11 March 2015

Some More Thoughts on Historical Inevitability

A long time ago I posted some writings on historical inevitability (Part 1, 2). Recently I reviewed Bruce Riedel's book, What We Won: America's Secret War in Afghanistan, in which he made the case that (a) the US government successfully brought down the Communist regimes of Central and Eastern Europe by aiding the Afghan rebels, and (b) this effort did not bring about the rise of the Taliban or al-Qaeda. My criticisms of his book made the argument that he had gotten it backwards: Western support for the Afghan rebels did not cause the collapse of the USSR, but it did lead to the rise of deadly sectarianism.

However, Mr. Riedel makes an argument that I think is valid, even if it's wrong in the case where he applies it. In other words, he objects to historical reasoning backwards from an event, to where one assumes planners and actors either knew, or ought to have known, the ultimate consequences of their actions. My criticism was that he was applying this to a case where the Central Intelligence Agency clearly ought to have known the consequences, and making claims about causality that are clearly false. The USSR's fall was almost certainly not hastened by its failed war in Afghanistan; there was little reason to expect funnelling money to the insurgents there would accelerate this. A more likely outcome was the occurance of a major war in Central Europe, or deadly attacks on US government employees. That neither of these occurred is good luck, not skill or prudence on the part of the US deep state.

I've already addressed my views about CIA support for ISI and the mujaheddin in my review. Riedel's claim that the CIA was not to blame for the fact that its material aid went to taqfiri zealots, on account of the Saudi General Intelligence Presidency (GIP) actually managing access to the mujaheddin, is not an excuse--it's not even a bad excuse. But in other cases, it is a fallacy to reason backwards like this.


Click for larger image
One obvious example is found in economics textbooks when I was in high school. Following William Baumol,1 economists were found of pointing out that market economies tended to flourish, and otherwise conform to expectations: national productivity was closely correlated to capital endowments of a country, but higher returns to capital in countries where there was less (e.g., postwar Japan, postwar Italy) ensured rich countries would invest in poor ones, and incomes would converge. This sounds absolutely wonderful, and for much of my life I was totally enthralled with the logic. In fact, it looks as though convergence should occur within regions of a single country (as it did for much of US history.

But look again.  Baumol's list of countries includes only the top success stories of 1986. He doesn't include countries which were poor in 1870 and are so today, or which converged until some point in the past, and then became poor.  A lot of these countries mostly adhered to unusually strict market policies, such as Lebanon and Egypt; but they're not high income countries today (and neither was in 1976, when the civil war in Lebanon erupted).  The cherry-picked data creates an illusion that economic development is mostly like a predictable chemical reaction.  The enormous fluctuations in wealth and capital experienced by Japan and Germany, for example, are not shown in this chart.

Here, the inference from economics is that one can indeed predict the success of free market policies in a developing country; common sense says this should occur, and it does... except when it doesn't.   To make matters worse, public policies require a consensus for enactment.  In cases where no such consensus exists, the results can be an utter disaster. In other cases, the state may lack the means to supply basic infrastructure for a modern, converging economy.  "Market reforms" will not bring this about, but there's no guarantee that a state can supply the infrastructure under any ideology: in many cases, good intentions from foreign helpers may be completely  defeated by local corruption.2  Apparently, one can have a situation where a highly "benighted" regime (in economic outlook) is the only one capable of having the institutional capability to meet any of the criteria required for economic development.


In the case of tactics, one has only to observe historical events where the outcome obviously was in contrast to the aims of the prime mover.  The most spectacular example of this may well be Mao Zedong, whose Cultural Revolution probably made it nearly impossible to resist subsequent shifts in state policy.  After all the "capitalist roaders" had been terrorized into submission (1950s), people of good party background were terrorized as well (1966 and thereafter) as well as devout Communists favoring rapprochement with the USSR; when Deng Xiaoping returned to the scene with a plan to dismantle socialism, the usual sort of opposition one observes elsewhere simply didn't arise.

Mao was an exceptionally well-read man with a flair for unconventional thinking.  For anyone familiar with Chinese traditions of leadership, his idea of the Cultural Revolution (and management of it) was even more astonishing than someone who isn't. Moreover, it's hard to defend the proposition that Mao didn't care about the fate of Communism in China: a close reading of his efforts makes it clear it was about the only thing he really did care about.  But the outcome of his efforts--including the pharaonic cult of personality, designed to ensure reverence for his ideas as well as fearful obedience to them--was pretty much the antithesis of Maoism.

A common feature of conspiracy theories is the proposition that a particular party favored an event, or applauded it, and therefore brought it about.  This should be self-evidently wrong to anyone, but even more obviously wrong is the whole notion that, when putatively omnipotent actors like the US government suddenly "lose control," and suffer humiliation.  The problem here is that the US government is not a cohesive entity and its components aren't either.  The debacle in Vietnam, for example, permanently altered the ideology of Congress and the obsessions of  the deep state.  Historical explanations featuring a very large organization really aren't explanations.


ADDITIONAL READING

Charles L. Jones, "Convergence Revisited" (PDF), Journal of Economic Growth, 2: 131–153 (June 1997)

J. Bradford De Long, "Productivity Growth, Convergence, and Welfare" (PDF),  The American Economic Review,  Vol. 78, No. 5, (Dec., 1988), pp. 1138-1154

NOTES
  1. William Baumol, "Productivity Growth, Convergence, and Welfare: What the Long-Run Data Show" (PDF), The American Economic Review,Vol. 76, No. 5 (Dec., 1986). I am grateful to Prof. Thomas Piketty for hosting this file. 
  2. See, for instance, efforts to rebuilt Managua, Nicaragua after the 1972 earthquake. F.Y. Cheng, Y.Y. Wang, Post-Earthquake Rehabilitation and Reconstruction, Elsevier (1996), p.172.  Notice in Nicaragua, it required a revolution against the Somoza regime to bring about any improvement at all.

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05 March 2015

Review of Bruce Riedel What We Won: America's Secret War in Afghanistan Brookings Institution Press (2014)

What We Won
This book has been very well-received in most serious circles.  The author, who advised President Barack Obama on Afghanistan policy from the beginning1, has a startling message: Western intelligence agencies, including the American CIA, Britain's MI5, and others, did help defeat the USSR by supplying the mujahidden rebels in Afghanistan; but they were certainly not responsible for the appearance of groups like the Taliban or al-Qaeda.  The main error of the USA in supporting the mujahidden was to abandon them after February 1990.  These are the main points, and I would like to explain why they are implausible.


