MAIN IDEA:

Alinsky’s main idea is that American society divided into Haves, Have Little Want Mores (middle class), and Have-Nots. He was firmly on the side of Have-Nots and sought to empower Have-Nots to transfer resources from Haves to themselves. The book is philosophical, moral, and practical discussion on why the revolution should occur and how to promote it using opportunities presented by democratic character of society. Alinsky does not see this democratic character as absolute and he does not attempt to hide that. He believes that as soon as Have-Nots took power any moral and democratic niceties should not bind them.

The biggest part of book is dedicated to practical themes of preparing organizers (they used to be called revolutionaries) and how to organize masses to achieve objectives: mainly resource transfer from Haves and Middle class to Have-Nots. Alinsky, however believes that Have-Nots could not achieve power without attracting a significant part of middle class and he convinced it is possible by discrediting American dream of material prosperity in the eyes of young members of middle class and giving them better alternatives which he does not bother to specify. As practical guide to political fight it is product of long end effective career of practitioner and it provides wonderful examples of raising rubble and antagonizing groups of society against each other.

DETAILS:

Prologue

Saul Alinsky considers himself a part of revolutionary force and sees its targets as both moral and material. His hope resides in the young generation of American society (baby boomers at the time) who mainly came from the middle class background but reject similar middle class life for themselves because they saw its devastating effect on quality of life of their parents. His objective in this book is to provide this young revolutionary generation with meaning of life and tools to achieve this meaning by using democracy and organizing individuals who are not happy with existing arrangements into active force to change these arrangements.

The Purpose

This book is written for Have-Nots and designed as instruction on how to take power from Haves. Saul compares it with Machiavelli’s “The Prince”, the book that could be considered an instruction for Haves on how to keep their power. The way to achieve power for Have-nots is revolution. Alinsky sees history as sequence of revolutions and inevitable counterrevolutions, making two steps forward then step back. So his objective is to make revolutionary steps ahead longer and counterrevolutionary steps back shorter.

Alinsky keeps stressing his division of society into trinity of Haves, Have-Nots, and Have-a-little Want Mores. From the last group should come great leaders of revolution who will stir up frustrated and mentally weak Have-Nots and organize them into movement that will disposes Haves. However majority of this middle group will remain inactive due to their internal conflict of having too little to support Haves and too much to support Have-Nots. Alinsky perceives this revolution as moral imperative and as necessary in everybody’s interests including Haves because a man who has a loaf of bread and does not want to share with hungry is going to be killed by hungry to get his bread. Alinsky wants to take bread from Haves without killing.

Of Means and Ends

This chapter is somewhat long and detailed discussion on question “Does the means justify the ends?” Generally Alinsky’s answer is YES, but with a caveat: “Does this particular end justify these particular means?” Actually his view is quite interesting because he views the whole human life as a story of means and ends so he comes up with a set of rules for ethics of ends and means:

1. Concern with ethics of means varies inversely with personal interest in and/or distance from conflict.
2. The judgment of ethics of means directly depends on politics of person making this judgment.
3. In the war ends justifies almost any means. The only reason to comply with any rules whatsoever is possibility of retaliation in kind.
4. Any judgment about ethics of ends and means must be made in context of time when it occurred not in abstract.
5. Concern for ethics increases with number of means available and vice versa.
6. The less important the end to be desires, the more one can engage in ethical evaluation of means.
7. Generally success or failure to achieve ends is determinant of ethics of means. The point with allusion to American Revolution: There is no such thing as successful traitor because if one succeeds he becomes a founding father.
8. The morality of means depends on these means being deployed at the time of imminent victory or imminent defeat. Here Alinsky goes into condemnation of American use of nuclear weapons.
9. Opposition automatically judges any effective means as being unethical.
10. One does what he can with what he has and clothe it with moral garments.
11. The Goals must be phrased in general terms like “Common Welfare” or “Bread and Peace”

Interestingly enough at the end of this chapter Alinsky find it necessary to declare his own means in the most elevated terms as “Free and Open society anchored in complex of high values that include the basic morals of all organized religions.” In his view Democracy is not the end, but political means to the ends of preciousness of human life, freedom, equality, justice, peace, and right to dissent.

