Keynesian Spirits

Chomsky on Artificial Intelligence

Noam Chomsky on Artificial Intelligence: it’s interesting that like Douglas Hofstadter, who’s nearly been forgotten and shunted aside in the academia, he disagrees with the current data-heavy approach. In addition, there are very interesting parallels with economics as we debate the utility of Randomised Controlled Trials.


Chomsky: I have to say, myself, that I was very skeptical about the original work [in AI]. I thought it was first of all way too optimistic, it was assuming you could achieve things that required real understanding of systems that were barely understood, and you just can’t get to that understanding by throwing a complicated machine at it. If you try to do that you are led to a conception of success, which is self-reinforcing, because you do get success in terms of this conception, but it’s very different from what’s done in the sciences. So for example, take an extreme case, suppose that somebody says he wants to eliminate the physics department and do it the right way. The “right” way is to take endless numbers of videotapes of what’s happening outside the video, and feed them into the biggest and fastest computer, gigabytes of data, and do complex statistical analysis — you know, Bayesian this and that [Editor’s note: A modern approach to analysis of data which makes heavy use of probability theory.] — and you’ll get some kind of prediction about what’s gonna happen outside the window next. In fact, you get a much better prediction than the physics department will ever give. Well, if success is defined as getting a fair approximation to a mass of chaotic unanalyzed data, then it’s way better to do it this way than to do it the way the physicists do, you know, no thought experiments about frictionless planes and so on and so forth. But you won’t get the kind of understanding that the sciences have always been aimed at — what you’ll get at is an approximation to what’s happening.

And that’s done all over the place. Suppose you want to predict tomorrow’s weather. One way to do it is okay I’ll get my statistical priors, if you like, there’s a high probability that tomorrow’s weather here will be the same as it was yesterday in Cleveland, so I’ll stick that in, and where the sun is will have some effect, so I’ll stick that in, and you get a bunch of assumptions like that, you run the experiment, you look at it over and over again, you correct it by Bayesian methods, you get better priors. You get a pretty good approximation of what tomorrow’s weather is going to be. That’s not what meteorologists do — they want to understand how it’s working. And these are just two different concepts of what success means, of what achievement is. In my own field, language fields, it’s all over the place. Like computational cognitive science applied to language, the concept of success that’s used is virtually always this. So if you get more and more data, and better and better statistics, you can get a better and better approximation to some immense corpus of text, like everything in The Wall Street Journal archives — but you learn nothing about the language.

A very different approach, which I think is the right approach, is to try to see if you can understand what the fundamental principles are that deal with the core properties, and recognize that in the actual usage, there’s going to be a thousand other variables intervening — kind of like what’s happening outside the window, and you’ll sort of tack those on later on if you want better approximations, that’s a different approach. These are just two different concepts of science. The second one is what science has been since Galileo, that’s modern science. The approximating unanalyzed data kind is sort of a new approach, not totally, there’s things like it in the past. It’s basically a new approach that has been accelerated by the existence of massive memories, very rapid processing, which enables you to do things like this that you couldn’t have done by hand. But I think, myself, that it is leading subjects like computational cognitive science into a direction of maybe some practical applicability…

Q: engineering?

Chomsky: …But away from understanding. Yeah, maybe some effective engineering. And it’s kind of interesting to see what happened to engineering. So like when I got to MIT, it was 1950s, this was an engineering school. There was a very good math department, physics department, but they were service departments. They were teaching the engineers tricks they could use. The electrical engineering department, you learned how to build a circuit. Well if you went to MIT in the 1960s, or now, it’s completely different. No matter what engineering field you’re in, you learn the same basic science and mathematics. And then maybe you learn a little bit about how to apply it. But that’s a very different approach. And it resulted maybe from the fact that really for the first time in history, the basic sciences, like physics, had something really to tell engineers. And besides, technologies began to change very fast, so not very much point in learning the technologies of today if it’s going to be different 10 years from now. So you have to learn the fundamental science that’s going to be applicable to whatever comes along next. And the same thing pretty much happened in medicine. So in the past century, again for the first time, biology had something serious to tell to the practice of medicine, so you had to understand biology if you want to be a doctor, and technologies again will change. Well, I think that’s the kind of transition from something like an art, that you learn how to practice — an analog would be trying to match some data that you don’t understand, in some fashion, maybe building something that will work — to science, what happened in the modern period, roughly Galilean science.