A few points of clarification before I begin: one, I am NOT a member of any intelligence organization.  I have no security clearance; I'm only reviewing a book based on publicly available information.  Two, the ISI is the Directorate of  Inter-Services Intelligence  of the Pakistani armed forces, which was the principal interlocutor of the CIA during the secret war in Afghanistan.2  Three, the USA has been a major supplier of foreign aid to Pakistan since independence (with the exception of a brief interlude, which I'll mention below)3; in addition, or separately, the CIA funnelled money directly to the mujahidden4). So when writers speak of the US "abandoning" Af-Pak" after the Soviet withdrawal, there's reason to question this narrative.  I'll discuss that below also.

ABANDONING THE FIELD


It is frequently alleged, especially in Pakistan, that the USG abandoned Pakistan after the Soviet-Afghan War.  In some senses, this is a fair allegation: in October 1990, after six years of looking the other way, the White House "noticed" Pakistan's nuclear weapons program and drastically all forms of aid. Diplomatically, the US was suddenly antagonistic to Pakistan; even as it shifted from military to civilian rule.  The reason was that Pakistan was determined to use its alliance with the USA in a war against India, which would have been utterly horrific. 


Aid continued to flow to the mujahidden after 1990; it continued until April 1992.5 The USG was faced with an insoluble dilemma: the ISI was essentially running Pakistani foreign policy through fait acompli, while the Bhutto (and subs. Sharif) governments were locked in a political deathmatch with Pres. Ishaq Khan and each other.  The intelligence services (remember, Pakistan has several agencies) were implicated in the  political turmoil,6 and it became apparent that aid to the government was sure to result in a political crisis for Pakistan. The rival factions of mujahidden were fighting each other; the comparatively benevolent ones, like Ahmed Shah Massood, were not accessible to the CIA.


For this reason, "sticking with the job" was not feasable. All of the parties in Pakistan were seeking to avoid public association with the USA anyway.


On p.149, in his list of recommendations for future covert wars, Bruce Riedel warns against "mission creep," which in this case meant going from the Carter plan of harassing the Soviets, to the Reagan [era] plan of defeating the Kabul government.  This would have meant an even more "egregious" and arbitrary-seeming abandonment of Pakistan than what actually happened.7 But at least it's original.


THE 3 JULY FNDING


As is now, I think, universally known, on 3 July 1979 Carter issued a presidential "finding" for assistance to the mujahidden; writing for the _Nation_, Eric Alterman writes "First revealed by former Director of Central Intelligence Robert Gates in his 1996 memoir _From the Shadows_, the $500 million in nonlethal aid..." Alterman's article is about as shoddy as it's possible to get: Gates' memoir cites a figure of $500 thousand, while cumulative US aid to the mujahidden did not reach the $500M level until 1985. He also ignores the fact that the DRA government was a junta with massive Soviet support, which had accelerated during its troubled 18-month history.; The Soviets had not yet invaded, but they had definitely taken over (analogous to South Vietnam, prior to October 1963--in this case, with the USG).8 Gates hints that more "non-lethal aid" followed, but doesn't specify how soon or how much.In any event, the inference drawn by Alterman and Blum is totally false: the USSR was committed to propping up a client state despite it swerving out of control.  There were already ample Soviet/KGB assets in Afghanistan, and had been since the Saur (April) "Revolution" of 1978.


One point about the Nouvelle Observateur article: it's been translated twice (English to French, French to English).  The title of the article declares that ‘Oui, la CIA est Entrée en Afghanistan avant les Russes...’ ("Yes, the CIA was in Afghanistan before the Russians") which is emphatically false.  The Soviet government had a long-standing relationship with PM Muhammad Daoud Khan, long before he ousted his cousin, King Zahir, in the 1973 coup, and dating back to 1965. This isn't necessarily a bad thing, but clearly Brzezinski was not listening to his interlocutor and assumed "intervention" meant "invasion."  Even if one acknowledges (as the CIA eventually did, internally) that the Soviets were surprised by the PDPA coup in 1978, they nevertheless acted quickly to shore it up militarily.  In any event, declassified documents do not support any of Brzezinski's remarks. For one thing, the Soviets were demonstrably not concerned about the rural uprising because they did not expect it would be hard to suppress.  They were angry with the renegade Hafizullah Amin, who had murdered their client Nur Taraki.9


On the other hand, there  the case of Gen. Naseerullah Babar, former interior minister of Pakistan.  In 1973, as mentioned above, the monarchy had been overthrown by Daoud Khan. The new '73 coup was, like the subsequent 1978 "Saur Revolution," pro-Soviet and comparatively left-leaning; more urgently, from the point of view of Gen. Babar (and Pres. Zulfikar Ali Bhutto), the new regime favored a major border revision. Gen. Babar successfully recruited Gulbuddin Hekmatyar, Burhanuddin Rabbani, and Ahmed Shah Massood to launch attacks on the Afghani army from the Panjshir Valley.  This insurgency failed to oust the government but may have extracted concessions from it; at the time, Pakistan's relationship with the USA was in suspended animation.10


ACCESS TO THE MUJAHIDDIN


Riedel claims many times in his book that the CIA "had very little direct contact" with the fighters or their leaders (p.41, quoting Robert Gates) as well as the Arab volunteers (p.81, preceding a detailed account of UbL's and Abdullah Azzam's CIA un-influenced experience in Afghanistan.  Steve Coll corroborates this claim, which surprised me. For example, as late as 1989, Milton Bearden, CIA station chief in Islamabad (of the sort typically described as "colorful")  describes running into a Gulf Arab (?) volunteer intent on killing "infidels" in Afghanistan.  At first I expected to  debunk this claim with documents available since 2004, but there really isn't a lot of evidence that the USG/CIA had any interaction with foreign  volunteers.  Sure, Prince Bandar told Larry King that he had been thanked by UbL for the latter's efforts to bring "the Americans, our [Usama's and Bandar's, presumably] friends, to help us against the atheists" (In case it isn't obvious, I don't think this ever happened).  But for the most part, encounters between either the Wahhabi volunteers or the higher ranking figures of the mujahiddin leadership were with Saudi entourages.