A Word About Words

This chapter is about 5 key words of politics:

POWER: It is a key for Alinsky because “life without power is death” so he is looking for power to use it constructively in achieving his goals

SELF-INTEREST: Alinsky seems to go against negativity of the term and links it to question of morality. In short, whatever is in our self-interest we find ways to consider moral and visa versa. He also seems to believe that in some cases like when white students fighting for civil rights, they demonstrate “wondrous quality of man” to overcome “natural dams of survival and self-interest”

COMPROMISE: For Alinsky it is a wonderful world because he sees it as a temporary rest stop while moving in direction of his objectives. However his understanding of compromise does not include notion of retreat.

EGO: This is a key quality for organizer and is different from ego of leader or egoism of regular people. The ego of organizer is fed by ability to transfer Have-nots into united group with mass ego capable to fights for whatever it wants. In this case organizer is supreme creator of this new entity of the mass.

CONFLICT: This is an essential core of free and democratic society. Alinsky calls it “the harmony of dissonance”

The Education of an Organizer

This chapter is detailed review of methods used to educate organizers. The key methods are merging with the group, internalize their goals and attitudes, and test any concepts by real life experiences. The quality necessary for good organizer Alinsky defines as: Curiosity, Irreverence, Imagination, Sense of humor, somewhat Blurred vision of the better world, Organized personality, Well integrated political schizoid, Oversized Ego, Free and open mind, and Political relativity.

Communication

Ability to communicate effectively is indispensible. Without it organizer does not exists. It includes ability to understand life experience of other people and bring communication message within this experience. Another important rule is to arrange message in such way that people would believe that they come to it on their own. Instead of transmission of ideas they should be patiently nudged so they would come with feeling of ownership even if the feeling were false.

In the Beginning

This chapter is about methodology of organizer’s action. Specifically it is about initial process of establishing his identity and value for the group.

Tactics

Here Alinsky again uses his marvelously well organized mind and comes up with tactical rules for organizers:

1. Power is not only what you have, but what your enemy thinks you have
2. Never go outside experience of your people
3. Wherever is possible go outside experience of your enemy
4. Make enemy to live up to their own book of rules
5. Ridicule is most potent weapon
6. A good tactic is the one your people enjoy
7. A tactic that drags on too long becomes a drag.
8. Keep the pressure on
9. The thread is usually more terrifying than the thing itself
10. If you push negative hard and deep enough it will break through its counter side
11. The price of successful attack is a constructive alternative
12. Pick the target, freeze it and personalize it

The Genesis of Tactic Proxy

The point of this chapter is to stress that rules are just a compilation of effective methods not really “how to manual”. The key for success is improvisation and constant pragmatic adjustments to real life situation. As example story of development of proxy fights tactic is provided.

The Way Ahead

Alinsky sees way ahead in organizing American middle class and especially its young members – student for action to destroy existing political order of America. The way to do it is to use insecurity of middle class and increasing difficulty to achieve traditional American value of prosperity in order to generate hate and enmity to upper classes that already achieved such prosperity and eventually substitute traditional value of prosperity with the value of denying prosperity to others. He seems to consider this the way to a beautiful world without poverty, discrimination, and all other ills of American society.

MY TAKE ON IT:

Alinsky explicitly rejects both communism and capitalism, but does not provide any vision for future structure of society where Have-Nots have power. His stated objective is to teach how to organize Have-nots for power and how to use this power for more equitable distribution of means of life for all people. No word however on where these means of life would come from. He believes that the future is organizing of middle class to join poor in massive robbery of existing wealth, but significant bulk of wealth belongs to middle class so somehow he misses impossibility of long term robbery of middle class by middle class.