Camus and Resistance

From Claire Messud’s review of Camus’ recently translated (by Arthur Goldhammer, who also translated Piketty’s Capital) Algerian Chronicles:

Camus to the French: “we must refuse to justify these methods [reprisals and torture against Algerian resistance and its supporters] on any grounds whatsoever, including effectiveness. Once one begins to justify them, even indirectly, no rules or values remain.”

Camus to the FLN, the movement for Algerian independence: “No matter what cause one defends, it will suffer permanent disgrace if one resorts to blind attacks on crowds of innocent people.”

If criticism is to be effective, he continues, “both camps must be condemned.”

Camus on the armchair intellectuals who endorse terrorist violence from afar: “Each side thus justifies its own actions by pointing to the crimes of its adversaries. This is a casuistry of blood with which intellectuals should, I think, have nothing to do, unless they are prepared to take up arms themselves.”

Camus, in a letter to Kessous on Algerian resistance: “Bloodshed may sometimes lead to progress, but more often it brings only greater barbarity and misery[…] I will be told, as you will be told, that the time for compromise is over and that the goal now must be to wage war and win. But you and I both know that there will be no real winners in this war…”

Statistical Analysis of Retaliation in the Israel-Palestine Conflict

The summary from Johannes Haushofer’s empirical paper on retaliation in the Palestine – Israel conflict (with all caveats of econometric limitations, particularly when dealing with political and historical matters):

“Ending violent international conflicts requires understanding the causal factors that perpetuate them. In the Israeli–Palestinian conflict, Israelis and Palestinians each tend to see themselves as victims, engaging in violence only in response to attacks initiated by a fundamentally and implacably violent foe bent on their destruction. Econometric techniques allow us to empirically test the degree to which violence on each side occurs in response to aggression by the other side.

Prior studies using these methods have argued that Israel reacts strongly to attacks by Palestinians, whereas Palestinian violence is random (i.e., not predicted by prior Israeli attacks). Here we replicate prior findings that Israeli killings of Palestinians increase after Palestinian killings of Israelis, but crucially show further that when nonlethal forms of violence are considered, and when a larger dataset is used, Palestinian violence also reveals a pattern of retaliation: (i) the firing of Palestinian rockets increases sharply after Israelis kill Palestinians, and (ii) the probability (although not the number) of killings of Israelis by Palestinians increases after killings of Palestinians by Israel.

These findings suggest that Israeli military actions against Palestinians lead to escalation rather than incapacitation. Further, they refute the view that Palestinians are uncontingently violent, showing instead that a significant proportion of Palestinian violence occurs in response to Israeli behavior. Well-established cognitive biases may lead participants on each side of the conflict to underappreciate the degree to which the other side’s violence is retaliatory, and hence to systematically underestimate their own role in perpetuating the conflict.”

‘He brought to life lost voices’: Hobsbawm passes away

Eric Hobsbawm passed away on the 1st of October, 2012. While we may not agree with all his ideas, he was undoubtedly an extraordinary historian and intellectual. Here’s Hobsbawm on the Hungarian revolution of 1956; on Britain’s inter-war experience; on meeting Gorbachev; on his fellow historian, Tony Judt, and on more recent, turbulent, affairs – the failure of ‘socialism’ and bankruptcy of capitalism. You can also read Edward Said’s review on his last major work, as well as the views of a diverse group of historians, including Niall Ferguson.

A Historical Look at Violence in Assam, India

The northeastern Indian state of Assam has been witnessing large-scale violence since around a week. India’s northeastern regions are a highly diverse place, supporting around 200 ethnic and tribal groups. Nearly a 100 people have been killed, many more are missing, and around 400,000 people have been displaced and are now living in relief camps as the violence continues. Such violence between the the indigenous population and recent immigrants started in the 1970s, with massacres occurring at various times, and these tensions have risen once more.

