Some Thoughts on Debt

I've been thinking some about debt. It seems to be the zeitgeist. There is nothing profound in this post. Mostly, I am just presenting a framework to think about lending and borrowing. The last part gives some of my personal debt rules.

Well, what this post lacks in profundity it makes up in length. Here is a small index.

What is Debt
Hedging the Bet
Different Kinds of Debt
When Waters are Calm
When the Storm Comes
Personal Protection


The other day I was in a shop that was being liquidated. I am always curious why businesses must close, so I spent a little time talking with the owners. One of the questions I asked was whether they had to take on much debt to open the shop. They said no, they used equity (the monetary value of a property or business beyond any amounts owed on it) from their home to finance the venture. For them, debt is defined to be any amount owed that exceeds net worth. That is, if you can sell all your property, and have enough to pay everyone you owe, you are not in debt. Even if this were an accurate definition, the home equity loan payments must have affected their cash flow.

What is Debt

The American Heritage Dictionary defines debt as:

1. Something owed, such as money, goods, or services.
2.
a. An obligation or liability to pay or render something to someone else.
b. The condition of owing: a young family always in debt.

The other side of the debt coin is loan
1.
a. Something lent for temporary use.
b. A sum of money lent at interest.
2. An act of lending; a grant for temporary use: asked for the loan of a garden hose.
3. A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan from the main office.

Loans and debt are all about the future. Both the lender and the borrower envision a future where the debt can be repaid, usually with interest. Ben Stein wrote a column about sales in which he recounted buying a car he wasn't sure he could afford.

In 1976, when I moved to Los Angeles, I desperately wanted a Mercedes 450 SLC, a car that was — even in used form — far more than I deserved or could afford at my entry-level, highly tenuous work as a scriptwriter. My salesman at Mercedes-Benz of Beverly Hills, Larry Anish, listened to my objections and simply asked, “Don’t you believe in your own future?” Of course, I bought the car.

In this case, the salesman wanted to sell the car. His financial interests only involved the sale. The loan, its terms, and its collection were someone else's problem. The salesman's projection of the future implied the fulfillment of dreams and faith in the buyer. In this case, I presume the bet was good. Ben got, and enjoyed, his car. The salesman got his commission, and the lender got the money back plus interest.

A different power dynamic occurs when someone wants a loan to start a new business. The borrower is generally the supplicant trying to persuade others that the wish should be granted. The lender usually insists on a business plan that takes into account foreseeable costs, revenue, and risks. The business owner dutifully uses the plan to project a future where the business succeeds and all parties prosper.

Hedging the Bet

Because the future is uncertain, lenders usually hedge the bet. This takes a number of forms.

In a "secured" loan the borrower offers something as collateral. Collateral is property or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default. With a secured loan, the lender is judging that even if the loan is not repaid, the collateral will allow recovery of the money owed. This was the case with the business owners who were liquidating their shop. They put up a portion of their house as a guarantee that they would repay the loan. Even after their shop is gone they must keep up the payments on the business loan or the lender may foreclose on their home to reclaim the remaining balance of the loan (plus interest, fees, the cost of the foreclosure...).

For secured loans, losses are limited to the difference between the amount due on the loan and the value of the property (less any costs for selling).

A standard mortgage is a secured loan where the lender owns the property until the debt is repaid. That is, the property itself serves as a stand in for future payments. The lender can only lose if the property loses value over time. A similar, but more risky, arrangement is used by venture capitalists. In exchange for money, the borrower gives up some portion of company ownership. This includes not only profits, but decision making as well. The business itself serves as collateral. The investors are projecting that if the borrowers cannot repay, the investors can seize the company and make it profitable.

Not all loans are secured. Sometimes the borrower and lender take a leap of faith together about the future. This is usually not a blind leap. Most loans are made with the expectation of profit and a weighing of risk. The amount loaned is balanced against the current situation of the borrower and past history of repayment. At the single loan level the lender generally requires that a trusted person, someone with a history of repaying debts and with current financial means, guarantee the loan. Lenders also vary the interest rate based on projected risk. As uncertainty of repayment increases, so does the interest rate. Over a large number of loans, the lender is assuming a certain percentage of defaults. The interest rate must be high enough to not only cover these bad loans, but to make a profit in addition.

The consolidation of financial information has allowed information about virtually all loans for all people to be tracked and shared. In this way, lenders enter into loans with a reasonably complete history of past borrowing and repayment. Financial models are used to project risk levels, hence the "credit score". In addition, lenders usually require some proof of current income.

The existence of elaborate systems to predict risk gives great comfort to lenders who deceive themselves that they understand the likely future. Unfortunately, the actual future is often unlikely. Every system of prediction devised by humans has failed, often catastrophically.

Different Kinds of Debt

Debt should not be considered a curse word. Much, if not most, of our built environment would not exist without debt. This includes roads, bridges, buildings, automobiles, computers... Most of the debts incurred to build these objects were incurred in good faith and paid off as expected. For individuals, both homes and cars are usually financed by debt and could not be bought without debt.