However his tactics are brilliant, not that much as tool for achieving something for the poor, but as political tools to achieve power in democracy by using misconceptions inherent in world views of young people on early stages of their live when indoctrination provided by schools and universities is not yet overridden by real life experiences. Alinsky’s spiritual grandchildren who organized Obama’s complain created a glowing example of successful use of his ideas. Too bad that political power in democracy has quite short shelf live if not supported by substantial improvement of quality of life. The quality of life as it changed under Obama stinks, which spells doom and gloom to the Party of Bureaucracy – Democrats as soon as their adversaries – Republican start using Alinsky’s rules with full power. If republicans find in themselves an ability to redesign themselves from the Party of Plutocracy into Party of Middle Class, the prosperity would come back and at the level unimaginable today.

MAIN IDEA:

The income tax is nothing more than robbery where robbers are government bureaucrats and politicians and victims are productive people. The income tax is evil per logic of Judeo-Christian tradition, that American culture and society is based on. The implementation of income tax in 16^th amendment was a revolution that completely changed the nature of American society from society of free individuals whose freedom was based on absolute private property into society of government subjects whose private property and consequently freedom are severely restricted by taxation and regulation.

This change in society led inevitably to corruption at all levels because all individuals, either at the top of all powerful government or at the bottom in masses being robbed, use all tolls available regardless of their morality either to hide resources from taxation or transfer to themselves resources confiscated from other people via income tax. The only hope is strength of American culture, which always managed to produce individuals passionately dedicated to freedom, and American constitutional structure of formally sovereign states. If enough people understand evil character of income tax and act to reverse results of income tax revolution of 1913, it will be possible to restore lost American freedoms. The tool to be used for such restoration could be revolt of state governments, which together can decrease power of the federal government and restore true union as it was established in original constitution.

DETAILS:

1. Solomon’s Yoke

Solomon’s yoke was cost of maintaining political establishment via income tax. This and other source demonstrate that this method of resource acquisition was very old as well as method to avoid it.

2. Politically Speaking What Is “Evil”?

This is a discussion of notion of evil as it related to Judeo-Christian tradition and American traditions derived from it. At the end it states that 16^th Amendment that established income tax transformed American society into something alien to its roots as society of free people.

3. Yours Is Not Your Own

This is discussion of relation of income tax to property rights with very logical conclusion that income tax destroyed absolute property right in USA substituting it with absolute government supremacy over resources. It also links income tax to Marxism as the first step in elimination of private property. It correctly infers that elimination of private property would lead to destruction of society as it did happened in Soviet Union.

4. How it came upon us •

This is a history of fight by government-connected elite against property owners for establishment of income tax. Initially for the first 100 years of republic it was unsuccessful, but victory came to elite via propagation of “ability to pay” doctrine and enfranchising masses of people who are not able to pay and actually receive support from government. The side effect of this victory is change of capital structure of the country and decrease in productivity and wealth generation.

5. The Revolution of 1913.

This is discussion of 16^th amendment not as a reform, but rather as revolution, albeit it was initially slow moving and not obvious for people. This revolution had converted republic of free and independent property owners and citizens into country of democratically elected bureaucrats and politicians, reducing American citizens to subjects of political elite. The conclusion is that 16^th amendment had undermined immunities of property, body, and mind; and that the freedoms won in 1776 were lost in 1913.

6. Soak the Poor

This chapter makes case that expansion of government did the biggest blow to the well being of the poor. The reason is impossibility to hide wages from taxation and from placing government in control of intergenerational wealth transfers taking big chunks of wealth from transfers between productive middle to their children by using government financed education and between productive middle and their parents via social security.

7. Corruption and Corruption

Corruption in American usage means use of public office for betterment of politician or bureaucrat. This chapter demonstrates how income tax make corruption wide spread and inevitable, undermining morals of the society.

8. A Possible Way Out

Author sees the only way to salvation from the evil of income tax and New Deal, which he considers an American form of socialism, in the doctrine of federalism: division of authority between states and federal government.

