The Information

the-information-gleickWhat is Information? Is it inseparably connected to our human condition? How will the exponentially growing flow of information affect our societies?  How is the exploding amount of information affecting us as people, our societies, our democracies? When The Economist talks about post-truth society, how much of this trend is related to the failure of fact-checking, increasing polarity and fragmentation of media and the distrust of ‘experts’?  The Information starts with a reference to Borges’ Library of Babel:

The Library of Babel contains all books, in all languages.  Yet no knowledge can be discovered here, precisely because all knowledge is there, shelved side by side with all falsehood.  In the mirrored galeries, on the countless shelves, can be found everything and nothing.  There can be no more perfect case of information glut. We make our own storehouses.  The persistence of infomation, the difficulty of forgettting, so characteristic of our time, accretes confusion. (p. 373)

In The Information, James Gleick takes the reader on a historical world tour to trace the origins of our ‘Information Society’, basically an old term that keeps on being reinvented. It’s a sweeping and monumental tour that takes us from African drumming over alphabets, the beginnings of science, mathematical codes, data, electronics to the spooky world of quantum physics.  He shows how information has always been central to who we are as humans. He points to foreshadowings from the current information age such as the origin of the word “network” in the 19th century and how “computers” were people before they were machines.

shannonThe core figure in the book is Claude Shannon. In 1948 he invented information theory by making a mathematical theory out of something that doesn’t seem mathematical. He was the first one to use the word ‘bit’ as a measure of information. Until then nobody would have though to measure information in units, like meters or kilograms. He showed how all human creations such as words, music and visual images are all related in the way that can be captured by bits. It’s amazing that this unifying idea of information that has transformed our societies was only conceptualized less than 70 years ago.

It’s Shannon whose fingerprints are on every electronic device we own, every computer screen we gaze into, every means of digital communication. He’s one of these people who so transform the world that, after the transformation, the old world is forgotten.” That old world, Gleick said, treated information as “vague and unimportant,” as something to be relegated to “an information desk at the library.” The new world, Shannon’s world, exalted information; information was everywhere. (New Yorker)
At its most fundamental, information is a binary choice.  A bit of information is one yes-or-no choice. This is a very powerful concept that has made a lot of modern technology possible. By this technical definition, all information has a certain value, regardless of the content of the message.  A message might take 1.000 bits and contain complete nonsense. This shows how information is at the same time empowering, but also desiccating. Information is everywhere, but as a result, we find it increasingly hard to find meaning.  Has the easy accessibility of ‘facts’ diminished the value we assign to it?
Despite the progress in producing and storing information, we have remained human in our ability to filter and process information. Gleick gives the example of his own writing process:
The tools at my disposal now compared to just 10 years ago are extraordinary. A sentence that once might have required a day of library work now might require no more than a few minutes on the Internet. That is a good thing. Information is everywhere, and facts are astoundingly accessible. But it’s also a challenge because authors today must pay more attention than ever to where we add value. And I can tell you this, the value we add is not in the few minutes of work it takes to dig up some factoid, because any reader can now dig up the same factoid in the same few minutes.
It’s interesting because this feeling of the precariousness of information is everywhere. We think information is so fragile, that if we don’t grab it and store it someplace, we’ll forget it and we’ll never have it again. The reality is that information is more persistent and robust now than it’s ever been in human history. Our ancestors, far more than us, needed to worry about how fragile information was and how easily it could vanish. When the library of Alexandria burned, most of the plays of Sophocles were lost, never to be seen again. Now, we preserve knowledge with an almost infinite ability.
Redundancy is a key characteristic of natural information networks. As Taleb taught us, decentralized networks are much more resilient than centralized structures.  Every natural language has redundancy built in. This is why people can understand text riddled with errors or missing letters and why they can understand conversation in a noisy room.  The best example of a natural information network may be life’s genetic make-up:
“DNA is the quintessential information molecule, the most advanced message processor at the cellular level—an alphabet and a code, 6 billion bits to form a human being.” “When the genetic code was solved, in the early 1960s, it turned out to be full of redundancy. Some codons are redundant; some actually serve as start signals and stop signals. The redundancy serves exactly the purpose that an information theorist would expect. It provides tolerance for errors.”
 Technological innovation has always sparked anxiety. Gleick quotes Plato’s Socrates that the invention of writing “will produce forgetfulness in the minds of those who learn to use it, because they will not practice their memory.” (p.30) Mc Luhan recognized in 1962 the dawn of the information age.  He predicted the confusions and indecisions the new era would bring and wrote about a ‘global knowing’.  Thirty years before H.G. Wells wrote about a World Brain, a widespread world intelligence, taking the form of a network.  Wells saw this network as a gigantic decentralized encyclopedia, managed by a small group of ‘people of authority’. The network would rule the world in a ‘post-democratic’ world order.
Gleick writes that we’re still only at the start of the Information Age. Some effects on us and on our societies will only become apparent in the coming decades. Will the internet continue to evolve into a world brain or will it splinter into various parts. Will the atomisation of our media into countless echo chambers continue and what kind of society will it lead us into?
The library will endure; it is the universe. As for us, everything has not been written; we are not turning into phantoms. We walk the corridors, searching the shelves and rearranging them, looking for lines of meaning amid leagues of cacophony and incoherence, reading the history of the past and of the future, collecting our thoughts and collecting the thoughts of others, and every so often glimpsing mirrors, in which we recognize creatures of the information. (p.426)
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The Euro Crisis and its Aftermath (Jean Pisani-Ferry)