Interviews with US station personnel in Pakistan validates this thesis.  Much of intelligence work done in Pakistan during the mid-late 1980s was to determine what the ISI was doing with US money and weapons.  A key opponent was the embassy and CIA staff in Islamabad, who dreaded leakage of internal criticism to their Pakistani hosts.  But gradually, the message reached Washington by 1988 that the ISI was totally devoted to the most extreme Wahhabist factions, rather than ones that were effective or likely to win respect in Afghanistan.  Pakistan's hoped-for transition to democracy was a descent into anarchy and potential nuclear war with India; amid the endless repining about abandoning the region in the 1990s (along with Leonard Shelby-levels of forgetfulness about why "we" did so), the political establishment in the USA was unwilling to fully disavow the ideology and goals of the Taliban.  Members of the US Congress certainly would not have liked to live in Taliban-controlled Afghanistan, but they clearly preferred the Talib for the people of Afghanistan.


MY PROBLEM WITH THE PREMISE OF THE BOOK

There is a well-established pattern of the USG targeting modernizing foreign governments (sometimes with compelling reasons, sometimes not), ousting them at terrible cost, and leaving sectarian tyranny in place.  Bruce Riedel is very anxious to remind us that it was the Soviet invasion and occupation of Afghanistan that created the international jihadist movement, and it was General Zia ul-Haq who made the decision to launch the war of resistance.  Saudi-Pakistani motives were compatible, in Afghanistan, and in some respects Pakistan had opened itself up to internal development by the Saudis.11


This was, in effect, a vending-machine regime-change; the USG dropped a lot of coins into the Pakistani slot, prevented do-gooders from unplugging the machine, and after ten years there was a loud clonking in the dispenser; but the soda was a little fizzier than anticipated.  Who could have expected such a thing?  In case you think I'm attacking a straw man, here's Bruce Riedel:
The Muslims who came to Pakistan in the 1980s to fight with the mujahedin did not come because of the CIA, the ISI, or the GID*, they came because of the Soviet invasion. [...] To suggest there is some inevitable link between President Carter's and President Reagan's backing of the mujahidin and 9/11 is tortured and incorrect logic.  It also shows a lack of understanding of the U.S. role in the Afghan war.  CIA officers in Pakistan had no interaction with the Arab volunteers, just as they had little interaction with the mujahedin themselves.  The business of fighting the war was in the hands of the ISI, not the CIA. (p.81)
On p.151, Riedel briefly reprises this message.  One might point out that Riedel contradicts himself: if the ISI and the Saudi GIP were actually managing the fighting, and the CIA was merely providing money, weapons, and diplomatic cover, then he can't use the same argument to exonerate them as well as the CIA.  At the very least, the ISI and the GIP bear some of the blame for the extreme comparative success of Gulbuddin Hekmatyar and Burhanuddin Rabbani--who won because they let others fight the Soviets, while they fought the other _mujahiddin_. But even then, it's absurd to imagine that the CIA, or its political masters (snort) in Washington had no responsibility to notice the disturbing ideology of the fighting forces.  The huge increase in the number of madrassas in Pakistan, funded by Saudi Arabia, was clearly intended to remold public perceptions of what Islam means.  Pakistan was not a sequestered Shangri-La closed to Western eyes; its society was under intense scrutiny by official Washington. The notion that the State Department and the CIA were unable to predict the rise of a quasi-Islam targetting the USA, is impossible to take seriously.


Either the US endeavor in Afghanistan had no effect on the history of the region (unlikely), or it did.  The Soviet commitment to the Afghan War was small: a peak commitment of 100,000 troops, in a war on its very border.  In contrast, the US commitment to the War in Viet Nam was massive: a peak of 540,000 troops (both figures apply for a short time only).  The famously casaulty-averse USA lost 58,000 Americans in the Vietnam War; the poorer, authoritarian USSR lost 15,000 troops in Afghanistan.  As a share of available resources, the Afghan War for the Soviets was about the same as the Vietnam War on the USA.12 Economically, I find it hard to take seriously the proposition that the Afghan War caused the collapse of the USSR, or even contributed significantly; it merely made thousands of Soviet conscripts miserable.  Liberating Afghanistan was naturally not a goal of the CIA; the ISI, as Riedel acknowledges, wanted to win control of Afghanistan for Pakistan.


On the other hand, insisting that the foreign jihadi volunteers who traveled to Afghanistan were not influenced by the CIA effort there is a bad faith argument.  The CIA was well aware that the ISI's goal was to get at India, not the USSR or Communism. The Saudi goal for Afghanistan was directly visible in the refugee camps of the NWFP.  Emotional antipathy towards the Americans was constantly on display in Pakistan; the ISI definitely felt the need to hide its cooperation with the Americans (but not the Saudis) from the Pakistani public.  In 1979, rumors that the US was to blame for a Wahhabist uprising in Mecca caused Pakistanis to riot at the US embassy in Islamabad, killing four inside.  This was, at the very least, a place that was (a) very poorly understood by the Americans, and (b) obviously receptive to the most explosive anti-American hatred.  This alone ought to have given the US authorities pause, but it did not.  Likewise, the ideological chasm between the GIP and American society could reasonably have been expected to forestall any joint black operation when the Americans were barred any chance to observe what was happening.   A genuine ally does not have an uncontrollable urge to kill you if he meets you; this was what GIP and ISI agents explicitly said was the motive for denying CIA officers access to mujaheddin in theater.  There is no way this could have failed to produce a massively deadly terrorist attack on the US and its allies, and of course it did.


Hence, Bruce Riedel has got it exactly backwards: the intervention in Afghanistan's 1979-1992 "Civil War" produced, not freedom for Central Europe, but a large, well-seasoned, well-connected movement of eager terrorists, delighted to cleanse themselves of the stain of collaboration with the CIA.  Some even made it to New York City.


* Riedel probably meant "GIP," not "GID."  The GID is a Jordanian intelligence agency which sees Islamic fundamentalism as a major threat to the survival of Jordan.  The Saudi intelligence agency's English acronym is GIP.