9. Competition in Government

This is more detailed discussion of how competition between state level and federal level bureaucrats can help to repeal 16^th amendment and restore American freedoms.

1. Union Forever

This is analysis of mechanics of federal dominance over states when federal government collects income tax and then grants some of this money back to the states with lots of strings attached. If states are able to break down this mechanism by repealing 16^th amendment they will restore original union of sovereign states.

1. For Freedom’s Sake

Author believes that income tax put America on the road to destruction of traditions and civilization that produced America. However he hopes that American culture is strong enough to produce individuals capable to restore original republic of free people and the first step in this restoration will be repeal of 16^th amendment.

MY TAKE ON IT:

I agree with just about everything except for idealization of the past and recipe for the future. I think that American freedoms always were severely restricted even if not by the federal government than by state and local government banditry.

As for the future, I do not see division of power between states as the real hope because the state politicians and bureaucrats are not independent groups, but really just part of one countrywide hierarchical structure of political parties. When Democrats or Republicans come to power they become part of countrywide structure that has control over combination of federal, state, and judicial power. Depending on variation set of offices in the hands of each party the policy is changing either to provide slightly higher preference to bureaucrats if Democratic Party has more control, or to plutocrats if Republican Party has more control, but always at the expense of productive part of population.

However I do see lots of hope in individuals’ strife for the better life that would always make requirements to provide more resources and freedom of action: impossibility under bureaucratic control. If the idea of equal and marketable rights for natural resources takes root, than everybody have something to sell and justification of income tax as necessary for resource redistribution to help poor and maintain social peace would disappear. As soon as majority understand that income tax is redistribution from them to bureaucrats and politicians, the democratic process would lead to creation (rather then restoration) of society based on ideals of 1776. The American culture of necessity to have at least pretense of freedom, combined with generally well armed population would prevent any attempt of violent disruption of democratic process by bureaucrats and politicians, so they would rather not even think about it. It short, I think that future is bright.

MAIN IDEA:

The main idea is that religion could not be possibly discarded as something that is not essential for human survival. It has high value as adaptation tool at the level of group’s evolutionary survival. Moreover, it is highly effective and often is necessary tool for survival even in contemporary world when individual has high level of dependency on the group. Finally the analysis of religion could and should provide tools and methods to analyze other unified systems of human society.

DETAILS:

Introduction: Church as Organism

This is about looking at religion and church as unit of natural selection, pretty much the same way as it is commonly done for individual organism. Actually this approach to the group applies not only to the church, but also to any grouping in human society. More specifically this book designed to treat organismic concept of religious groups as scientific hypothesis.

Chapter 1. The View from Evolutionary Biology

The first chapter is review of relevant concepts of evolutionary theory. It goes through notion of functional thinking and defines fundamental problem of social life as conflict between individual and group survival. Darwin’s solution to this fundamental problem is view of adaptation and survival of individual with two levels of characteristics: individual and group with survival assured for individuals with best mix for adaptation. In this case culture, religion, and, morality are group characteristics adaptive for survival or not. Author also reviews here the issue of group definition and its relation to organism definition and defines human group as adaptive unit. He uses this definition to develop and present table of Evolutionary Theories of religion:

1. Religion as an Adaptation
   1. Religion as group-level adaptation
   2. Religion as Individual-level adaptation
   3. Religion as a cultural parasite that evolves at expense of individuals and groups
2. Religion as Nonadaptive
   1. Religion as adaptive in past environments and maladaptive in modern
   2. Religion as byproduct (spandrel) of genetic and/or cultural evolution.