$_35Until 2013, Pisani-Ferry was the director of Bruegel, a think-tank.  In his book Jean Pisani-Ferry recalls the story of the euro from “the day it ceased being boring” and explores the underlying causes of the euro crisis.

The introduction of the euro was intended to create a forefront for more political and economic harmonisation among the adopting countries.  However, in the mid-2000s, it became gradually clear that national economies were diverging rather than converging.  Northern European economies like Germany were doing penance, running surpluses and accumulating savings, while countries in Southern Europe (incl. Ireland) went through a period of euphoria and saw consumption and debt rising.

After the introduction of the euro, these countries experienced a ‘golden decade’. They experienced a strong drop in interest rates, which reduced their debt burden and opened credit floodgates.  Resulting increases in wages and prices created higher inflation than in the northern countries.  Interest rates were the same across the Eurozone, but prices of nontradable goods and services such as houses and restaurant meals were not.  As a result, inflation rates were also not the same and the real cost of credit (the difference between the interest and the inflation rates) was much lower in the southern countries and Ireland.  In Spain, poor households bought houses they could hardly afford, helped by the now infamous cajas, the regional savings banks, creating their own version of the subprime crisis.

Then, on 16 October 2009 the euro stopped being boring.  That day, Greek prime minster George Papandreou confessed that Greek debt and deficit numbers were much worse than reported.  Investors suddenly realised that Greek debt was more risky than German debt and the spread between the two rose to 4%.  Greece revealed the incompleteness of the European construction and the strong disagreements about how to complete its architecture.

The negative feedback loop between banks and their sovereigns (countries) became apparent, the so-called ‘doom loop’.  Why is this relation problematic? Banks usually have large portfolios of debt issued by their countries.  At the same time, they depend on their sovereign for assistance in case things turn sour.  When investors doubt a country’s guarantee to save its banks, these banks can see their capital flows come to a sudden stop.

An example. The Spanish state was borrowing from the Spanish commercial banks which, in turn, borrowed from the Spanish central bank, which, in turn, borrowed from the ECB.  Meanwhile, private money flowing out from Spain was being deposited with German (or other northern European) banks, which, in turn, deposited it with the Bundesbank, which in turn lent it to the ECB.  The European system of central banks had become a sort of gigantic artificial heart that pumped back into southern Europe money flowing out from it in search of northern safety (p.145).

“Banks may be European (or global) in life, but they remain national in death.”

This explains why Ireland, with a debt-to-GDP ratio of only 25% got into problems. Its banking system was 8 times the size of its GDP.  Similarly, Spain’s problem was not a fiscal one, having low debt and running current account surpluses.  Its problem was that Spanish banks accumulated lots of loans that became non-performing when real estate prices plunged.  Add to this that the housing boom in Spain created a very unbalanced economy in which the non-tradable sector had expanded beyond reason at the cost of the tradable-goods sector.

Overall, debt levels and deficits in the Eurozone are much lower than those in the US or Japan.  What makes Eurozone debt vulnerable (less internal debt), faces a grim long-term demographic outlook (low fertility rates and not enough migration) and faces a lack of competitiveness (in the south).

Pisani-Ferry describes how Eurozone leaders throughout the crisis devised piecemeal solutions that were time and time again overtaken by reality.

The introduction of a common currency removed external devaluations as a way to inflate away debt and restore competitiveness as a tool from the toolbox. Milton Friedman compared devaluating a currency with daylight saving time.  It’s much easier to change time than to ask everyone to change their habits. In the same way, when a currency is overvalued, it is easier to devalue the exchange rate than to modify all wages and prices individually. By entering the Eurozone, member countries gave up this popular weapon, leaving them only the painful option of internal devaluation.

Much has been achieved since the outbreak of the euro crisis.  Under massive market pressure and by overcoming deep divisions, countries have agreed on new rules and created new institutions.  These solutions increased the power of the European institutions.  For example, the Commission received an ex-ante near-veto on national budget plans, including automatic sanctions for sinners. However, as economic prospects have improved, the political sentiment has clearly deteriorated.  Politics lag behind economics, which in turn, lag behind market developments.

On the other hand, solutions so far have only been found under the pressure of urgency and in an attempt to avoid the worst.  In Pisani-Ferry’s words, Europe has consistently displayed a strong sense of survival, but it has equally consistently failed to display a sense of common purpose (p.175).  The sense of survival comes from a realisation that a unified Europe is the only chance for Europe’s nations to remain significant actors in the world economy and to contribute to the shaping of global rules. The main challenge of European policy makers is to chart the road to continued relevance and to convince European citizens that it is the right road to take.