NOTES

  1. Bruce Riedel, a former CIA official, was selected by the Obama Administration to chair the White House review of policy in Afghanistan. See Julian E. Barnes, "Obama team works on overhaul of Afghanistan, Pakistan policy," Los Angeles Times (11 February 2009; accessed 2 March 2015)
  2. ISI is the best-known intelligence agency in Pakistan, but--like the American CIA--is neither the only intelligence agency in that country, nor entirely identical in interest and outlook to its government, military, or rival social classes.  See Peter Lyon, Conflict Between India and Pakistan: An Encyclopedia, ABC-CLIO (2008). While an analysis of the dynamics of the Pakistani intelligence/police services is not possible here, it is definitely relevant to events that followed.
  3. For data on US aid to Pakistan, see Claire Provost, "Sixty years of US aid to Pakistan: Get the data" The Guardian (11 July 2011).  This article includes links to source material and a database.  Data on foreign aid is classed by type; in no year since 1951 has there been no US financial aid to Pakistan, but military aid plummeted after the 1963 Indo-Pak War, and ceased after 1968. It increased after 1983, although no doubt much "direct" (i.e., non-USAID) economic assistance was actually secretly intended to strengthen the Pakistani armed forces (Riedel discusses this a bit, around pp.103-105).

    Military assistance to Pakistan ended in late 1990, as a result of the Pressler Amendment; it resumed in 2002, for obvious reasons, and is now immense.
  4. Military assistance to the mujahidden included cash and weapons bought with that cash--most notably, the Stinger missile system, authorized for use after 1985. The US Dept. of State reported (in 2011) a total outlay of $3 billion to the mujahidden; press reports cite a flow of $20M (in 1980) "rising to to about $300 million per year during FY1986-FY1990." (Kenneth Katzman, "Afghanistan: Post-Taliban Governance, Security, and U.S. Policy," Congressional Research Service, 24 Feb 2015,  p.4.).  Footnote 2, same page, mentions, " For FY1991, Congress reportedly cut covert aid appropriations to the  mujahedin  from $300 million the previous year  to $250 million, with half the aid withheld until the second half of the fiscal year. See “Country Fact Sheet:  Afghanistan” (PDF) in  U.S. Department of State Dispatch,  vol. 5, no. 23 (June 6, 1994), p. 377."
  5. Robert Gates, From the Shadows, (1996), p.432.; Robert Gates was DCI from Nov 1991 to January 1993. Gates later claimed otherwise, switching over to the narrative that the USG perfidiously abandoned the region after the USSR evacuated.
  6. For a brief account of this period see Husain Haqqani, Pakistan: Between Mosque and Military, Carnegie Endowment (2010), pp199ff; Zahid Hussain, Frontline Pakistan: The Path to Catastrophe & the Killing of Benazir Bhutto,  Penguin Books (2008), pp.23-26;  Edward A Gargan, "Pakistan Government Collapses; Elections Are Called," NY Times (19 July 1993); and Barbara Crossette, "Bhutto Facing New Misconduct Charges," NY Times (17 Oct 1990). Chapter 8 (pp.129-140) of What We Won is not bad either, and spells some of this out, but his claim that the CIA became aware in 1990 that Pakistan perhaps really did have a bomb, and Benazir Bhutto was notably more hawkish toward India than Zia ul-Haq was, cannot be taken seriously.
  7. Because in that case the CIA would have broken off collaboration with its ISI partner before its partner's objectives in that theater were finished, and while the personnel in Pakistan was largely the same.  After 1989, ties of loyalty to individuals in the Pakistani government became inherently conflicted because the political establishment was divided against itself. ALSO: p.132, Riedel objects to the post-1990 neglect of the mujahidden, Afghanistan, and Pakistan.  This is admittedly not the same thing as calling for more money to be supplied, but it seems most unlikely any options were then available to the CIA.

    Steve Coll (Ghost Wars, p.200) mentions that Frank Anderson, director of the Afghan Task Force at Ft. Langley (CIA HQ), was arguing for CIA withdrawal from the the Secret War well before the Soviet troop withdrawal (Feb 1989).
  8. Eric Alterman, "Blowback: the Prequel" (The Nation, 25 Oct 2001):  The legend of a massive US scheme to provoke a Soviet invasion of Afghanistan by "stirring up Moslems" [sic] was promoted by Zbigniew Brzezinski (Alterman tries to distance himself from William Blum, who undoubtedly drew attention to the interview Brzezinski gave to Le Nouvelle Observateur in 1998, but fails; see Killing Hope appendix, or Rogue State).   Steve Coll, Ghost Wars (2004), p.46 also cites Gate's 1996 memoir on the 3 July finding.
  9. For a sadly amusing account of the deadly triangle of Amin, Taraki, and the KGB, see Steve Coll, Ghost Wars, pp.48-49.
  10. Ibid., p.114.
  11. Saudi Arabia's massive foreign assistance program probably ought to be regarded as an ideological developmentalist regimen.  Western critics of the Saudi state usually make the mistake of imagining it to be self-consciously seeking to restore the middle ages to the Islamic world.  In fact, the Saudi state is quite visionary; its foreign assistance program does in fact pursue the economic development of its partners, albeit in an opaque and decentralized manner. Pakistan's ruling institutions certainly appreciated the aid received from Saudi Arabia, and evidently approved of its objectives for Pakistani society.
  12. There are a lot of pitfalls in my comparison, but Riedel says the Afghan War cost the Soviets 2% of their GDP in 1986 (p.31, citing the DIA estimate; admittedly, GDP estimates for the USSR were probably excessive); the Vietnam War cost the USA about 2.3% of its GDP in 1968 (Stephen Daggett, "Costs of Major U.S. Wars" (PDF), Congressional Research Service-29 June 2010, p.2).  Both estimates are in current accounting and ignore indirect costs.  Both wars lasted about the same time, with the Soviets and Americans getting involved indirectly before officially invading, and continuing to fund their respective sides for a couple of years after departing.  Note this comparison is not decisive; it can be argued that a socialist economy is less adversely affected by massive amounts of unproductive spending than is a market economy; on the other hand, market economies are more resilient, and can recover.

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16 August 2013

RE: A Challenge to Michael Emmett Brady

Updated 31 August 2013 to address a misreading of what I wrote.  Revision is in boldface type.