 Chapter 2. The View from the Social Sciences

Here is presented Rodney Stark’s rational choice theory of religion (199x). The table of 20 propositions provided to explain this theory and another table of just 6 propositions to demonstrate its adaptive quality. Another example is somewhat older ideas of functionalism is Emile Durkheim “Elementary Forms of Religious Life” (1912). Also provided is philosophical assessment of functionalism via articles related to Holism – general idea of the Whole being more than sum of its parts. The chapter ends with idea that extremes are in the past and modern common denominator is multi-level theories of adaptation

Chapter 3. Calvinism: An Argument from Design

This chapter is a detailed review of adaptive value of religion based on history of Calvinism. It is natural before and after experiment, which quite convincingly demonstrates that “after” Geneva society was more functional and its members more adaptive to environment then “before”.

 Chapter 4. The Secular Utility of Religion: Historical Examples

This chapter provides real live examples of functional value of religion:

1. The Water temple system of Bali
2. Survival supporting functionality of Judaism
3. Early Christian Church

Finally table presented with 25 randomly selected religions and future research of their functionality discussed. However even at the first glance all these religions provided for basic functional value.

Chapter 5. The Secular Utility of Religion: The Modem Literature

This chapter is a review of contemporary research and literature about impact of religious believe and participation on prosperity of individuals or lack thereof. The results are very interesting. They demonstrate that religion does deliver benefits and it is in proportion to how strict and demanding it is, but only for individuals who need support such as new immigrants and/or individuals with personal problems. This issue reviewed using example of Korean church in Houston. Another issue is related to benefits and participation during life cycle of religious denominations. It seems to be going through dynamic process of poor helping each other to obtain mutual benefits via congregation, becoming richer in process and eventually falling out when help is not needed any more, normally in the next generation when gratitude is not carrying lots of weight any more.

 Chapter 6. Forgiveness as a Complex Adaptation

This chapter presents analysis of religion from the point of view of Games theory. From this point of view religion often could be presented as set of adaptive conditional rules of type “DO X if Y is TRUE”. It looks like typical religion rules such as forgiveness comply with most effective strategies in theory of games: Tit-For-Tat with variation for Contrite TFT (one mistake forgiveness) and Generous TFT – forgiveness in proportion to frequency of mistakes. This follows with more detailed analysis of these rules as applied in Christianity. The history shows that it works as group adaptation, but fall far short from ideal of universal inclusion.

 Chapter 7. Unifying systems

In this chapter author expands discussion to the level of General Theory of Unifying Systems with religion being just one of such systems. Others could be political, military, business, and any other types of human organization into groups. In this framework author discusses:

• Function and Fuzziness of the systems
• Symbols and Sacredness
• Factual and Practical Realism
• Science, as the only one system that puts high value on consciously analyzed correctness of facts
• Beauty and Utility necessary to provide motivation.

The book ends with call to learn and understand our unifying systems such as religion, so we could perfect them and fly higher rather then crash and burn because of destroying them.

MY TAKE ON IT:

I find myself in agreement with pretty much everything in this book. I also see religion as survival mechanism working at the level of group and developed via regular evolutionary process when group with better-developed religion would win over the group with less effective unifying tools. I would only note that I’d like to see more research on the role of individual susceptibility to religion or other grouping ideology. It is obvious that some individuals genetically more inclined to internalize ideology and act on it and some other much less inclined to do the same. I would also be interested to trace age related dynamics. It seems to me that religiosity of individual is changing with age depending on changing role of this individual in the group. It would make sense if there were biological mechanisms that make young adults much more religious (ideological) than older people who in turn much more inclined to put premium on maintenance of traditional practices then abstract ideology these traditions are based on.

In any case, the view at religion as evolutionary tool necessary for individual fitness via survival of the group is, in my opinion, the most reasonable way to look at it. This obviously means that religion should be embraced, rather then fought, but only on condition of tolerance to all other religions or lack thereof that satisfy need of diverse individuals in ideology. To push religion to the level of individual believes with tolerance as non-negotiable requirement, is probably the only way to maintain coherent society.