So far, solutions for the Eurozone crisis (financial firewall, fiscal treaty, building blocks of banking union) have much of an adhocracy.  Decisions on policy moves were not taken on the ground whether they would improve outcomes, but whether they were needed to avert disaster, like house owners only contemplating repairs when the house is about to collapse.

For Pisani-Ferry, a sustainable solution to deal with all the following aspects:

  1. The ECB’s inflation mandate of an average inflation rate across the Eurozone close to 2% implies a higher inflation rate in Northern Europe for several years.  During the first 12 years of the Euro, inflation rates were higher in Southern Europe.  The correction process has started for wages, but prices lag behind in the South because of the high cost of credit and the fact that many sectors are not open to competition.  A side effect of low interest rates is that non-functioning firms still get access to cheap credit, preventing the process of creative destruction, which would reduce supply, allowing others to raise prices, resulting in inflation.
  2. The EU’s budget comprises 1% of its total GDP and negotiated (and fixed) for periods of 7 years. This leaves little room for flexibility.
  3. For the dollar, US Treasuries are the safe assets.  For the Eurozone, 10-year German government bonds (‘Bunds’) are the de facto safe assets. This is an advantage (‘rent’) for Germany, as it can borrow money at lower rates than other countries. Because of this privilege, Germany should take up special responsibilities such as acting as an insurer for the whole Eurozone or sharing this rent with other countries through issuing Eurobonds.
  4. Gradual acknowledgement of reality of unsustainability of Greek debt, acceptance of debt restructuring and design of systematic way of dealing with debt crises.
  5. Acceptance of ECB as a lender of last resort.
  6. Strengthen the democratic character of the EU.  Germans, for example, are particularly underrepresented in the parliament in comparison to citizens from smaller countries.
  7. Governance reform.  The most important one.

“The euro area is not equipped with a government, but with a series of partial powers.  The ECB has decision-making capacity in its important, but limited domain (it makes full use of it).  The Commission has been given a defined mandate of oversight of national policies (it generally fulfils it) and a broader mission to chart a way through the policy challenges (it sometimes fulfil it and sometimes forgets it). Berlin exercises leadership (or not).  Paris tries to balance it (effectually or not).  Bratislava or Helsinki insists on specific points that are close to their hearts (and generally push through a minor concession).  Rome matters when the prime minister has stature (not always the case).  And the president of the Eurogroup chairs the meetings of finance ministers (and does little more).  Europe’s governance is reminiscent of Blaise Pascal’s definition of the universe: a sphere, the centre of which is everywhere…” But unlike Pascal’s universe, few observers, if any, see the hand of God in its design” (pp.165-166)

Currency unification has led European states to an unknown territory in which national borders are less defined as they used to be.  The euro has created a community of fate.  The EU and the Euro zone need a common vision on their future.

Basically, there are two models for the Eurozone:

  • An agglomeration model that accepts concentration of activities in certain areas, for example manufacturing in northern Europe.  This model comes with mobility of labour, portable social rights, acceptance of national current account deficits and surpluses and a full banking union.
  • A rebalancing model that focuses on limiting differences among countries.  This comes with attempts to southern re-industrialisation. This is the logic of the Structural Funds.

The agglomeration model is economically more efficient.  Not every country is good at everything and the agglomeration model stimulates countries to specialise.  However, this model is likely to lead to wider (but not necessarily permanent) disparities in GDP/person and would require euro-area-wide taxation and transfer systems. Also, the agglomeration model requires a stronger political community, something which still needs to materialize, if it ever will.

A permanent solution for the Eurozone’s travails would need to answer fundamental questions about the union:

  1. Are countries and their citizens prepared to embrace a degree of labour, product and capital market integration that is needed for a monetary union to function?  Current discussions about the scaling back the Schengen union and the rise of extreme right suggest not.
  2. Are countries and their citizens ready for a fundamental redefinition of the fiscal framework that would create a predictable regime for state insolvency and introduce a degree of risk-sharing through the partial mutualisation of sovereign liabilities?
  3. Is the euro area willing to accept a degree of contingent redistribution across countries or even individuals in order to help smooth adjustment within a monetary union, for example through a common budget or through contingent transfer mechanisms?
  4. Is the euro area for institutional reform that would equip it with effective decision-making capacities (and budget) within it fields of competence?

In a democracy, power should be limited, but not weak (Tommasso Padoa-Schioppa)

Pisani-Ferry’s book tremendously helps to put the Euro crisis into perspective.  It enables the reader to understand the causes and the responses. In my case, it helped to change my opinion that the crisis was not so much (only) a consequence of southern (mainly Greek) profligacy, but a result of economic imbalances resulting from an incomplete monetary and fiscal union.