow A (CPR B233). So while we are aware of a temporal order of appearances, that order is merely subjective, not objective. As Kant writes, “I am therefore only conscious that my imagination places one state before and the other after, not that the one precedes the other in the object”—meaning that “through the mere perception, the objective relation of the appearances that are succeeding one another remains undetermined” (CPR B233-4). An objective, necessary temporal ordering of A and B would require that “the relation between the two states… be thought in such a way that it is thereby necessarily determined which of them must be placed before and which after rather than vice versa” (CPR B234). So an objective temporal orderwould require A to always precede B or B to always precede A. No empirical concept of causality can perform that task; only the pure concept of causality “carries a necessity of synthetic unity with it” capable of imposing objective temporal order upon the subjective flow of events, such that “[the cause] determines [the effect] in time” (CPR B234). After sketching this basic theory of causality, Kant helpfully compares the perception of a house in parts with the perception of a boat moving downstream in order to “show what sort of combination in time pertains to the manifold in the appearances itself even though the presentation of it in apprehension is always successive” (CPR A190/B235). In other words, what renders a certain temporal order objective within the subjective flow of our experience? What makes some alterations (in which “a state comes to be that previous was not”) necessary?The differences between the house example and the boat example promise toanswer those questions.

In the case of sequential perceptions of a house, “the apprehension of the manifold in the appearance of a house that stands before me is successive” but “no one will concede” that “the house itself is also successive” (CPR A190/B235). In other words, the progression of the perceived parts of the house is not due to those parts coming to be and then passing away, but rather to the movement of the eyes. So Kant is not here appealing to mere common sense, but rather to fact that the subject can alter the order of his perceptions by his own actions. As he notes, “my perceptions could have begun at its rooftop and ended at the ground, but could also have begun below and ended above; likewise I could have apprehended the manifold of empirical intuition from the right or from the left” (CPR A192/B237-8). More generally, “in the series of these perceptions there was… no determinate order that made it necessary when I had to begin in the apprehension in order to combine the manifold empirically” (CPR A192-3/B238).

By such considerations, we may justly declare that the temporal connections between the perception of various parts of the house are merely subjective, not objective and necessary. In contrast, such reversals of order are not possible in the case of the boat moving downstream with the current. In that case, “my perception of its position downstream follows the perception of its position upstream” such that “it is impossible that in the apprehension of this appearance that the ship should first be perceived downstream and afterwards upstream” (CPR A192/B237). As with all such causation or objective temporal order, the “determine order” of appearances “makes the order of perceptions that follow one another (in the apprehension of this appearance) necessary” (CPR A192-3/B238). According to Kant, such is the basic distinction by which we may “derive the subjective sequence of appearances from the objective sequence of appearances” (CPR A193/B238). Only when a person “cannot arrange the apprehension otherwise than in exactly this sequence” is he “justified in saying of the appearance itself, and not merely of [his] apprehension, that a sequence is to be encountered in it” (CPR A193/B238).

In that case, the sequence of change in appearance is subject to an objective temporal order—
meaning that it involves a necessary causal connection between two events. So as Gardner notes, the concept of causation is just “the concept of a necessary and irreversible succession.”Such is the origin of the second analogy, i.e. the rule that “all alterations occur in accordance with the law of the connection of cause and effect” (CPR B232). Without such a rule imposed upon perception, Kant argues, our mental life would be reduced to “a play of representations that would not be related to any object at all” (CPR A194/B239). Hume also regarded our ideas of causal connection as critical to “all reasonings concerning matter of fact” but merely on the grounds that they are required in order to “go beyond the evidence of our memory and senses”—a seemingly modest claim in comparison (Inquiry 41). Kant’s essential arguments in the Second Analogy, are thus well-summarized by Gardner as follows: “The experience of objective change, i.e. of the world as changing, as opposed to merely oneself ,one’s representations changing, is necessary for experience of an objective time-order, and that the distinction between change occurring in our representations, and change occurring in an objective world, can be made only by employing the concept of causality.”

The Application of the Concept Causation
As already noted, Kant viewed the fundamental question about causality to be that of the “the origin of the concept,” in that the answer to that question would allow us to determine “the conditions of its use and the sphere of its valid application… as a matter of course” (Pr 259). Kant’s account of the origin of our ideas about cause and effect is consistent with the substance and method of the rest of his critical philosophy, so the few unique objections may be raised against it within that context are hardly noteworthy. Instead, since Hume was concerned with the justified application of the concept of causality to experience, let us consider whether Kant’s general theory of causation may be plausibly applied to the determination of particular causal relationships between particular events.After presenting his argument for causality as an a priori rule necessary for the experience of objects, Kant seeks to demonstrate the validity of our particular claims of causalconnection between events. He writes:
It is… important show by an example that even in experience we never ascribe sequence (of an occurrence,in which something happens that previously did not exist) to the object, and distinguish it from thesubjective sequence of our apprehension, except when a rule is the ground that necessitates us to observethis order of perceptions rather than another, indeed that it is really this necessitation that first makespossible the representation of a succession in the object (CPR A196-7/B241-2).

Kant’s purpose here is ambitious, to say the least. He aims to demonstrate that any and all ascriptions of objective temporal order (i.e. necessary causal connection between events) are valid instances of such order on the grounds that those types of claims are only possible in virtue of the causal rule of the second analogy. He attempts to prove this claim though the general question of how “we come to posit an object for [our mere] representations,” i.e. how we ascribe “some sort of objective reality” to the mere “subjective reality” of our representations (CPR A197/B242). Kant’s answer is simple: the only “characteristic… given to our representations by [their] relation to an object” is that of “making the combination of representations necessary in a certain way, and subjecting them to a rule” (CPR A197/B242). In other words, the only feature which distinguishes objective representations from subjective representations is that the former are subject to an a priori rule, while the latter are not. Consequently, Kant claims:
As soon as I perceive or anticipate that there is in this sequence a relation to the preceding state, from
which the representation follows in accordance with a rule, I represent something as an occurrence, or assomething that happens, i.e. I cognize an object that I must place in time in a determinate position which,after the preceding state, cannot be otherwise assigned to it” (CPR A198/B243).
So because causality is an a priori rule which makes possible connections between perceptions, even the slightest whiff of its relevance implies that it is already in full force. The mere thought that some temporal sequence from A to B might be in the object makes it so, since the thought would not be possible if the temporal sequence was merely subjective. So on this transcendental model of causality, rational beings must be infallible in the attributions of causal relationships. Given this infallibility implication of Kant’s theory of causation, a person need not be a committed skeptic like Hume to reject his theory as not just implausible but also obviously false.