But, the purpose of this piece is not to discuss this topical question, but to start exploring an even longer history of resistance and violence between the indigenous residents of Assam and the Indian state. This very violent past offers quite an interesting perspective on modern, democratic India. It would be instructive to understand what has happened in Assam since the British left the subcontinent as it shows the strengths and weaknesses of the current political structure in India, and sheds a light on other important conflicts, such as the one in Kashmir. The noted British historian, Perry Anderson, has written a series of very insightful, and thought-provoking articles on India in the London Review of Books. Below is one long excerpt from his article, ‘After Nehru’, which sheds some light on the Assam issue.

“On the symmetrical wing of the union to the east, matters were no better. There the British had conquered an area larger than UP, most of it composed of the far end of what James Scott has described as the Appalachia of South-East Asia: densely forested mountainous uplands inhabited by tribal peoples of Tibeto-Mongoloid origin untouched by Hinduism, with no historical connection to any subcontinental polity. In the valleys, three Hindu kingdoms had long existed, the oldest in Manipur, the largest in Assam. The region had lain outside the Maurya and Gupta Empires, and had resisted Mughal annexation. But by the early 19th century Assam had fallen to Burmese expansion, and when the British seized it from Burma they did not reinstate its dynasty, while leaving princely rule in the much smaller states of Manipur and Tripura in place. The spread of tea plantations and logging made Assam a valuable province of the Raj, but the colonial authorities took care to separate the tribal uplands from the valleys, demarcating large zones throughout the region with an ‘Inner Line’ and classifying them as ‘Excluded and Unadministered Areas’, which they made little effort to penetrate. So remote were these from anything to do with India, even as constituted by the Victorian Empire, that when Burma was detached from the Raj in 1935, officials came close to allocating them to Rangoon rather than Delhi.

The arrival of independence would, in its own way, make the links of the North-East to the rest of India even more tenuous. For after partition, only a thin corridor, at its narrowest some 12 miles wide, connected it to the body of the union. Just 2 per cent of its borders were now contiguous with India – 98 per cent with Bangladesh, Burma, China, Nepal and Bhutan. Manipur had no direct road connection to India at all. Confronted with difficulties like these, the Congress leaders did not stand on ceremony. The ruler of Manipur had not been rounded up along with his fellow princes by V.P. Menon in 1947, and by 1949 was resisting full integration. Briefed on the problem, Patel had just one short question: ‘Isn’t there a brigadier in Shillong?’ Within days, the maharajah was kidnapped in Shillong, cut off from the outside world and made at gunpoint to sign his kingdom into oblivion. With it went the elected assembly of the state, which for the next decade was ruled – like Tripura, brigaded into the union at the same time – with no pretence at popular consultation by a commissioner from Delhi.

Dispersed tribes in the uplands did not permit of this kind of coup de main, and there trouble started even before the departure of the British. In Assam, about half the Naga population of 1.5 million – some 15 major tribes, speaking thirty languages – had been converted to Christianity by Baptist missionaries, and acquired an educated leadership in the shape of a Naga National Council, which made clear it did not want to be impressed into any future Indian state. A month before independence, a delegation called on Gandhi in Delhi. ‘You can be independent,’ he told them, characteristically adding: ‘You are safe as far as India is concerned. India has shed her blood for freedom. Is she going to deprive others of their freedom? Personally, I believe you all belong to me, to India. But if you say you don’t, no one can force you.’ Congress was less emollient. Nehru dismissed the emergent Naga leader, Phizo, as a crank, and the idea of Naga independence as absurd.

Undeterred, the Naga leaders declared independence a day before Britain transferred power to India. Congress paid no attention. Phizo continued to tramp villages, increasing support among the tribes. In March 1952, he met Nehru in Delhi. Beside himself at Phizo’s positions, Nehru – ‘hammering the table with clenched fists’ – exclaimed: ‘Whether heavens fall or India goes into pieces and blood runs red in the country, whether I am here or anyone else, Nagas will not be allowed to be independent.’ A year later, accompanied by his daughter, he arrived on an official visit as prime minister at Kohima, in the centre of Naga country, in the company of the Burmese Premier U Nu. Petitioners were brushed aside. Whereupon, when he strode into the local stadium to address a public meeting, the audience got up and walked out, smacking their bottoms at him in a gesture of Naga contempt. This was an indignity worse even than he had suffered among the Pathans. The Naga National Council was de-recognised, police raids multiplied. An underground Naga army assembled in the hills.