In the course of researching Keynes, probability theory, and other matters pertaining to economic theory, I've encountered a lot of book reviews by a person named Michael Emmett Brady. A link to his profile on Amazon is here; and here is his page on the Social Sciences Research Network (SSRN). He wrote over 700 reviews, mostly in very dense and hastily-typed bursts that are often difficult to follow, mostly of books on economics—in fact, usually on Keynesian economics or attacks on Keynesian economics. He has been published in the History of Economics Review, History of Political Economy, The British Journal for the Philosophy of Science, International Studies in the Philosophy of Science, Psychological Reports, and Synthese.. His book reviews are usually mild, but he has sparred with a school of economics called Post-Keynesianism, whose most famous adherent is probably Paul Davidson. 

This is not the sort of thing that attracts screaming headlines or anything, but I could never help wondering if there was something to Mr. Brady's allegations that the Post-Keynesians failed to understand Keynes's Treatise on Probability, and this affected their understanding of The General Theory

Then someone named Philip Pilkington wrote a general rebuttal to Michael Emmett Brady here. The essence of the rebuttal is that Mr. Brady is a mysterious person who is saying everyone of repute is wrong about what John Maynard Keynes said, particularly with regard to decision theory. Or, as paraphrased by the blogger "Lord Keynes" (a pseudonym),
Post Keynesians have not understood Keynes’s Treatise on Probability properly, and in particular his idea that of relegating frequency interpretation of probability to a highly limited domain and that non-objective probabilities (in the sense of non a priori probabilities or non relative frequency probabilities) can nevertheless be mathematically represented with imprecise interval estimates (apparently called“approximation” by Keynes). This leads into a Keynesian decision making theory with some mathematics behind it superior to the Ramsey/Savage/neoclassical EUT and consistent with Daniel Ellsberg’s decision making theory.
Mr. Pilkington argues that, if Mr. Brady is so confident of his judgment about decision theory, he ought to put his theories to the test at a hedge fund. 

The problem with this is that, of course, Mr. Brady is not a full-time trader by profession. A common argument by some economists is that if a theory is valid, it ought to survive a test in a real time exchange (although this almost never actually happens). But in this case, Mr. Brady's gloss of Keynes pertains to the nature of inferences about the future by people with the data they have. That's the whole point of the first three chapters of Keynes's Treatise on Probability. Which means, if Mr. Brady knows he doesn't understand financial markets, he knows his foray would be a disaster. 


In other words, Mr. Brady's field of expertise is on J.M. Keynes as a philosophically-minded mathematician that later turned to economics, not the trading of stocks. Any choice he would make in the milieu of the trading floor would be less valuable than it would have been if his life's work was as a market-maker or seasoned day-trader. It will no doubt be objected that this is special pleading: Mr. Brady ought to be able to explain his theory to a hedge fund manager, who could then apply the theory and use it to beat the market (according to Mr. Pilkington). 

One well-known problem is, of course, that efforts to exploit different mathematical models and techniques—all questions about their logical foundations and accuracy being put aside—have long ago been stretched to the breaking point. As soon as an improved model is developed, financial experts use it to harvest rents as fast as possible. The rents never disappear, but neither do massive failures—major busts and panics. The reason is that the technique of weighted hedging of risk becomes itself an investment vehicle, and hence another data point. Data processing, mathematics, and leverage are the limiting factors, while practical application of weighted hedging is the driving force. 

I don't pretend to speak for Mr. Brady, but I think this explains why his arguments on Keynes's probability theory are unrelated to the business of hedge funds. In fact, Mr. Brady has spared no opportunity to denounce speculation on the basis of virtue ethicsanyway. Saying that one's opponent's entire Weltanschauung rises or falls based on some application of one's own choosing is an argument that is unlikely to change anyone's mind. Another point of concern for Mr. Pilkington is this:

Brady appears to be making the claim that buried within Keynes’ Treatise on Probability is some sort of theory of microeconomic behavior. This has always seemed to me a bizarre assertion. Surely for someone to make decisions in line with Keynes’ work on probability they would have to have first read and understood this work. Given that such an argument is coming from a scholar that complains that not enough people read the Treatise the irony is, of course, enormous. Indeed, in many ways Brady’s argument is structured in the same way as a rational expectations argument in that the economist assumes that people act in line with his model of them — so, it implicitly assumes that such a model exists “in their heads”,which seems unlikely unless they have deeply studied and adopted said model.
Something has to be said about this. One is that any theory about human behavior could be, to the same degree, accused of tacitly assuming that everyone it purports to describe "knows" the theory. By this reasoning, Freudian psychology, likewise, "assumes people have first read and understood Freud"—for surely, for someone to make decisions in line with Freud's work on psychology they would have to have first read and understood this work. This does not work as a rebuttal.

Another is that the Rational Expectations Hypothesis differs in so far as it uses the "stylized" or "schematic" assumption that people's estimates of the future will not be consistently wrong. For the record, defending rational expectations is one of the last things I would ever do, but claiming that it is so obviously wrong that no sensible person would embrace it is probably not a good idea. I would definitely agree that it is wrong, but I would also agree that debunking it is not easy.

Mr. Pilkington writes,

I don’t believe in mathematical decision-making theories, [no] matter what type of probability theory they’re based on. A useful decision-making theory has to say something about the real world. Since the most relevant place where such a theory can be applied is the financial markets then this, for me, is the ultimate test of any theory. Indeed, this is what the Efficient Market Hypothesis does; it posits a theory of decision-making and then makes actual market predictions (no one can beat the market etc.).
Belief in mathematical decision-making theory probably ought to depend at least in part on what the mathematics purports to explain. If the mathematics purports to explain what people are compelled to do based on available evidence and logical necessity, then a case-by-case assessment is in order. If you really take the position that no decision theory can have any pertinence to real decision making, then I'd say you've repudiated the field of economics because you've rejected any logical inference about economic behavior.
"Since the most relevant place where such a theory can be applied is the financial markets then this, for me, is the ultimate test of any theory."
The problem with this point of view is explained above: if a theory's inferences are orthogonal to questions like the frequency distribution of outliers, then no, that's an unreasonable opinion. Believe it or not, there are wiser economists who know better than claiming to predict stock market behavior off-the-cuff.

"[T]his is what the Efficient Market Hypothesis does; it posits a theory of decision-making and then makes actual market predictions"—no, the EMH posits a theory of what markets are capable of, viz., capturing all relevant information immediately after it becomes available. The EMH has been discredited, but doing so was not easy. If the EMH was a decision theory (which it is not, although it does have behavioral descriptions and assumptions), it would not appeal to common sense, because it is not reasonable to assume people are always making correct decisions about the future of volatile prices, but it is reasonable to assume the market, in the aggregate, is extremely difficult to outperform and requires something like inside information to do so. Again, for clarity, it's reasonable but mistaken.