After all, people err in their claims of causal connection on a regular basis. Some claims of causation from A to B are largely arbitrary, such as those made by people who regard the course of their lives as subject to the influence of the stars, angels, and so on. Other claims of causation from A to B are reasonable, but nonetheless mistaken, such as when a woman yells at her barking dog, thinking him to be aroused by the slam of a door in the wind, when he is actually warning of a prowler outside. Generally, such mistaken claims of causal connection are based upon the experience of coincidences, i.e. two events closely connected in time which seem causally related but are not. Any decent theory of causation must distinguish between genuine instances of causation from A to B and the mere coincidence of A then B. But on Kant’s view, all coincidences are treated as genuine causes, since we could not even think “Ah, maybe A caused B” unless A actually caused B. Notably, Kant cannot overcome Hume’s skepticism about causation with a weaker but more plausible account of the determination of particular causal relationships. After all, if we are capable of erring in the designation of A as the cause of B, then we immediately subject ourselves to the very sorts of skeptical worries raised by Hume.
Concluding Thoughts
Although Kant’s theory of causation generally fits well into his overall critical philosophy, it fails in its basic task of answering the skeptical challenge posed by Hume. The fact that it cannot adequately account for the existence of coincides is not merely a small problem to be solved by some minor modifications. Rather, it indicates that Kant lacks the necessary means to distinguish between real and apparent causal relationships, despite all of his concern for the difference between objective and subjective temporal orders. For such reasons, a solution to Hume’s skepticism about causation must be sought elsewhere.

Thursday, August 9, 2012

Niccolo Machiavelli

Niccolò Machiavelli would have undoubtedly secured enduring fame for any one of the roles he mastered during his life in and out of Renaissance Florence: historian, diplomat, military strategist, civil servant, poet, playwright. However, it was in his capacity as political philosopher that Machiavelli earned eternal renown by sparking some of the most intense scholarly controversies in Western intellectual history. Not without reason, many commentators consider Machiavelli the father of modern political thought or modern political science—some even ordain him the founder of “modernity” itself. Yet the specific content and precise objectives of his political writings remain elusive: Was Machiavelli an adviser of tyranny or a partisan of liberty? A neutral technician of power politics or an Italian patriot? An anti-clerical reviver of pagan virtue or a devious initiator of modern nihilism? Put simply, to what extent was Machiavelli a “Machiavellian”? These questions, among countless others concerning the essence of Machiavelli’s thought, will continue to generate contentious debates for as long as people reflect seriously on political affairs.

Machiavelli’s most famous work, On Principalities [1512], or, as it was titled by others, The Prince, certainly announced a dramatic break with previous political doctrines anchored in moral and religious systems of thought. Unlike his classical or medieval predecessors, who took their political bearings from transcendentally valid or divinely sanctioned conceptions of justice, Machiavelli oriented himself to the “effectual truth” of politics; how the world actually “is” rather than how it “ought” to be. Indeed, Machiavelli’s brutally realistic advice seems intended to contravene all previous, socially respectable forms of political reflection. For instance, he boldly declares that it is safer for a prince to be feared rather than loved (if he must choose one between these two forms of regard) because subjects love at their own pleasure while they fear at the pleasure of a prince. Moreover, Machiavelli steadfastly insists that violence and cruelty are necessary means of effective political action (even if their deployment must be circumscribed meticulously to avoid unintended, deleterious consequences for a prince’s rule). Machiavelli accepted that the violations of moral norms can have justification, "in actions of men, especially princes , the end justifies the means"(The Prince). Machiavelli advises "he who diligently examines past events easily foresees future ones and can apply to them remedies used by ancients."

Cornerstone of Machiavelli's philosophy is that success particularly in the tricky realm of politics depends on willingness to adopt circumstances.Machiavelli's political philosophy was rooted in comparative biography of the kind at which Plutarch excelled.Rather than treating history as unfolding of impersonal forces an approach stressed by political thinkers like Hegel and Marx, Machiavelli grounded his science in psychology of men. 

In The Prince, Machiavelli barely feigns hesitation about recommending as exemplars of “well-used” fear and cruelty individuals, such as Agathocles the Sicilian, Cesare Borgia and Liverotto of Fermo, whom historians and contemporary opinion-setters considered criminals. And yet Machiavelli demonstrates that figures such as Moses, Romulus and Cyrus, whom established authors attempt to elevate beyond moral reproach, themselves achieved political greatness by recourse to crimes. One prominent difference between the first and second set of princes, Machiavelli insinuates, is that the latter’s crimes were minimized or obscured by the legendary attributes bestowed on them as a result of the longevity of the “new modes and orders” they founded.Machiavelli appropriately praises these successful founders of long-enduring republics, empires and religions as the most virtuous princes in history.

Yet his desire to lay bare the effectual truth of politics, stripped of its idealistic and mythic veneers, compels Machiavelli to devote considerable space in The Prince to generally under appreciated, less successful and, much more disreputable historical figures like Agathocles and Borgia. Precisely because the latter two accomplished demonstrably less than Romulus and Moses, perhaps their motivations, deeds and genuine achievements can be more readily apprehended and more easily analyzed.

Machiavelli loved going to diplomatic missions more than any other thing.He was adventurous and always keen to find solutions to diplomatic challenges.But Machiavelli was his own worst enemy due to his sharp tongue and prickly personality.

Machiavelli wrote the Prince during exile and while jobless.It was written at time of crises and out of depression.As Machiavelli sat down to write, his career lay in ruins and the loss of his salary threatened to plunge him into humiliating poverty.Surrounded by ghosts of history and the contemplation of eternal truths Machiavelli forgot his current misery and began writing his masterpiece.

Machiavellianism is superhuman, divine, transcendental, it will never be achieved by
man, at most approximated.
-Nietzsche Will to Power 304

Machiavelli intimates that careers of Agathocles and Borgia may provide important clues for those pursuing answers to the following crucial questions: What horrendous crimes, in addition to the few already recorded, did Romulus and Moses actually commit in order to achieve immortal fame? Conversely, what mistakes might have Agathocles and Borgia avoided if they were to succeed ultimately in gaining the success and renown attained by Romulus and Moses? Machiavelli famously places himself in the company of the most illustrious princes; he boasts that he, in formulating a startlingly unprecedented political doctrine, embarked upon the dangerous road of founding “new modes and orders.” Yet few scholars note how closely Machiavelli affiliates himself personally with what might be called the common criminal element in the history of princes and would-be founders. Indeed, this rather low-born Florentine of questionable parental lineage uses exactly the same phrases to describe himself--a victim of “fortune’s malignity,” who suffered countless “hardships and dangers” on behalf of his fatherland--as he does to evaluate, respectively, the Papal bastard, Borgia, and the abjectly poor “potter’s son,” Agathocles.