MAIN IDEA:

The main idea is that Western world undergone 3.5 revolutions over last 300+ years and is now on the brink of the 4^th revolution. The first 3 were: establishment of nation-state; triumph of liberal capitalism of XIX century, partial rejection of liberal capitalism and establishment of welfare state. The half revolution of the second half of XX century was partial roll back of welfare state in America and UK during Regan and Thatcher administrations.

The current situation with its unsustainable debt, demographics, and level of benefits is pregnant with the next step of society development that should resolve these issues via 4^th revolution. After detailed review of alternative to liberal democracy in form of Asian authoritarian capitalism of Singapore and China, authors came to conclusion that it is not the way Western world is going to follow. They expect that 4^th revolution will come in benign form of technological and functional improvements to government activities that would allow resolution of current problems without sacrificing quality of life, political freedoms, and even welfare state.

DETAILS:

Introduction

This book starts with description of Chinese government school GELAP where future leaders are trained. The point is made that the student and teachers are eager to learn about western technology and management, but not only uninterested, but despise western political and cultural arrangements. It follows by discussion of Leviathan that seems to be suffering with elephant disease in all western democracies and reasons why it will inevitably be treated:

• Unsustainable government debt
• Demographics with prevailing old age and small numbers of workers per pensioner
• Impossibility to maintain current level of benefits for everybody
• External competition from Singapore model of authoritarian government combined with economic freedom for business.

Authors put out their position that too little of government is more dangerous then too much and so they reject libertarian position of government as necessary evil. However they still believe that western democracies have better chance to meet new demands because it makes authorities listen to people. They also believe that democracies have higher risk for the same reason: listening to people makes politicians to do wrong things to meat people’s demands.

PART ONE: THE THREE AND A HALF REVOLUTIONS

Chapter 1: Thomas Hobbes and the Rise of the Nation-State

This is history of the First revolution – rise of nation state that resolved problem of incessant wars of everybody against everybody through overwhelming power of this state.

Chapter 2: John Stuart Mill and the Liberal State

This chapter is short history of liberal state, as it existed in XIX century – Second revolution that provided for tremendous economic growth, but created massive groups of disenfranchised individuals at the bottom and top of society unhappy with their share of newly created wealth.

Chapter 3: Beatrice Webb and the Welfare State

This chapter is description of last period of XIX and first half of XX century when unhappy people at the top like Marks and Engels developed ideas that energized bottom and as result implemented the Third Revolution that created bureaucratic welfare state throughout Europe and its spinouts after some totalitarian deviations into Communism in Russia and Nazism and Germany.

Chapter 4: Friedman’s Paradise Lost

The final chapter of this part reviews a half Revolution of Regan and Thatcher based on ideas of Austrian school of economic effectively promoted by Hayek and monetarism of Milton Friedman. This half revolution somewhat pushed back government interference into economy creating some breathing space for western society via economic growth and prosperity for about 20 years. However this revolution failed to stop growth of government and even more important it failed turn back ideological offensive of welfare and bureaucracy forces, which practically took over education in schools and universities.

PART TWO: FROM THE WEST TO THE EAST

Chapter 5:The Seven Deadly Sins-and One Great Virtue of California Government

This is review of problems of Western government using example of California as the highly representative case. Here are the problems or sins:

1. Mismatch between structure and purpose of public sector organizations
2. Baumol’s disease: slow growth of productivity in public sector comparatively to private.
3. Mancur Olson’s law: advantage of interest groups over public in general
4. Overactive state: massive intervention into business (licensing and such)
5. Fuzzy governmental math: refuse to follow general accounting rules and reporting requirements applied in private business
6. Use of government to transfer public resources to well connected plutocrats
7. Political paralysis caused by continuous fight between different political groups of approximately equal power

The biggest problem however is the human nature: people love to get something from government and hate to pay for it. The result is mismatch between taxes and spending covered by public debt accumulated beyond any reasonable amounts.

The virtue and hope is that current democratic power in California seems to be able to move to solution by cutting expenses and increasing taxes, but it is far from success yet.

