WHAT's IN A NAME?

Howard S. Katz wrote this blog here.
8-18-08

In commenting upon the recent (July-August) decline in commodity prices, Bloomberg news service recently reported:

"Commodities, measured by the CRB, are down 20 percent….”

Bloomberg, 8-15-08

This would seem to be an unobjectionable statement, mathematical in its precision. There is, alas, one problem. What is the CRB?

The Commodity Research Bureau was an organization founded in the 1930s by a group of economic types to study the commodity markets. In the mid-1950s, they started to compile an index of the most prominent commodities to do for commodity traders what the Dow Jones Index had done for stock traders. This index was called the Commodity Research Bureau (CRB) Index, and for half a century it served its function well. It told commodity traders what commodities as a whole were doing.

But in 2004, with the founding generation gone, the CRB, now a successful and established organization, had passed into the hands of a new generation. A generation educated in the new way of gathering knowledge. The new generation sought knowledge by hiring a group of authority figures with long and impressive titles to rework the CRB.

I will save you a lot of complicated mathematics and say that the new index they came up with was half crude oil. Each commodity was given a special weighting, and when all the calculations were in, crude oil and its associated commodities (heating oil, unleaded gasoline and natural gas) had a weighting of close to 50%. Since there was a high probability that the other commodities in the index would cancel each other out, the new index pretty much moved up and down with crude oil. The authority figures with their impressive titles had taken away the CRB index and in its place put in its place one commodity. It would have been like taking away the Dow Jones Index and substituting a new index based on GM. GM may be an important stock, but it isn’t a proxy for the market.

Fortunately, the new Commodity Research Bureau knew that they could not just throw out the old CRB Index. That would risk another group picking it up and taking their business away from them. So they kept the CRB Index and changed its name to the Continuous Commodity Index. The new index they called the Reuters/Jeffries CRB Index (hoping that it would be abbreviated to CRB Index and thus confused with the old index).

Of course, if one wants an objective record of what commodities have been doing for the past half century, then one needs to track the same index over that period. It would not be valid to track the DJI from 1956 to 2004 and then switch to GM all the while calling the whole thing the DJI.

In short, the new Reuters/Jeffries CRB is a worthless piece of garbage, and any commodities trader with half a brain will give it no further thought. It was to head off this kind of thinking that the modern CRB gave the new index the name of the old one and changed the old one’s name.

Now perhaps you might say, “Well, these people originated the index. They named it in the first place. They have the right to change the name to anything they want.” The problem, however, is that a name stands for an object. If a young couple has a child, they have the right to call him “Bill.” But if they have a second child 20 years later, they do not have the right to call this second child Bill and rename the first. The character of the first child has become associated with the name “Bill.” People who know him will become confused, and his reputation may (undeservedly) suffer. This is the kind of confusion inherent in the idea that definitions are arbitrary.

Let me take another example. Ever since there has been a science of economics, economists have known what money is. Money was the economic good with which you could buy things. For example, if you want to buy a car and go to the dealer, the dealer will only accept one thing in exchange. If you bring a famous painting to exchange for the car, you will be refused. They will tell you, “Sell the painting for money, and come back and give us money for the car.”

But in the 1980s, Milton Friedman announced a new “money” (which he called M-2), which included short term loans (bank certificates of deposit). This has the same problem as the painting above. It cannot be used to buy things. If you take a bank CD to the car dealer, he will tell you politely to turn it in for money and come back. Soon M-2 had spawned a dozen brothers, up to M-13.

To come up with something like this takes a Nobel Prize winner. Oh, excuse me. I forgot that there is no such thing as the Nobel Prize in economics. It was not one of the 6 prizes described in Alfred Nobel’s will. Indeed, it came along more than 70 years later. Somebody just announced that they were giving a prize in honor of Alfred Nobel. By calling their prize by this name, they were trying to give it the distinction and honor which the prize had acquired over the years. The world press fell for it hook, line and sinker.

The creation of M-2 is a serious problem because in trying to predict a rise in prices, one must take account of any rise in the money supply. If two people cannot agree on what money is, then they cannot predict when prices will rise. Prices only rise as a result of an increase in the economic good which is used to buy things.

Another of my favorite examples is the concept of capitalism. This concept was first used by Karl Marx, and he never defined what capitalism was. For the next century, Marx’s followers would call anything they did not like “capitalism.” For example, Hitler called himself a socialist (as in National Socialist – NAZI), but his leftist enemies called him a capitalist. Adam Smith never used the word. Neither did the classical economists (including Herbert Spencer). I have learned from bitter experience that whenever I hear the word, I am sure to be served up a pastry of confused gobbledegook.

The advantage of simply making up one’s own definition is that you can prove pretty much anything you want. But this is a big disadvantage in the honest search for truth. If you want your ideas to correspond to reality, then you must have accurate definitions of the concepts you use. And since any society has intuitive definitions for all its concepts, intuitive definitions which capture our minds and in terms of which we think, your explicit definitions have to correspond to these intuitive definitions. Otherwise you will confuse the two. Pretty soon you have won the argument and lost the search for truth. (The intellectual world is full of people who “cleverly” start out with formal definitions they know will lead to the conclusion they wish to reach. But these definitions do not correspond to the concept. For example, some sound money types, with whom I am in basic sympathy, defined inflation as an increase in the money supply. They did this so that they could “prove” that inflation is caused by an increase in the money supply. They have been hammering away at this point for over half a century and have still not convinced any of their opponents. If they define inflation as a general rise in prices, they will have a bit more success.)

For example, I define a witch as a woman who has magical powers used for evil. I don’t believe that witches exist. But when I define the concept, I have to put into words the (intuitive) idea of the people in my culture even if they do believe in witches. If I don’t do that much, then I will never be able to convince them that witches don’t exist.

The problem is that modern intellectuals support the arbitrary nature of definitions. It creeps into our culture, and it makes (most) people stupid. For example, do you remember being told early in the year 2000 that the DJI was going to 35,000? It was in all the papers. The New York Times and the Wall Street Journal cooperated in shoving that idea down our throat. Did you buy stocks just before the horrific bear market of 2000-2002? Well, you are allowed a few mistakes, but you are expected to learn from them.

When I first took philosophy courses at Harvard, I was told that all they could teach me was that they didn’t know anything. Hey, wait a minute. The reason I went there in the first place was that they told me they knew more than anyone else. If they couldn’t teach me anything, then what was I paying them money for? How about a class action suit to get my tuition money back?

One of the things I learned about Harvard was that of all the things I learned there, nothing worked. I couldn’t do anything with my “knowledge.” Fortunately, I studied on my own before going to college, and this gave me some ability to question my professors. After college, I continued to study on my own, and now I realize that they are nothing but a collection of frauds.

Unfortunately, this collection of frauds continues to corrupt our youth and dominate our society. They make everybody dumb. We are so dumb that we even buy Books for Dummies. In a previous generation, any book reader would have been offended by such a title, and a book with such a title would not have sold. Today’s book buyer meekly accepts it because he feels himself to be a dummy.

Unlike my college professors, readers of this blog are expected to admit and learn from their mistakes. If it doesn’t work, then it isn’t true.

If you do nothing more than read The Federalist Papers or some of the other works of the Founding Fathers, you realize that the intellectual level has collapsed over the past 2 centuries. We are now seeing the cultural and economic collapses which are the result of this. And if nothing is done to stop it, we will eventually follow the path of ancient Rome.

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Howard S. Katz can be visited at http://www.thegoldbug.net.