A careful assessment of Machiavelli’s accounts of these figures’ careers yields the conclusion that in many respects he considers a Borgia, despite his limited success, and an Agathocles, despite his infinite crimes, politically superior to, respectively,recent hereditary kings of France and the exalted hero of humanist literati, Scipio Africanus. What then are the princely qualities most conducive to political success as so assertively and realistically re conceived by Machiavelli? Flouting the ethical pretensions of classical, Christian and humanist political philosophy, Machiavelli unequivocally instructs readers of The Prince that “virtue” most certainly does not correspond with the interior moral character of an individual political actor. Instead, Machiavelli affiliates virtue with the latter’s proficiency at wielding force and fraud to overcome fortune’s sway over the external world. Machiavelli metaphorically presents fortune’s nearly inexorable power as a raging river overflowing its banks or a manipulative goddess determined to derail the grand designs of mortal men. More literally,Machiavelli identifies fortune with the unexpected events that emerge from the ever-changing conditions of human affairs, or, more pointedly, with the limits imposed on a prospective prince’s autonomy by his servile dependence on superiorly situated political actors. The virtuous would-be prince, Machiavelli argues, creates laws and institutions, political dams and dykes, that, at least temporarily, impose order on the unruly political universe; and he effectively slaps around Lady Fortune by ruthlessly eliminating any individuals who stand in the way of his attaining increased power and unfettered autonomy.

Further indicative of Machiavelli’s unorthodoxly realist approach to politics, the Florentine blatantly rejects the ideal of philosopher kings whose perfect judgment might be at least remotely approximated by the educated, wealthy and prominent noblemen of worldly cities. Machiavelli insists that there exist no few best men whose wisdom, prudence, or love of the common good can be counted upon to settle, with impartial justice, political controversies and crises. Defying the aristocratic preferences of “all” previous philosophers and historians, as he states in the Discourses, Machiavelli recommends in The Prince that individual princes militarily arm the common people, in whom the noble quality of onestà (honesty, decency or justice) actually resides, and crush at every opportunity self-styled nobles, “the great,” whose ambitious and avaricious motivations and machinations offer little more than oppression for the people and insecurity for a prince.

The image of ideal prince which Machiavelli conjures up in the pages is someone who is able to bend the course of history to his will, a man with superhuman strength of will, cunning and ruthless when required.

Machiavelli's masterpiece

  The Prince was written for Giuliano de Mdici but the final version was dedicated to Lorenzo di Piero de' Medici after Giuliano's death,  though his work was never read by Medicis and not published while he was alive.His work was an attempt to win the favor of the Medici.

Though Machiavelli is considered immoral by some but he was not a teacher of evil , in fact he was a good citizen who is often (like Nietzsche) congratulated for tearing off hypocritical masks, brutally revealing the truth, and so on, is not that men profess one thing and do another (although no doubt he shows this too), but that when they assume that the two ideals [of politics and ethics] are compatible, or perhaps are even one and the same ideal, and do not allow this assumption to be questioned, they are guilty of bad faith (as the existentialists call it, or of “false consciousness,” to use a Marxist formula), which their actual behavior exhibits. Machiavelli calls the bluff not just of official morality .As men are evil in general so to live among them Machiavelli advices that one must be cunning to protect himself .

 The Florentine Republic [1494-1512], which Machiavelli served as an administrative secretary, diplomatic emissary and militia organizer for over a decade, was overthrown by an aristocratic coup, foreign intervention and Papal intrigue that returned the Medici family to power. Machiavelli responded by writing to the restored princes, delicately advising them to betray their allies among the nobility and align themselves instead with the presently disempowered Florentine people (Machiavelli, “Ai Palleschi”). For his troubles, Machiavelli was implicated in an anti-Medici conspiracy, tortured, imprisoned and subsequently confined to internal exile. Several years later, Machiavelli repeated his advice that the Medici ultimately re empower the Florentine people at the expense of the family’s aristocratic “friends” in an understudied but important memorandum on constitutional reforms.(Machiavelli, “Discursus Florentinarum rerum”).

Machiavelli’s Discourses [c. 1513-19] and Florentine Histories [1532] clearly exhibit the author’s admiration for republics, even if, ever intriguingly, these works generally affirm rather than repudiate the moral and practical lessons of The Prince. The near perfect, ancient Roman Republic is Machiavelli’s primary subject in the Discourses, while the hopelessly disordered, medieval Florentine republic takes center stage in the Histories. In Rome, a wise founder, Romulus, armed the poor and collected the wealthy in a senate, insuring that future conflicts between plebeians and patricians would produce two salutary institutions: an office, the plebeian tribunate, dedicated to the welfare of the common people, and large citizen assemblies in which the people themselves freely discussed and directly decided legislation and political trials. Intense but productive class conflict at home, and unprecedented territorial expansion abroad, herald, for Machiavelli, Rome’s singular greatness and its ultimate value as a model for all subsequent republics to emulate.

By contrast, in Florence, Machiavelli demonstrates how one individual after another emerged with the prospect of assuming the role of founder (e.g., Giano della Bella, Michele di Lando, the Duke of Athens); yet they each ultimately demurred from fully arming the people civically and militarily such that social conflicts (not only between classes but especially among families and factions) persisted in episodically destructive rather than constructive ways. Machiavelli exhaustively chronicles how the republic’s defective ordering and chronically tepid leadership result in its gradual enfeeblement, measured by both geo-political decline and civic corruption.
Bust of Machiavelli

Particularly emblematic in this respect is Machiavelli’s vivid account of Florence’s Ciompi Revolt in book III of the Histories. Since the city’s oppressed woolworkers had no recourse to tribunes who might air their grievances and were unable to confront directly Florence’s wealthiest and most prominent citizens assembled in an actual senate, the Ciompians were compelled to pursue the city’s nobles house to house in a series of bloody, destructive riots. These disturbances produce no longstanding progressive gains for Florence’s poorer citizens but rather facilitate conservative consolidation of power among the city’s richest families. From such entrenched oligarchic arrangements, Cosimo de’Medici and his family successors rise to the ranks of commercial princes. Rather than arm citizens, the Medici rendered the latter mere economic clients, definitively corrupting the city’s civic life and ensuring its military dependence on foreign mercenaries.