Chapter 6: The Asian Alternative

The Asian alternative is relatively small authoritarian government thinly covered by democratic procedures that deliver order and safety net, but does not interfere that much into business. It is discussed by using example of Singapore and current development in China.

PART THREE: THE WINDS OF CHANGE

Chapter 7:The Place Where the Future Happened First

The point here is that the future and seems to be quite bright for democracy future already happens in Sweden that moved back from being the most socialistic democracy to being efficient capitalistic democracy that successfully cut on government size and services without hurting majority. Similar process is happening in other Nordic countries. They also seems to discover ways to modify existing government services in such way that introduce competition and financial discipline. Sweden for example changes its pension system from defined benefits to defined contribution.

Chapter 8: Fixing Leviathan

This chapter compares old business model of GM in 1930 with contemporary successful business model of Google and infers from this that only similar dramatic change could help fix the government. It briefly reviews previous attempts to this end that mainly failed, but states that this time it is different because there is too little space to continue on current patterns without big disaster. The remedies suggested are: more diversity, localization of government, more pluralism, and more opportunities for experimentation.

Chapter 9: What Is the State For?

It is a very short review of philosophy of government in America from Tocqueville, through old liberalism of XIX century and welfare state and crony capitalism of XX century with recourse to previously discussed remedies: trimming of entitlements and limitation on power of interest groups to transfer resources to themselves. At the end it calls to complete half revolution of 1980s and make it into the full-blown Fourth Revolution.

CONCLUSION: The Democratic Deficit

The conclusion is: the Fourth revolution is coming and it will incorporate technology to upgrade western democracy to condition that include the best of capitalism, competition, individual freedom, and even welfare state. The hope is that once again western creativity will generate new and effective solution.

MY TAKE ON IT:

I mainly agree with the thesis of 3.5 revolutions and close coming of the 4^th. I also agree that technology will play tremendous role in dramatic change of society. I also agree that Asian way is not feasible for Western society, moreover I do not believe that it feasible on the long run for Asian societies either. However I do not agree that 4^th revolution would produce only minor changes in existing arrangements. I think that it would lead to complete destruction of the welfare state. I hope that this destruction will come, as I suggest, in form of change to equal and marketable rights to natural resources, providing everybody with something to sell in exchange for resources and consequently creating limitless opportunities for free market capitalism with dramatic decrease in role of government and violence in economics and overall society.

MAIN IDEA:

The idea is that existing theoretical framework of equilibriums used for monetary policy proved to be incorrect by the crisis of 2007. The main flow of this framework is not taking credit into account and maintains notion of equilibrium as something static that could be achieved by raising or lowing interest rates. Instead the Wicksellian framework of dynamic equilibrium between natural rate and money rate could generate correct signal about macro movements of market.

DETAILS:

Introduction

Key financial Issues that had to be dealt with:

• Pensions crises: In addition to aging population the return on pension funds proved to be far lower than was used in calculations for needed set aside funds. Current financial framework cannot resolve this crisis.
• A handful of dissenters not only denied contemporary theory (Hyman Minsky and Joseph Stiglitz), but proved in investment practice that other option exists (Soros, Brevan Howard)
• A new hope? Ideas of Knut Wicksell based on role of credit with denial of equilibrium refined by Hayek and Myrdal could possibly allow generating correct signals of business trend and dramatically improve returns on investments.

1 The Great Moderation and the unraveling of a Great Myth

The great moderation is period from 1980s to 2007 when economy grew at reasonable pace and central banks seems to be able to control inflation and economic cycles by changing interest rates policy increasing rates when inflation was growing and decreasing when economy was slowing down. The core ideas of general equilibrium, rational expectations, and inflation control as implemented in policy failed to prevent economic crash of 2007. This chapter is the story of development of these ideas, their triumph, and eventual failure to provide reliable market signals.