One can finally ask, So James, in what sense is Michael Emmett Brady circulating a useful decision theory? In what sense does it have something to say about the real world? And I would have to say that Mr. Brady has always discussed its value in the realm of public policy, and I would also say that if his reading of Keynes is correct—something I am not qualified to arbitrate—then its value lies there.



Sources and Additional Reading

The blogger known as "Lord Keynes" has addressed Mr.Brady's criticisms more rigorously here: "Post Keynesians and Degrees of Uncertainty."

Ammons Scientific - Psychological Reports (for future reference)

The British Journal for the Philosophy of Science

International Studies in the Philosophy of Science

Synthese (an International Journal for Epistemology, Methodology and Philosophy of Science)

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01 March 2013

The Night Watchman Nonstate (Appendix)

(Part 1 & 2)

SUMMARY OF SECURITY FIRMS



G4S, plc (London, England)
Publicly limited company; listing (Yahoo finance)
Employees:  657,200 (Dec 2011)
Revenue: £ 7,522 million (2011) = $11,668 million
Operating profit: £ 375 million (2011) = $582 million

(Conversion from British pounds based on GBP:USD forex as of 2 January 2012)
Acquisitions:
2008       ArmorGroup International (UK)
2004       Securicor (UK)
2002       Hashmira (Israel)
2002       GEO Group (fmrly Wackenhut; USA)

Securitas AB (Stockhold, Sweden)
Privately held by Investment AB Latour
Employees: about 300,000 (Dec 2012)
Revenue:  SEK 66,458 million (2012) = $10,260 million
Net Income: SEK 1,212 million (2012) = $187.1 million

(Conversion from Swedish kroner based on USD:SEK forex as of 2 January 2013) 
Acquisitions:
2011       Chubb Security (UK)
2010       Reliance (UK)
2001-     Loomis Armored (USAàdivested, Sweden 2008)
1999       Pinkerton (USA)
ISS A/S (Copenhagen, Denmark)
Privately held by EQT Partners, Goldman Sachs Capital Management (GSCM), Kirk Kristiansen Foundation (KIRKBI), & Ontario Teachers' Pension Plan (OTPP)
Employees: 537,300  (June 2012)
Revenue:  DKK 77,675 million (H2-2011 to H1-2012) = $13,226 million
Net Income:  (DKK 364 million) (H2-2011 to H1-2012) = ($62.0 million)

(Conversion from Danish kroner based on USD:DKK forex as of 2 July 2012)
Acquisitions:
2006       Tempo Services (Australia)
1999       Abilis Solutions (Canada)
Corrections Corporation of America
Publicly held; listing (Yahoo finance); Fortune profile
Employees: 16,750 (Dec 2011)
Revenue: $1762.8 million (2012)
Net Income: $151.8 million (2012)

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28 February 2013

The Night Watchman Nonstate (2)

(Part 1)

THE NIGHTWATCH

There are conflicting versions of the story, even among company publicists. In 1901, one Marius Hogrefe, a [draper? lawyer?] founded the Kjøbenhavn Frederiksberg Nattevagt (Copenhagen-Frederiksberg Nightwatch).1 The nightwatch was a fairly commonplace business entity in Europe at the time, and similar organizations in Hälsingborgs (1934), London (1935), and elsewhere would become ancestors of AB Sercuritas and G4S, plc.2 Securitas' own corporate website claims "Erik Philip-Sörensen founded Hälsingborgs Nattvak," which is unlikely. What is mentioned by all accounts of Securicor (London), Falck (Copenhagen), Securitas AB (Stockholm), and ISS A/S (Copenhagen) is that they grew by absorbing very large numbers of nightwatch companies, in a process that was mostly completed by 1964.

(In this essay I frequently use company names anachronistically; ISS A/S adopted that name in 1973, while Securitas AB adopted its name in 1972. Securicor, plc, took that name in 1953, and no longer exists. Moreover, there are several companies in the Scandinavian/German-speaking countries that have "securitas" in their name, which are unrelated to the entity known as Securitas AB.)

A common theme is the Philip Sørensen name: the Kjøbenhavn Frederiksberg Nattevagt eventually became ISS A/S; Erik Philip-Sørensen was responsible for a wave of nattvakt acquisitions in Sweden that latter became Securitas AB (initially an ISS A/S subsidiary, later bought out by the Philip-Sørensen family).3 Later, Jørgen Philip-Sørensen moved to the UK in 1964 to establish Group 4, yet another security company.  In 2000, Falck merged with Group 4; the Falck family involvement was long gone but the Philip Sørensen clan remained in control of the merged entity (G4F, plc).  In 1983, Sven Sørensen sold his stake in Securitas AB to Skrinet and Cardo, and Jørgen did the same.4 Cardo AB is a Swedish lock and armored door producer; Skrinet was an investment group.  Both were later absorbed into Investment AB Latour.

The nattvakt/nattevagt businesses of Scandinavia had been funded by subscriptions for beneficiaries; households and businesses had paid the local nightwatch to protect their premises, but there was presumably spillovers. Copenhagen, in particular, first had a permanent (state-run) nattevagt around 1783, and an English-style police force after 1863.5 But ISS A/S's precursor, DFVS, was able to bundle security with a large number of other services, viz., cleaning. In fact, in the case of DFVS (i.e., the future ISS A/S), even its prominent DDRS was pitched as an augmentation to its security services. DDRS was the public face of the company: single women, usually younger, using modern Swedish equipment (DDRS had a special agreement with Electrolux), maintaining cleanliness. Possibly--but this is conjecture--the larger DFVS, with its selective policing on behalf of private, wealthy clients suggested a disturbing violation of Scandinavian egalitarianism.6

Click for larger image


RESCUE CORPS TO RENTA-COP

Concurrent with the commercialization (?) and business consolidation of the nattvakt/nattevagt was the appearance of professional Redningskorps.  Unfortunately, I was unable to find out much about the history of the Redningskorps besides the corporate histories for Falck.7 Basically, the Redningskorps were similar to modern fire departments, with emergency rescue and repair services. Sophus Falck is claimed to have founded the Redningskorpset for København og Frederiksberg (1906).  Later, the by-subscription RKF changed its name to Falck, and by the late 1950s, covered the whole of Denmark with over 106 stations.  Its fleet of motor ambulances--the earliest in Scandinavia, if not the world--accounted for 80% of medical transport in Denmark.