Machiavellie like Nietzsche is a preacher of enduring sufferings ,bravery, pride, overcoming hardships and confronting dangers.

Why were Rome’s founders and civic princes so virtuous and Florence’s so hesitant and inept? Machiavelli sometimes directly and sometimes more subtly blames Christianity for the weakness of modern republics and their leaders: unlike the teachings of previous, more robustly political belief systems, Christian tenets encourage passivity, subservience, and deferral of punishment to the next world and, perhaps worst of all, promote an inflexibly undifferentiated view of “the good.” These precepts seem to inhibit modern peoples and princes from behaving in the “bad” ways that actually prove salutary for political life. Ancient armed populaces often took matters into their own hands to discipline those who commit “sins” against the public; and ancient princes like Moses and Brutus never hesitated to eliminate rival threats to their new modes and orders that guaranteed the liberty and longevity of their regimes.Machiavelli states that ethics and politics should be separated and that a wise Price may not necessarily a moral man.He argues that a Prince must be ready to do anything for his country and that he must be intelligent and cunning as a fox to spot enemies and  forceful as a lion to fight with them.

Indeed, Machiavelli laments, Christian populaces suffer rather than punish ill-treatment by abusive elites; or, as the Ciompi Revolt makes plain, when finally provoked to the point of spirited response, they strike out against them in undisciplined and ineffective ways. Florentine princes like the Medici, Friar Girolamo Savonarola and Machiavelli’s own patron, Piero Soderini— who all maintained concrete ties of one kind or another with the Roman Catholic Church--seem hamstrung internally by Christian morality or externally by the Church’s secular power from acting decisively to found and maintain a healthy civic republic. In particular, Machiavelli avers, Christian princes seem especially incapable of arming the people with little more than platitudes attesting to their goodness, and of eliminating the metaphorical “sons of Brutus,” who forever threaten “a free and civil way of life”: oppressive minded aristocrats who invariably detest the people’s liberty, bitterly resent their participation in politics, and always intransigently oppose any reformer who attempts to limit their own power and privilege. Scholars often grossly overstate Machiavelli’s concrete impact on practical politics and constitutional forms in the modern world. The “republicans” of the broad Enlightenment era drew upon the Florentine’s prescriptions in a highly selective fashion: they only partially adopted his call for neo-Roman full militarization of the people, and almost completely rejected the democratic institutions and practices that Machiavelli hoped would be demanded by such newly armed citizenries. They explicitly rejected his call for modern plebeian tribunates, and for assemblies in which common citizens themselves discuss and enact public policy. Instead, the framers of modern constitutions opted exclusively for generally elected offices in which the people might choose the most wise and prudent (read: richest and most prominent) individuals,and for elected assemblies of notables that purportedly would faithfully and effectively “represent” the interests of common people.

Machiavelli achieved perhaps his greatest practical influence, and hence earned his greatest infamy, in literatures associated with “reason of state,” a phrase he never used. Architects of the European absolute monarchies appropriated Machiavelli’s apparently cynical, amoral doctrines, but decisively severed these from the Florentine’s own crypto-normative political concerns. They successfully elevated individuals to the status of national monarchs— Tudors and Stuarts; Valois, Hapsburgs and Hohenzoellerns--and certainly helped subordinate traditional aristocracies to the latter’s authority. But by relying on professional militaries and by endorsing “representation” of the public’s interest, modern statebuilders failed to empower the people to the full extent that Machiavelli recommended. The economic dependence of these modern princes--and, notably, the bureaucratic states that succeeded them--on newly emerging capitalist aristocracies, would leave the citizens of modern republics without recourse to the military or civic arms that the Florentine thought eternally necessary for the defense of their liberty from rapacious elites.

"So a new ruler who thinks he has to secure himself in his new principality must secure friends,overcome obstacles either by fraud or force,be followed and respected by soldiers,eliminate potential enemies,maintain friendship with kings and princes,replace old laws with new ones and break up disloyal army and make a new one ."

The radically democratic spirit of Machiavelli’s political philosophy was perhaps best recognized by twentieth century Marxist and post-Marxist theorists on the continent, especially, Antonio Gramsci, Louis Althusser, Claude Lefort and Michel Foucault. They often ingeniously translated his ideas concerning the struggle between the “humors” of the great and the people in terms of capitalist class conflict; or recognized the affinity between Machiavelli’s Prince and the party vanguard who would lead the people to socio-economic liberation; or appropriated for contemporary circumstances Machiavelli’s notion of politics as a game of strategy in which various actors negotiate a field of myriad opposing forces. However, perhaps precisely due to the powerful legacy of “reason of state” on the continent, “the state,” a concept that Machiavelli never really deployed, became for this literature an unproductive idée fixe. Moreover, perhaps bewitched by orthodox illusions of eliminating elites or overcoming “rule” altogether, most authors in this tradition failed to revive or elaborate anew the institutional means through which Machiavelli intended the common people to realize civic liberty; that is, to rule themselves and control socio-economic and political elites.

Monday, July 2, 2012

History of Money & Banking

This article is made from the books by Niall Ferguson.

Niall Ferguson is a foremost historian in the study of money, wealth and banking

The lust for money started in USA when Spanish Francisco Pizarro came to El Dorado and he with other army went to the money mountains of USA where the mines of gold and silver were common. The portable power was taken by Pizarro. Silver and gold was shipped to Europe and so crown of Spain got rich. But because of excess supply of silver in a short time the value of silver coins got low as compared to products sold so in long run the things did not work out well for Spanish Empire.
Money is not metal or paper but it's the trust and the belief of recipient, you can rely on people to borrow money from you and later pay it back. The borrowing and lending existed since 2nd century against products and their value. Lending is all that made the commerce today to come into being. Fibonacci  was the first mathematician to related maths to business and it helped with calculations of commerce. Computation of interest and book keeping was made by Fibonacci as well . Italian cities were the first business hubs of world ,many money lenders and bankers were established there. Compensation of lender is what we call interest as in old times merchants were given loan and as we cannot predict weather so lenders demanded high interest/compensation. Merchant of Venice tells the story of money lending Jews in Venice .
Niall Ferguson

From Renaissance Italy to modern world ,the money lenders were always villains due to high interest and their demand of anything back when money was not returned. In 15th century Italy the Medici family was top in money dealing and lending, they gained power and you can see in Florence. It was Niccolo Machiavelli who wrote their history and the Medici were the people who paid for Renaissance in Italy . Medici were basically known as tyrants or godfather and those who used to lend money. Now for the first time in 14th century Medici money lenders became founders of the banking. Also Giovanni was the one who made banks across Italy and then began the story of Medici power as banking family in Europe. Medici were the first ones to make banking a powerful profession, they became pioneers of money exchange. 