2 From model failures to streams of data

Before 2007 economists like Ben Bernanke believed that their models are pretty good and just need a little bit of tweaking. However it was not really possible to define equilibrium that these models are based on. The reason for that is powerful exogenous factors that is just not possible to predict. Besides all measurements depend on statistical estimates, which are far from exact. The analysis in 2011 by Feds demonstrated that economic forecast models failed.

One of the most important reasons is that modeling assumptions were far away from real world. For example typical assumption that firms try to maximize profit is incorrect. Detailed analysis shows that much higher priority is to build relationships with customers while earning acceptable profit. Pursuit of short-term maximization would undermine firm even on medium run.

Instead of equilibrium analysis author suggest to rely more on analysis of streams of data and chaos theory to understand general trends. Especially important is analysis of credit data, which traditional equilibrium models completely missing.

3 The problem of credit

Analysis of boom and busts shows that they are directly related to credit availability variations. Here it also seems to be clear that there is no equilibrium in credit market. This is because it depends of value of collateral, which grows dramatically in boom time and collapses during the bust. This chapter describes ideas of Minsky and Stiglitz regarding business cycle.

4 The Vienna and Stockholm schools: A dynamic disequilibrium approach

Inability to explain behavior of credit resulted in monetary policy generating false signals for investors. One of important facts is that credit bubble does not coincide with inflation. Chapter goes through Hayek’s theory of cycles, Menger’s marginal utility, and money as calculation medium rather then measure of exchange value. It follows with Bohm-Bawerk analysis of capital as sum total of intermediate products. Also reviewed are ideas of Karl Wicksell with emphasis on credit and two different interest rates one for money and another for loans. There is also natural rate of interest defined in relation to current value of future product. Economy is in equilibrium if rates are equal. If money rate is higher then returns are unprofitable.

If money rate is lower, then entrepreneur generates higher profit at the expense of creditor. Finally ideas of Gunnar Myrdal of economy in continuing disequilibrium reviewed.

5 The neo-Wicksellian framework

Theory of credit and business cycle is based on variance between natural rate and money rate. Natural rate divided into ex-post measures (investment made) and ex-ante (investor expectations). The problem is that to measure natural rate is not really possible, but this chapter provides some approximate methods to do it.

6 Testing Wicksellianism

In this chapter author uses economic history of XX century to test application of Wicksellianism. The inference is that analysis based on Wicksellian theory of credit has better explanatory power then any of GDP factor. Relationship between Wicksellian Differential and return on equity is stronger then it is for GDP.

7 The creation and destruction of capital

This chapter analyses consequences of government interference with banks and credit. It is done in relation to huge balances of pension funds in developed countries which is also require high rate of return if they to meet future payment needs. Overall ability to produce high return is linked at its core to productivity growth and it is slowing down. Author relates this slowing down to failure increase educational achievement. After that there is a discussion of government ability create of destroy capital and its necessity as preventer of market failure. There is a wise advice at the end of chapter: Junk the models and look at the data.

8 Where are the customer’s yachts?

This chapter starts with fascinating anecdote about fund managers’ yachts and lack of those for customers. The idea is that credit based analysis could allow investors to make effective investment decisions.

9 Post-script- Constructing business cycle tracking funds

The key conclusion of analysis in this book is that Efficient Market Theory works fine at the micro level, but it does not at the macro level. Thus the opportunity to invest had to be brought to macro level through asset allocation technic investing into undervalued asset classes and shorting overvalued. At the end author provides a short description of use of Wicksellian ex-ante signaling in asset allocation.

MY TAKE ON IT:

I find strange the very idea of using monetary policy without taking credit into account. As far as I’m concerned money are created every time when two individuals agreed to exchange something in two steps one now and another at some point in the future. In other words I consider credit as part of money and as such it increases or decreases money amounts and consequently can create booms and boost that is consistent with Austrian theory of business cycles. I am not sure to what extent Wicksellian framework allows generate investment signals, but I completely in agreement with author that EMT works at micro level, but not at macro level and therefore idea to react to market signals via asset class allocation makes sense.