Initially, Falck's business consisted of fire salvage: rescuing valuable items from burning structures while fire crews fought the fire. The business model included immediate assistance for everyone, with billing for nonsubscribers. Subscribers, presumably, paid less or nothing extra for service. The business grew rather slowly (Denmark is a tiny country, and it required about fifty years to saturate the country). By the time the Falck family sold the firm to Baltica Insurance (1988), it was probably the most respected firm in Denmark.

It's hard for an outsider to tell what the effect was on Falck. At the time, subscribers were mostly Danish, the firm was still quite small, and coverage of Falck in the business press was probably confined to Scandinavia. Baltica later sold a major stake in Falck, and in 1995, the firm was listed on the Copenhagen SE. By then, it had gone into empire building in a big way. It bought the Danish business of ISS, ISS Securitas (which Securitas AB bid for as well), plus several regional firms.8

The share issue permitted Falck to finance a merger with the remaining Sorensen holding, Group 4. Thereafter, Falck was no longer separately traded; it would be listed on the stockmarket as G4S. In the new entity, Falck had the advantage (institutionally) of not having family ownership; Lars Nørby Johansen had been brought in well after Baltica's purchase and partial divestment but had managed to secure himself there despite the absence of any loyal shareholder.9 In contrast, Jørgen Philip Sørensen (who died in 2010) remained in the minor role of chairman of the board, still damaged by the many scandals Group 4 suffered during the first couple of years as a correctional contractor in the USA.

One of the reasons why rising productivity over the last twenty five years has not translated into rising wages is that firms consolidate to capture external spillovers, i.e., market power over suppliers, consumers, employees, even financial markets and governments.  This is expensive, and absorbs an immense amount of revenue.  Firms respond, as did Falck, by cutting back personnel, reducing targets for customer satisfaction, and availing themselves of more advanced financial instruments.  Efficiency methodologies sometimes make a difference, but the larger (i.e., merged) firms don't seek efficiency so much as market power. Too much efficiency, after all, can reduce the systemic consequences of the firm's failure on affected governments, and cause them to become indifferent to the firm's comparative success.

Group 4 Falck soon after bought Wackenhut, the second largest US security firm (as well as its second largest private prison operator), Hashmira (the largest Israeli security firm), and Securicor.10 The newly created entity today has 657,000 employees and ongoing scandals over high-profile contracts it has mismanaged, such as the 2012 London Olympics; still, its operations globally make all of that inconsequential: in the Global South, it is very successful.

BIG AND BIGGER

That leaves Securitas AB, the Danish-originated, Swedish-based firm where I left off above: the Sørensen clan dissolving its ties to the company, whence it became a part of Investment AB Latour, a financial vehicle for Gustav Douglas.  Count Douglas is, according to Forbes (March 2012), the world's 418th richest person.

When I first began researching for this article, I had been startled to notice that Wackenhut was now the GEO Group, and it was owned by Group 4 Falck; then I noticed that, no, the GEO Group was now a tiny speck in the vastness that is G4S, plc.   More amazing still was that the old core of G4S, Group 4, had been the London side of a family empire whose other side was Securitas AB of Stockholm; and that Securitas had gone through a second phase of international growth, snapping up Pinkerton, Burns Security, and Loomis Fargo (USA) and Reliance (UK)--entities I remembered as fearsome hired guns. 

Now Securitas AB employed 309,000 employees in 50 countries.  The two old halves of Philip Sørensen's empire employed over a million people, a majority of them guards of some time.  Another piece--ISS A/S, once managed by Philip Sørensen and his son Erik--had 390,000 more. All three had grown with amazing speed to their present size.  ISS A/S was privately held, G4S, plc, was institutionally owned (at least, the re-listed Falck part is), and Securitas AB was... one of 70 companies wholly owned by Investment AB Latour.11

To be sure, not all of the firms are on the same order of magnitude as Securitas AB. And it's possible that in another year, G4S, plc, will partly unravel, Latour sell Securitas, and ISS be reduced to listing itself.  But for now, the empire of the Sorensens is opaque at both ends.

UPDATE: Falck A/S was spun off from G4S, plc, in 2005 and sold to Nordic Capital Fund V and ATP Private Equity Partners.  It continues to be mostly ambulance services, in seven countries of Europe.  In April 2011, Nordic Capital sold its stake in Falck to the Lundbeck Foundation. Today, 57% is owned by Lundbeck and 20% by the Kirk Kristiansen Foundation (KIRKBI Invest A/S). KIRKBI's most famous holding is the LEGO Group (toys, entertainment) and Lunkbeck's most famous holding is the pharmaceutical company H. Lundbeck. All of these organizations are Danish.12

ISS A/S, as I mentioned above, is also privately held. In 2008, a pair of private equity firms "took the company private," meaning they bought all the shares outstanding and delisted it: EQT Partners and Goldman Sachs Capital Management (GSCM).  In 2012, the Ontario Teachers' Pension Plan (OTPP) invested $437 million and the Kirk Kristiansen Foundation (KIRKBI Invest A/S) invested $187 million in ISS A/S. Afterward, this investment was regarded as 25% of ISS A/S's equity, implying that the entire firm was worth $2.5 billion.13


Notes 

  1. "The ISS Story" (p.1) refers to founder Marius Hogrefe as a draper; Dahlgaard, Khanji, & Kristensen (2007) merely refer to "a lawyer"(p.288).  Abrahamsen & Williamson (2010, p. 43) say Marius Hogrefe and Philip Sørensen. "The ISS Story" precludes this by claiming (p.2) that it was long after that the company was founded that Philip Sørensen was hired.  Group 4, Securitas AB, and ISS A/S were all founded or managed by members of Philip Sørensen's family; Falck came under Philip Sørensen control after it merged with Group 4.