Leonardo Da Vinci and Michelangelo were among  the few who were paid high by Medici to provide art in Italy. Michelangelo worked for Lorenzo de Medici to give masterpieces. Giovanni di Medicci was a top banker and he extended the banks around Italy. Cosimo de Medici ,son of Giovanni  later worked hard to maintain the power of banking. Cosimo (father of Lorenzo de Medici) was the master of Florence and controlled everything from law to politics to finance. A notable contribution to the profession of accounting by Medici family was the improvement of the general ledger system through the development of the double-entry bookkeeping system for tracking credits and debits. This system was first used by accountants working for the Medici family in Florence.Medici family thus in end of 15th Century was labelled as a family who was ruthless and powerful.

Cosimo de Medici helped banking, trading and industry to develop and made Medici Bank the biggest bank of Europe.

From 1996-2006 there were 1-2 million each year to get bankrupt. While in America we say that many failed in start but made money later on e. g Henry Ford went bust in start and started all over again. The Bond market later turned banking into a casino game ,risk takers went to buy stocks and bonds and made fortunes overnight. Bond market funded wars, it created political powers. In modern time Bond Market  crushed Argentina, fortunes of most of us are linked to Bond market.
In 14th and 15th century many states in Italy were on war ,Sienna ,Tuscany and Pisa etc and all this fight was because of money and goods. Though financing war needs money and so Bond market was invented during Italian Renaissance where wars were done to capture capital, powerful armies used to take goods from weak forces and invested it to make themselves capable to fight with stronger armies. Florence people had a lot of money as there were many bankers were there.
While a war is taking place you as a money lender or bond trader are facing a high risk as you are facing the chance that war may ruin the city but if your clients win you will get a lot in return of the high risk you are facing. So even in old times risk was the actual measure of profit.

 London later became the centre of Europe (or the world) and then in 18th Century the story of Rothschild family started.In 1750 Mayer Amschel Rothschild, worked at the Hanover Bank as a clerk a few years after his father's death. He made a lot of fortune in Germany and also expanded the bank across Europe including England and France, later his son Nathan came and made a giant banking empire.

 Nathan Rothschild was a man of great obsession in banking .He was clever and hard working and he made the first big bank in London. Battle of Waterloo was a war on business ,to pay for war the British sold many Bonds. Nathan later went to get gold and silver from Europe and England's Exchequer while Duke of Wellington was also on march across the Europe to gather gold along with Nathan and while selling gold where the price was high or sending rest in London. So we say that London was premier place for gold exchange and was the market of top metals(gold ,silver etc).Prussian army was beaten as well by Duke of Wellington and later Nathan took a risk to sell gold, he gambled to war of Waterloo and he bought many bonds and wishing that war won would lead Britain bonds to get high price, also while bonds were generated Britain was getting money for war as well. So we say that war/ politics and economy are related to the financial market. By the start of 19th Century Nathan Rothschild acquired control over banking system across Europe including England and France.
Nathan Rothchild

Though the French war made Rothschild family rich and powerful and later they went on to bet American Civil war .Later cotton fields were used for bond market fuel, Rothschild's were always in New York and later Abraham Lincoln was supported by Rothschild for the cotton capture, for a while cotton trade was well off and it made a lot of profit for Rothschild. Rothchild  later had a Machiavellian thinking and chose to be feared rather than loved and even some British started to hate them due to their greed and the political problems due to their lust for money. Cotton from America was sold in Europe and bonds were traded in terms of cotton price(just like gold).Bonds not only effect economy or politics but it effects pensions and inflation which effects everyone. At high inflation bond prices fall, i.e. Argentina is one of example. One Harrods was also in Argentina suggests that it was a rich country and they had a lot of resources(they had a lot of gold and silver but lack of management made it loose all).

16th Century belonged to lending and financial market, while 17th century was about Bond market.

With no foreign loan and no bonds ,the Govt. of Argentina had no option than print new notes and a time came when Argentina was out of paper and printing staff was on strike. Farmers were not bringing or breeding cattle as a price of a cow was equal to 2 pair of shoes or even farmers were in trouble. After the fall of Argentina the Bond market became less famous, price of food got high and many were hungry now, families ran out of cash and they sold goods to buy food. Keynes later came in Britain and described the bond market in his way. Keynes theories rely on a functioning bond market to support  economic of a country. Bond market gained rise again.

Joint stock market came into being in 18th century ,the "stock market" came into being in late 18th century and became top industry in 19th century. Future is always certain ,and stock market is prone to randomness and these can go bust like bubbles. Enron became corporate fraud in history of America (or world).STOCK MARKET BUBBLES CAN CAUSE MASSIVE IMPACT ,even bigger than the bond market or other financial trades.  

John Law was the father of stock market bubble, he was the Scot who owned half of US and he was gambler, financial genius , convicted murderer and a man who indirectly caused French revolution. John Law was famous from Florence to Amsterdam to New York and London, he was the first greatest stock market guy. Law was later charged with murder and was prisoner but he fled to Amsterdam from jail and later went to Paris and also stayed there and made himself a legend.

Stock Market

Later trades were done in Asia where Dutch armies used to get goods like spices and used to sell them in Europe, East India company was first built by Dutch and goods were traded to Europe. People started to invest in East Indi company and made fortunes.
By 1610 THE DUTCH EAST INDIA COMPANY was ready to conquer the world, it was biggest multinational company(also monopoly trading company) of world. With 10,000 soldiers and 70 ships the network was across the world from Java to India. Every good was traded and their own stocks were traded in European company and many got wealthy due to this. John Law was in Amsterdam and was living on gambling and was also involved with Bank of Amsterdam.