By late 1955 a Naga Federal Government had been proclaimed, and a full-scale war for independence had broken out. Under its commander-in-chief, two divisions of the Indian Army and 35 battalions of the paramilitary Assam Rifles, a largely Gurkha force notorious for its cruelties, were dispatched to crush the uprising. As in Malaya and Vietnam, villagers were forcibly relocated to strategic hamlets to cut off support for ‘hostiles’ – Indian officialese banning even use of the term ‘rebels’. In 1958, Nehru’s regime enacted perhaps the most sanguinary single piece of repressive legislation in the annals of liberal democracy, the Armed Forces (Special Powers) Act, which authorised the killing out of hand of anyone observed in a group of five persons or more, if such were forbidden, and forbade any legal action at all against ‘any person in respect of anything done or purported to be done in exercise of the powers of this regulation’, unless the central government so consented. With this licence to murder, Indian troops and paramilitaries were guaranteed impunity for atrocities, and made ample use of it. The brutality of Delhi’s occupation of Nagaland far exceeded that in Kashmir. But as in Srinagar, so in Kohima pacification required the suborning of local notables to construct a compliant façade of voluntary integration, work that in Naga territory was entrusted to the Intelligence Bureau. Once assured of this, Nagaland was promoted to statehood within the union in 1963. Half a century later, the Armed Forces (Special Powers) Act is still required to hold the region down.”

‘After Nehru’ by Perry Anderson

AlJazeera on the history of the current violence

A Scam at the Heart of a £350 Trillion Market

Barclays Bank has been charged by Britain’s rejuvenated financial regulator, the Financial Services Authority, as well as the US regulator, Commodities Futures Trading Commission, for manipulating a key interest rate – the London Interbank Borrowing Rate (LIBOR).

This manipulation began around 2005 and continued for around five years. LIBOR indicates an average of borrowing rates for banks in all top currencies, and is used as the benchmark for financial contracts and interest rates around the world, which is a market worth £350 trillion.

This is how LIBOR is calculated: the British Bankers’ Association (BBA) asks each bank what rate it expects to pay to borrow from other banks for relatively short time periods – from overnight loans to 12 months in a range of currencies. It is important to note that such short-term borrowing was the primary source of funding for a lot of banks. Before the financial crisis, this rate used to be quite low, because banks didn’t see much risk in lending to each other as they were all profitable, and the markets were functioning perfectly. However, when the subprime crisis exploded, it became clear that many of the assets that banks held on their balance sheets may be worth much less than thought, all banks panicked, LIBOR shot up, and banks stopped lending to each other. Nobody was willing to trust anyone. How could they know that the bank they were lending to was fundamentally sound, and wouldn’t be bankrupt in the future?

It was in this environment that Barclays, and other involved banks, made the most by manipulating the rate. It was certainly used to boost profits, but more importantly, the banks manipulated to rate and pushed it lower during the financial crisis. This was done to convey the false signal that the banks were sound, that their borrowing costs weren’t too high, and that they didn’t need any help. Thus, Barclays was able to dupe foreign investors, mostly cash rich, but risk-averse sovereign funds, during the panicky period of 2008. Barclays, unlike RBS, said no to UK government funding, and instead asked sovereign funds to invest in the bank.

For such an important interest rate to be calculated in such a manner seems cavalier. The calculations are done in such a manner that outliers are eliminated so that one bank cannot really influence the rate, but in this episode, while only Barclays has been fined yet on this matter, others like the Royal Bank of Scotland, UBS, Bank of America, Citigroup and a dozen other banks (spanning 3 continents) are being investigated as well. Hence, this was most probably an industry-wide practice, and wasn’t solely limited to Barclays.

