Thoughts in Between

by Matt Clifford

TiB 110: The new politics of central banking; existential risk; the upside of the Black Death (!); and more...

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The end of an era of apolitical central banking

Amid record falls in employment and GDP, the stock market is having a great week. This seems odd, so I asked about it on Twitter. The replies are striking. Some say stock market gains anticipate a V-shaped recovery. I’m skeptical (see Azeem Azhar on this) but even if that’s right, why were stocks so historically expensive before the crisis? The best answer is surely massive and sustained central bank intervention (or, if you prefer, in joke form). 

Central banking has cultivated a reputation as the most technocratic, apolitical branch of government. That era is ending. Richard Cantillon is about to become the most important 18th century philosopher you’d never heard of: the Cantillon Effect is the idea that increasing the money supply has important distributional - and so political - consequences. Today that means that, though intervention is sold as a public good, the financial institutions that are the Fed’s intermediaries reap the biggest benefits.

An unlikely alliance of left- and right-wing critics share this critique. From the libertarian right, Allen Farrington says “This is Not Capitalism” (thanks Ian for the link) and destroys economic well-being. From the left, Matt Stoller argues that we need new institutional arrangements that bypass Big Finance. Do read both pieces. I suspect pandemic-induced monetary intervention will fuel a new radicalism that cuts across party lines with difficult-to-categorise planks - possibly anti-fiat money, anti-financialisation, pro-UBI? The fight for the post-coronavirus era will be fierce and fascinating. 

Taking existential risk seriously

We talked a couple of weeks ago about the challenge of taking weird ideas - like global pandemics - seriously. Silicon Valley is proud of having been ahead of the curve, but forget that in most realms of human activity, unlike VC, being wrong a lot doesn’t pay off. It’s therefore likely that public opinion (and so politicians) systematically underestimates catastrophic risk. Jonathan Wiener calls this “the tragedy of the uncommons”. When there’s no past data to draw on, what can we do?

The best answer seems to be to estimate risks carefully and plan. Fortunately, The Precipice, a new book by Effective Altruism founder Toby Ord does just that (see this superb Slate Star Codex review for a good summary). Ord argues that we should take existential risk much more seriously, but thinks it comes from (perhaps) surprising places. He thinks we overestimate the existential threat of climate change and nuclear war and underestimate AI and, well, pandemics.

Ord has a long list of policy suggestions for reducing existential risk, all of which sound eminently sensible. A key idea is that we’ve become much more dangerous to ourselves over recent decades. This amazing anecdote about the Manhattan Project brings this home (see also this great reply). One hope is that in the aftermath of coronavirus we might take rare and destructive events more seriously. If so, The Precipice is a great starting point.

How valuable was the Black Death?

Several of you replied to the discussion of the long run impact of the Black Death two weeks ago, so I thought it was worth revisiting. I came across this paper from 2007 (or here as a column), which argues that plague was crucial in establishing the conditions for the industrial revolution - particularly higher incomes before 1700 and demand for manufactured goods.

This matters because it solves an important historical puzzle: how did Europe achieve higher per capita living standards before industrialisation? The basic argument is that the loss of two fifths of the population rapidly increased the land-to-labour ratio, which meant real wages soared. Higher incomes meant more demand for non-food goods (because of Engel’s law), which in turn accelerated urbanisation. 

Why were these changes not just absorbed in a classic Malthusian trap, where population outpaces economic growth? The authors’ grim conclusion is that early modern cities were such death traps that urbanisation drove average death rates to a permanently higher level, which “protected” income gains. The industrial revolution might have been the most important event in history, but for modern policy makers one hopes there are better ways to increase GDP per capita than to reduce the denominator by 40 percent. 

Quick links

BONUS: In the unlikely event that you don't feel you hear enough of me, I have three interview / podcasts out this week - with Venture Stories (alongside my co-founder Alice), Amazon Web Services, and Protocol.

  1. How to watch more, better TV. A bizarre but intriguing playbook for making the most of the Golden Age of Television.
  2. Terra cognita. The British Library has made some of its beautiful antique globes available digitally online.
  3. What year is it again? People under lockdown experience time dilation, later bed times and worse sleep quality.
  4. Change at Londinium. Great visualisation of the Roman Empire as a tube map.
  5. On the one hand... What do professional economists think about lockdowns? Interesting dataset.

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Until next week,

Matt Clifford