In 1760 John Law arrived in Paris, France was in debt due to its wars. It was the perfect opportunity for John Law to change fortune of France, Law was a self taught economist and he suggested to print a lot of money. He later went on to give credit at less interest and also suggested that France should make a monopoly company like East Indi Company. French went to USA and a company was built "Mississippi Company",John Law as its director. Many French merchants and investors were financing the company and this company made men millionaires and John Law was richest of them and later Law said" I am the economy". Law was the most powerful money man in history of France ,he controlled all financing banks, mints, trades and companies. Law later became the Prime Minister of France. John Law's money and stock schemes were Ponzi schemes.

John Law

John Law speculated that most profits will come from the French Colony in USA,LOUISIANA .The trade in this state was best under the management of Mississippi Company. Later share price of Mississippi company began to fell and angry crowd later gathered in Paris in front of Law's bank and started to stone the bank. It was a stock market bubble, Law later stayed in Paris and spent his time writing letters and continued gambling. France was later in loss and nightmare was unbelievable.  Later in 1929 came the stock market crash in Wall Street ,it was the most massive attack in history. Unemployment doubled and inflation rose as well. Technical reasons for such crashes are quite a lot but most relevant is herd behaviour(as described by Nietzsche that herd behaviour of many causes bubbles).According to Bell curve the probability are distributed according to frequency but in stock markets things are different and not follow a proper Bell curve i.e. heights of men are near 5 to 6 feet mostly and dwarves and giants are in tails but in stock markets everything has randomness which is not close to mean or which doesn't make quite a proper Bell curve.

Later Enron became the darling of Wall Street, Sharon Watkins was director of Enron and also many investors invested into Enron and it became one of the largest company in world. Enron launched largest gas pipeline in world, from USA to Brazil and in Argentina. Unlike John Law's system for his French company the system of Enron was fraud. In December 2001 Enron got bankrupt ,they were under 25 Billion debt. Ken Lay and other executives of Enron were charged with fraud and other securities fraud and were jailed .
Finance is much about risk than return, question is are you insured or hedged. Natural disasters also have huge impact on markets e. g Hurricane Katrina. The first insurance company was founded in 1744 in Edinburgh and was under management of Scottish ministers, Robert Wallace was a hard drinker and a math prodigy .He was pioneer of insurance fund and later the fund will become million dollar insurance industry. Robert launched widow fund and later in 18th and 19th century this widow fund expanded due to wars as soldiers were concerned about their sons and husbands. Insurance also contributes to welfare and economy of a country. Japan also was a pioneer in welfare. Nationalizing the risk was the key to welfare system. By late 1970s Japan became top in welfare and also it became the second richest country in world after US. Later in 1980s inflation was rising in London, due to risk.

Milton Friedman later won Nobel Prize and he stated that if money supply went up then so did the price level. Welfare state concept was also practised in Chile but it collapsed. So economics later merged with democracy and state laws.
Futures market later was formed in Chicago, futures contract assured hedging and later "Options" were formed. Future contracts are "Derivatives" and "Options" are smarter version of derivatives. Warren Buffet described derivatives as weapons of destruction of stock markets, one proof is that a big Hedge fund lost  almost all its value in a month. Later became the real estate business as price of land can go up and down. Money was borrowed for land and interest was earned by banks and clients expected the high price in future. But sub-prime borrowers were in this market due to greed of banks for interest(sub-prime borrowers are those who have not much assets but yet get loan as banks believe that rise of price of land will cover interest etc).This all led to sub-prime crisis in 2007 in US, it costed 153 billion to US. Later news were released that while in Sub Prime crisis almost one in two insiders were seen doing fraud.

Wall Street

Now let's come to Wall Street ,while during loans on houses many investors bought securities of A rated firms and so to save their money. Many had no idea what was going on, but they invested to avoid loss in Sub-prime crisis, lenders of Sub-prime mortgage were also investing in securities to save themselves. Those people who were unable to pay for their house were called for bids and were forced to sell houses, this caused loss to both lenders and home owners(loan takers).Next turn of investors was business but this is only limited to people with some capital or assets.
Total market of stocks/derivatives, insurance and bond market of world is 119 trillion dollars ,thanks to globalization and the top Stock Exchanges and their links. Money followed from Government to Government ,two banks such as WORLD BANK AND IMF were made in Washington D.C for stabilization of world economy.IMF and World Bank ensured that borrowed money by countries must be returned in a steady way, like Mexico got bankrupt after taking 30 Billion dollars and IMF took action and recovered money.IMF ensures that politicians are to be responsible to recover money from those countries.

Hedge Funds are funds that put funds for weeks and get massive returns, the master of Hedge fund was George Soros. His Theory of Reflexitivity suggests that financial markets are not perfect and so issues in these markets were read by him and he speculated from these and earned. Later Soros picked UK market and speculated British Treasury and went to speculate on trillion dollars. Soros speculation went right so in one single day he made million of pounds and that he became the world's richest hedge fund manager.

Merton and Scholes 's Long Term Capital Investments made million dollars by their hedging and speculation and later their option in top markets and the models to their speculation were quite accurate and so the risk of going bust was 0.01^20 so zero and later on they were awarded Noble Prize. Quants were predicting too and traders were happy too in all this case due to massive profits and ultimate profits were made. But quants were only using data of last 5 years, so later Long Term Capital crashed later and there came the 2007 crash. The crash that made quants feel like losers. Such crash was blamed for being faulty due to assumption of models of quants. Quants were good in models only for short-term and not for long term, while the one guy that did prove that quant models were wrong was Nassim Nicholas Taleb who warned the Black Swans in 2005-2006 and also suggested that Bell Curve is not to be used in stock or foreign market.

Nassim Nicholas Taleb, the creator of Black Swan Theory

China has many millionaires and also Chinese people are ones who save money for investment ,this makes them better gamblers than American or Europeans. In 2007(after sub-prime crisis) US needed 800 Billion Dollars in a year and China did gave the money so China became a banker to US. Why such a poor country like China will lend money to US? The answer lies in China's buying of dollars in Chinese market (China's business assets and stocks were traded in US dollars)thus raising value of dollar and so having more price in market. Quants are unable to predict Black Swans (as market is more complex these days and randomness is wild ) and human errors and also history of money market is known to few and only few take history into account these days. Thus we can say that crash in markets will keep on occurring unless we have enough knowledge about these issues.