You can see the flaw in the above method: the BBA asks banks to supply them with their borrowing rate. What happened at Barclays was that its traders had some positions in the market – they had bought an asset, or promised to purchase it, or they had some other financial position, and a change in this crucial interest rate would benefit their trades. Thus, the traders colluded with the treasury department (which sends this information to the BBA) to supply incorrect rates and thus manipulate them. It must be noted that normally there is supposed to be no communication whatsoever between these two parties.

Here are some useful readings on this issue:

Q&A by FT 1

Q&A by FT 2

BBC’s excellent Paul Mason with a clear, detailed post on Barclays’ manipulative acts

A primer on financial products

Insightful Readings on the Economic Crisis

Below are some of the clearest, most insightful and thought-provoking articles, essays and lectures on the economic and financial crisis that began in 2007.


The Real Solution is Growth – Daron Acemoglu

Rethinking Macroeconomics – Jeffery Sachs

How Did Economists Get It So Wrong? – Paul Krugman

The Crisis on 2008: Structural Lessons for and from Economists – Daron Acemoglu

An Agenda for reforming economic theory – Joseph Stiglitz

Has financial development made world riskier? – Raghuram Rajan

How much wealth do you need to live comfortably?

“In a survey of wealthy people (in 2005), those with net worth of over $1 million said that they needed $2.4 million to live comfortably, those with at least $5 million in net worth said that they needed $10.4 million, and those with at least $10 million wanted $18.1 million.”

Apparently, you can never have enough…

HT to Professor Perloff.

In Silicon Valley, Millionaires Who Don’t Feel Rich

Why Do Sandwiches Taste Better When Someone Else Makes Them?

This fascinating insight from Daniel Kahneman has seemingly solved one of the mysteries, relating to meals in general, of my stay (without my family) in Tilburg. However unappealing it may be, it nevertheless remains possible that I simply cooked much worse than others…


“When you make your own sandwich, you anticipate its taste as you’re working on it. And when you think of a particular food for a while, you become less hungry for it later. Researchers at Carnegie Mellon University, for example, found that imagining eating M&Ms makes you eat fewer of them. It’s a kind of specific satiation, just as most people find room for dessert when they couldn’t have another bite of their steak. The sandwich that another person prepares is not “preconsumed” in the same way.”

Role of Household Leverage in 2007 Recession

Below is the summary of a summary – the highly illuminating and rigourous work of Atif Mian (Berkeley) and Amir Sufi (Chicago) on the intersection of finance and macroeconomics, specifically on how household leverage influenced real economic outcomes:

1. From 2001 to 2007, household debt doubled, from $7 trillion to $14 trillion. The household debt-to-income ratio increased by more during these six years than it had in the prior 45 years. The household debt-to-income ratio in 2007 was higher than at any point since 1929.

2. Mortgage-related debt makes up 70 to 75 percent of household debt and was primarily responsible for the overall increase in household debt. The expansion of new mortgage originations was much larger in zip codes with a large fraction of low credit-quality households.

3. The fraction of home purchase mortgages that were securitized by non-GSE (government sponsored enterprise) institutions rose from 3 percent to almost 20 percent from 2002 to 2005. Non-GSE securitization primarily targeted zip codes that had a large share of subprime borrowers. In these zip codes, mortgage denial rates dropped dramatically and debt-to-income ratios skyrocketed. Expansion in mortgage credit did not reflect productivity or permanent income improvements for marginal borrowers.

4. The expansion in mortgage credit was more likely to be a driver of house price growth than a response to it.

5. From 2007 to 2009, foreclosures were responsible for 20 to 30 percent of the decline in house prices, 15 to 25 percent of the decline in residential investment, and 20 to 35 percent of the decline in auto sales.

6. Special interest pressure via campaign contributions from the financial industry influenced voting behavior on the financial rescue legislation that was designed to provide support to the banking sector in 2008. Similarly, constituent pressure from delinquent and under-water homeowners significantly influenced legislators to vote in favor of legislation that promoted mortgage modifications.


NBER Research Summary