  2. "History: G4S can trace its roots back to 1935 in the UK, making 2010 its 75-year anniversary," corporate history of G4S, plc, hosted at G4S's website (accessed 27 Feb 2013).
    [G4S]'s earliest roots in the UK appeared in 1935 when a former cabinet minister launched "Night Watch Services"--a modest enterprise with four bicycle-riding guards in old police uniforms. In 1951 it was renamed Securicor and it floated on the London Stock Exchange in 1971.
    With respect to Securitas AB,
    In 1934, Erik Philip-Sorensen brought the company into Sweden, buying Hälsingborgs Nattvakt, based in Helsingborg...
    (From Jay P. Pederson, International directory of company histories, Volume 42, St. James Press (2001), p.336.  I am not sure when or by whom, the original Swedish nattvakten were founded, but the ones mentioned are all for towns bordering the Øresund.

  3. "The family bought out the larger company in 1938, taking full control of the Swedish Securitas (ISS maintained the Securitas name elsewhere). Sweden now became the family's primary activity." Jay P. Pederson (2001), p.166.

  4. Kemp Powers, "Still sore," Forbes (4 Jan 2002; accessed 27 Feb 2013).  Powers was unable to reach Sven, who unilaterally decided to sell his 75% state in Securitas AB.  Displeased, Jørgen felt he had no choice but to sell his 25%. At the time, Securitas was worth far more than Group 4. AB Latour notes on its history page that it absorbed Skrinet.

  5. For the original Copenhagen nightwatch corps, see Sven Håkon Rossel, A History of Danish Literature, University of Nebraska Press (1993), p.107. It was founded by Ole Rømer, who is most famous for determining that light had a finite speed. For the reorganization of the Copenhagen municipal police, see Lester B. Orfield, The Growth of Scandinavian Law, University of Pennsylvania Press for Temple University Publications (1953), p.37. 

  6. I became aware of collaboration between DDRS and Electrolux via "The ISS Story" (PDF), but that article says it began with a 1976 plan to acquire and operate cleaning companies (globally?), p.5.  According to Electrolux's 1971 annual report (PDF), p.13, the two companies had shared ownership of ASAB for several years.

    My conjecture about the marketing strategies employed by DDRS/DFVS is drawn from reading between the lines of "The ISS Story." The author seems utterly befuddled by some unnamed storm that broke around DDRS in the early 1970s, leading to it changing its name and shifting its focus to the Global South. Unfortunately, Dahlgaard, Khanji, & Kristensen (2010) shed no light on the subject.

  7. My main source for the history of Falck prior to 1961 is Robert Rigby, "Denmark's Remarkable Rescue Corps," The Rotarian (Sept 1961 issue), p.14.

  8. Skaarup (2011), p.9

  9. Schmidt, Adler, Weering (2003), p.18. Schmidt, et al., are extremely favorable in their discussion of Falck & Group 4 management; arguably Schmidt had an interest in depicting another private security firm management team as positively as possible. According to the Danish Wikipedia entry for Johansen, he became CEO in 1998, not 1988. In an interview he tells Schmidt, et al. that that he has "been in the business for 15 years," implying perhaps that he spent ten years at Falck before becoming CEO.

  10. M&A activity after Group 4 Falck's creation in 2000 has been heavily covered in the Guardian Online. For the Wackenhut purchase, see "Denmark-Based Security Firm Group 4 Falck/Wackenhut Assailed by Transatlantic Union Alliance for Poor Practices in United States," PR Wire (9 October 2003).  Regarding Hashmira, see Peter Lagerquist and Jonathan Steele, "Group 4 security firm pulls guards out of West Bank," The Guardian Online (22 Oct 2002). For the new role of the firm once known as Falck, see "A fate worse than prison," The Guardian Online (11 Nov 2002).  Perhaps most unfortunately for Falck, Wackenhut's extraordinary notoriety comes from the behavior of one of its subsidiaries, the Australasian Correctional Management (based in Australia).  But Wackenhut has plenty to be embarrassed about on its own, which may explain why it changed its name the next year to GEO Group (All stories accessed 27 Feb 2013).

  11. Re: ISS A/S, see: "Company Overview of ISS A/S," Businessweek (accessed 27 Feb 2013); Re: G4S, plc, see Skaarup (2011), p.10; re: Securitas AB, see Latour: Holdings (website accessesed 27 Feb 2013).

  12. John Acher & Ole Mikkelsen, "PE-Backed Falck Explores IPO," Reuters (22 April 2010).  For H. Lundbeck A/S's foundation buying much of Falck from Nordic Capital, see Will Waterman, "Nordic Capital exits Falck," Reuters (28 April 2011).  On the current composition of Falck's ownership, see "About Falck: Owners," official webpage of Falck A/S.

  13. For the delisting of ISS A/S, see "PurusCo A/S completes the recommended tender offer for shares of ISS A/S" press release hosted at EQT Partner's website (9 May 2005; accessed 28 Feb 2013).  For the details of the later buy-in by OTPP and KIRKBI Invest A/S, see ISS A/S's 2012 Annual Report (PDF), p. 4. PurusCo was a Danish entity created by EQT and Goldman Sachs as a vehicle for the buyout.  As always, currencies are converted at the approximate date of the announcement.  In Oct 2011, G4S, plc, made an abortive bid to buy ISS from its owners; it offered £5.2 billion, or $8.1 billion ("EQT Partners and GS Capital Partners exit ISS," Invest IQ, 17 October 2011). 



Sources and Additional Reading

Rita Abrahamsen & Michael C. Williamson, Security Beyond the State: Private Security in International Politics, Cambridge University Press (2010)

"The ISS Story" (PDF), anonymous, hosted by ISS website (no date; accessed 27 Feb 2013)

Jens J. Dahlgaard, Ghopal K. Khanji, & Kai Kristensen, Fundamentals of Total Quality Management, Psychology Press, (2007)

Kemp Powers, "Still sore," Forbes (4 Jan 2002; accessed 27 Feb 2013). About the Philip Sørensen clan.

Robert Rigby, "Denmark's Remarkable Rescue Corps," The Rotarian (Sept 1961 issue), p.14.

Waldemar Schmidt, Gordon Adler, Els van Weering, Winning at Service: Lessons from Service Leaders, 1st Edition, Wiley (2003); note one author, Waldemar Schmidt, is a former CEO of ISS (whose main competitor, G4S, plc, is profiled in this book). 

Thomas Skaarup , "Strategic analysis and Valuation of Falck A/S" (PDF) Masters Thesis, Copenhagen Business School (Nov 2011)

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