Thursday, June 28, 2012

Fabian Society and the London School of Economics

Picture of Fabian Society at London School of Economics , Window  designed by George B Shaw

The Fabian Society was founded in 1884 by the best and brightest of Britain’s reformist thinkers. Absolutely anyone I would have wanted to correspond with in late Victorian Britain was a member, including Sidney and Beatrice Webb, George Bernard Shaw, HG Wells, Graham Wallas, Leonard Woolf and Virginia Woolf, Ramsay MacDonald, Emmeline Pankhurst, Annie Besant and Bertrand Russell. Annie Besant was the subject of one of my early posts and a totally fascinating person in her own right.

The Society joined with trade unionists in 1900 to found the Labour Party, suggesting that the Fabians were not merely intellectuals and writers. The key elements of a modern democracy first emerged in Fabian pamphlets. They proposed a minimum wage in 1906, the National Health Service in 1911 and the abolition of hereditary peers in 1917, all of which has or will improve the quality of life of ordinary working families.

Along with Fabian Society members Sidney Webb and Beatrice Webb and Graham Wallas, George Bernard Shaw (1856–1950) founded the London School of Economics and Political Science in 1895 with his and other private funding. One of the LSE libraries is named in Shaw's honour and now has collections of his papers & photographs.

The world famous London School of Economics and Political Science

Despite being known as a man of letters, Shaw designed a stained glass window in 1910 as a commemoration of the Fabian Society; it showed fellow Society members helping to build the new world. Artist Caroline Townshend created the window according to Shaw's design, in 1910.The figures are in Tudor dress to poke fun at Pease who evidently loved everything medieval. The Fabian Society coat of arms was shown as a wolf in sheep's clothing. The first man, crouching on the left, was HG Wells, cocking a snook at the others. He was followed by the actor-manager Charles Charrington, Aylmer Maude (translator of Tolstoy's War and Peace) and G Stirling Taylor (reading a book, New Worlds for Old). The women include suffragist Miss Mabel Atkinson and the artist who made the window, Caroline Townshend.

But where was the window to go? Apparently the window remained in Townshend’s workshop until after World War Two (1947), when Townsend's niece Eva Bourne took the Shaw window away. Perhaps she asked Shaw what he wanted to do with it, but being 91 at the time, he didn’t care.The timing was good. In 1947 The Webb Memorial Trust bought a large Victorian country house near Dorking Surrey and called it the Beatrice Webb House after one of the Fabian Society’s important founders. The Trust established itself for 'the advancement of education and learning with respect to the history and problems of government and social policy'.

Beatrice and Sidney Webb, and George Bernard Shaw

Bourne presented the Shaw window to Beatrice Webb House in the very year the house was formally opened by the Trust as an educational venue for the Labour party and Fabian Society. The house was opened by Labour prime minister Clement Attlee, also a former LSE lecturer.

It is unclear what happened to the window next. Americans stole from the house in 1978 and took it to Phoenix Arizona, but were they fans of the Fabian Society or its mortal enemies? The window did not resurface until it appeared in a Sotheby's auction in July 2005. The Webb Memorial Trust bought it, transported it back to Britain and have now loaned it to London School of Economics, to grace the School's Shaw Library. The LSE’s Press and Information Office was delighted.This time the Fabian window was unveiled by a different Labour prime minister, Tony Blair. 2006 was the centenary year of the Labour Party, and the window had settled into the Fabian-founded London School of Economics and Political Science, the social science university institution founded by the Webbs and Shaw in 1895. And as Coxsoft Art News blog noted, 2006 was also the 150th anniversary of Shaw’s birth. The circle of connections and symbols was complete.

Saturday, April 14, 2012

Friedrich August von Hayek VS John Maynard Keynes

The confrontation between John Maynard Keynes, and his Austrian born free market adversary and friend, Friedrich August von Hayek, is one of the most famous in the history of contemporary economic thought.  The debate took place during the Great Depression of the 1930s about the causes and remedies of business cycle downturns in market economies.

The origins of this debate can be traced back to the book ‘Treatise on Money’ (1930) written by Keynes, a rather obscure book, that was superseded by his masterpiece ‘The General Theory of Employment, Interest, and Money’ (1936).  ‘Treatise on Money’ was a difficult book to read, and this probably caused Hayek and Keynes to misunderstand each other.  As Keynes and Hayek were building their economic models at the same time, their debate was very much dominated by terminological definitions.  One of the main topics that Keynes and Hayek corresponded about was the definition of savings and investment, and Hayek wrote three extensive systematic reviews of ‘Treatise of Money’. In turn, Keynes wrote only one article in response accusing Hayek of misrepresentation.

The debate on ‘Treatise of Money’ was rather one sided, and in 1932 Keynes withdrew from the debate to reshape and improve his central argument, which was to become ‘The General Theory’.  This work became probably one of the most influential economic treatises immortalizing Keynes as one of the greatest 20th century economists.  His lasting legacy, that was to become known as Keynesianism, is an economic perspective that argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes.  The theory, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank, and fiscal policy interventions by the government, to stabilize economic output over a business cycle.
Many Keynesian economists have not regarded Hayek as their man’s equal.  However, there is an increasing agreement today that Hayek, although controversial, was one of the most influential 20th century economists.  He made fundamental contributions to economics in the theory of business cycles, capital theory, and monetary theory.  He was also awarded the Nobel Prize for economics in 1974, jointly with Gunnar Myrdal, “for their pioneering work in the theory of money and economic fluctuations”.

Most of Hayek’s work in the 1930s and the 1940s focused on the Austrian theory of business cycles.  He believed that the price system of a free market was an efficient mechanism to coordinate people’s actions, and that markets were a result of spontaneous order that had evolved slowly over a long period of time, as a result of economic exchanges between people.  Contrary to the statement in Wapshott’s book, that the Austrian School economists were more theoretical and mechanistic in their approach to economics, Hayek believed that markets were highly organic, and any interference with the spontaneous order of free markets would distort their efficient operation.  In fact, it can be argued that Keynes’ economic theory was more mechanistic, as economies could be manipulated in a machine-like fashion to behave according to the wishes of economic planners.
A true Renaissance man, Hayek also made intellectual contributions in political theory, psychology, and methodology.  It is perhaps because of his work in political theory that some economists, especially those with a Keynesian orientation, have wrongly dismissed his core economic research as ideologically motivated.  This is the trap that Wapshott seems to walk in, either intentionally, or because of Hayek’s criticism of the Keynesian model, that had become de facto orthodoxy for the most part of the 20th century, extends many decades, and to some extent, has remained unnoticed, or ignored, by many economists and policy-makers.
Friedrich  von Hayek

Wapshott’s book ‘Keynes Hayek: The clash that defined modern economics’ is a commendable effort to bring economic thought to the attention of the general reading public.  It is written in an engaging ‘human interest’ style, and I am certain it will sell well.  Its publication is also well timed, because there has been a marked increase in public interest about economics and economic policy, as a consequence of the ‘Great Recession’, and sovereign debt crisis that currently grips the world.  And this is where the book fails to deliver.  A reader should not expect any great insight into how Keynesian or Hayekian economics could be applied in today’s economic situation beyond ‘truly Keynesian’, e.g. political, government policy interventions, as outlined in Wapshott’s book.

Nevertheless, the book provides a delightful insight into the personalities of Keynes and Hayek.  Keynes is portrayed as a privileged and bright economist at the top of his game effortlessly moving between academia, political elites, and his bohemian ‘Bloomsbury group’ of friends.  Hayek, however, is painted as a stiff, humorless, theoretical, and linguistically challenged, central European scholar, brought to London School of Economics (LSE) by Lionel Robbins to provide an alternative to the theories of Keynes and his ‘Cambridge circus’ of almost evangelical followers. (3) Robbins, and the dons of the LSE, considered Keynes’ view that when free markets were left to their own devices, this sometimes caused economic slumps, and that decisive government action was needed to pull the economy back to an equilibrium state of full employment, as heresy.  In contrast to Keynes, the Austrian economists thought that free markets, driven by people’s choices tended to adjust to equilibrium if left alone, and free from government intervention.  Concerned with the increasing intellectual and policy influence by the new generation of Keynesian economists at Cambridge, Hayek was appointed to LSE to counterbalance Keynesian interventionist doctrine.

Much of Wapshott’s book is about the political philosophy that divided Keynes and Hayek in terms of the role of the government in the running of an economy.  Much less is spent on understanding the economics upon which the big-picture conflict was based.  Indeed, Wapshott overemphasizes Hayek’s 1944 book ‘The Road to Serfdom’, on the dangers of socialism.  This book was written after Hayek moved to Britain where he observed that many British socialists were advocating some of the same policies of government control that had been advocated in Germany in the 1920s.  His basic argument was that government control of people’s economic lives was a form of totalitarianism: “Economic control is not merely control of a sector of human life which can be separated from the rest…. it is the control of the means for all our ends” (1944).  The book became a best seller in the USA and it established Hayek as a leading classical liberal, or ‘libertarian’, as he would be called today.  However, the success of the book, which was serialized in ’Reader’s Digest’, typecast Hayek as a free market ideologue, detracting attention away from his scientific contribution in economics.
Wapshott provides a ‘workmanlike’ description of Keynes’ theory, but his treatment of Hayek’s economics and the critique of ‘The General Theory’, is woefully inadequate.

The fundamental tenet of ‘The General Theory’ is that there is a direct and positive relationship between employment and the aggregate expenditure in an economy.  Therefore, according to Keynes, total demand determines the employment level in the economy, and the existence of unemployment indicates that aggregate demand is insufficient to employ all factors of production.  Keynes considered that the capitalist system was volatile, and there were times when the level of demand would be insufficient to maintain full employment.  Therefore, Keynes recommended that the public sector should address this by controlling the level of aggregate spending in the economy.  His recommendations to reduce unemployment can be categorized as follows:
• Interest rates should be reduced as far as possible to encourage private investment;
• A progressive tax system should be used to divert income from the wealthy to the lower paid, as their propensity to consume is higher; 
• The government should actively participate in public investment activity to supplement private investment, should this prove insufficient to maintain a level of aggregate expenditure that corresponds with full employment.
John Maynard Keynes

After the publication of ‘The General Theory’, Hayek did not critique Keynes’ work as was expected; this he regretted ever after (Hayek in Sanz-Bas, 2011).  However, Hayek’s critique of Keynes is incorporated into many of his works including ‘Monetary Nationalism and International Stability’ (1937), ‘Profit, Interest, and Investment’ (1939), ‘The Pure Theory of Capital’ (1941), ‘The Campaign Against Keynesian Inflation’ (1974), ‘The Fatal Conceit’ (1988). It is perhaps because of the extended period of Hayek’s writing that Wapshott fails to provide a full account of Hayek’s economic thinking in general, and the critique of Keynesian theory in particular.
It is beyond the scope of this review to discuss Hayek’s critique in detail.  However, one of Hayek’s main criticisms of ‘The General Theory’ was about Keynes’ assumption that unemployment could be solved through increases in aggregate spending.  Keynes linked aggregate spending with employment; if spending in the economy was increased sufficiently, this would result in workers getting their old jobs back, and the economic crisis would be averted.  In contrast to Keynes, Hayek argued that the crisis was a direct result of the misallocation of resources during the previous economic booms.  Hence, Keynes’ solution to reestablish the same distribution of resources would not provide a sustainable solution to unemployment.  The only solution to systemic unemployment, according to Hayek, required a liquidation of wrong investments and reallocation of productive resources.  To quote Hayek:
“If the real cause of unemployment is that the distribution of labour does not correspond with the distribution of demand, the only way to create stable conditions of high employment which is not dependent on continued inflation (or physical controls) is to bring about a distribution of labour which matches the manner in which in which a stable money income will be spent” (1950).

What we can infer is that Keynes’ solution to economic crises was a short-term panacea, while Hayek advocated a market driven solution that would result in a more sustainable productive economic structure.  Such a structure would be consistent with consumer preferences.  Trade cycles, according to Hayek, were a result of the government interference with the spontaneous order of the markets.  Hence, the only way to avoid booms and busts, trade cycles, is to prevent them form occurring in the first place.

Wapshott concludes his book by crediting Keynes for “saving capitalism a second time”.  He makes a reference to Keynesian doctrine for solving the Great Depression, and the applicability of the same dogmatic panacea for the Great Recession from the 2008 onwards.  He conjures the ghost of the Keynesian high priest, John Kenneth Galbraith, who scolds conservatives in the English-speaking countries for embracing Hayekian economics: “better to accept the unemployment, idled plants, and mass despair of the Great Depression, with all the resulting damage to the reputation of the capitalist system, than to retreat on true principle….”.  What Wapshott misses in his argument is Hayek’s central proposition: booms and busts are a result of malinvestment created by the government interference in the operation of free market, a result of the very policies advocated by the dogmatic Keynesians of today.