Debt is incurred for different reasons. Some of this is embodied in the language we use to describe debt.

One of the terms is "leverage". The term is analogy with mechanical system where a lever allows a small amount of force to move a large object. In the financial case, the lever is the borrowed money. The borrower expects a future where financial gains from the borrowed money exceed the cost of the money.

Suppose I wish to buy a commercial property and have $1,000,000. I could invest all of my money and buy a small property outright. If the property increases in value by 10% and I sell, I make $100,000 profit. Suppose instead that I pay 10% down and take out a loan for $9,000,000. If the property value increases 10% and I sell, I make $1,000,000 (less the interest paid on the loan). With the same amount of my own money, I make roughly nine times as much. That is, I have leveraged my money.

In general, lenders of leverage loans insist on knowing the purpose of the loan and do their own analysis of the financial viability.

Educational loans are a form of leverage. The increase in earnings that come from increased knowledge and skills is expected to justify the risk that incurring a debt implies. Even a car can be thought of as leverage if it allows the buyer to travel in a way that increases income (a job across town).

A second kind of loan is "credit". This term is a strange reversal of meaning. In accounting there are columns for credit and debit. That is, credit is the opposite of debit. In more general parlance, credit is something you earn or have. In the lending industry, you can borrow against your perceived financial credit. That is, you can get a "credit line" which is an amount of money the lender thinks you are likely to repay. This gets shortened to credit.

Parenthetically, another twist of terminology is "debit cards". If you use a debit card, the amount is immediately debited to your bank account. Usually a debit card can only be used if you have the funds to cover the expense. That is "debit cards" do not incur debt.

Because the borrower is judged on general reliability, credit loans are typically "revolving credit". That is, there is not a single loan with a set amount and a fixed number of payments. Instead, the amount of the loan and the size of the payment can vary from month to month. The maximum amount that can owed at any time is fixed. This limits the risk to the lender.

Credit loans are typically unsecured and the lender does not investigate how the money is used. Consumers typically use credit lines for everyday expenses. That is, the money is used in ways that do not increase future income. This makes credit loans more risky and, as a consequence, increases their cost to the borrower. Some of the cost is in higher interest. Another part of the cost comes from fees associated with the account.

There is generally a minimum payment that must be made on a credit account each month. However, the interest and fees associated with maintaining a balance are so large that the minimum payment due may not even cover the monthly interest on the loan. As long as most of the loan will eventually be repaid it is to the lender's advantage for borrowers to have a large outstanding balance.

For example, if a credit card company lends someone $10,000 dollars and that amount is paid off at the end of the month, the card company makes only the amount of the money that the merchant paid to accept the credit card (typically a one to two percent of the bill plus a per transaction fee of between four and twenty five cents). For $10,000 this might be a single payment of $100 from the merchant.

If the borrower does not pay back the loan at the end of the month, the lender starts collecting interest. Currently, credit card annual percentage rates for interest range between ten and twenty five percent. On $10,000 a fifteen percent rate would be $1,500 a year or about $125 per month. In an economy where a five percent rate of return is considered healthy, fifteen percent is very good money. Of course if the borrower defaults on the loan, the lender is out the principal loaned. At fifteen percent, it takes about seven years to collect as much in interest as the original loan.

Lenders who want their borrowers to carry the highest possible level of debt do not have the borrowers best interest in mind. It is very difficult for many people to defer desires. The promise of immediate cash is almost irresistible. Most adults know someone with a large number of credit accounts, many of them "maxed out". They may even be borrowing money from one account to make minimum payments on another. They are literally "borrowing from Peter to pay Paul".

When Waters are Calm

Everyone who has watched "It's a Wonderful Life" knows that the credit system is based on trust. As George Bailey says:

No, but you... you... you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house... (to one of the men)...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?

The system is built on debtors paying their loans in an orderly fashion. George Bailey's building and loan acts as a middle man. In George's bank the people lending the money are the depositors. The people borrowing the money are the homeowners. Often the borrowers are also depositors. If the amount of deposits, loan repayments and withdrawals are predictable the bank can have enough cash on hand to satisfy the small number of depositors who wish to withdraw their money.

There are three pillars of stability.

• The vast majority of loans will be repaid.


• Assets that secure loans maintain their value and are liquid (can be sold quickly).


• There is a predictable pace of repayment.

In orderly times (any time when this month looks a lot like last month) the system is resilient and can tolerate a certain number of loans not being repaid. As long as the average rate of default can be predicted the lender can factor that number into the interest rates for loans. The interest rate is not just a return on investment. It also covers losses from the few loans that are not repaid.

This desire toward order can be seen in pre-payment penalties. Some loans have a condition that penalizes the borrower for paying the loan before expected. The lender expects a certain amount of interest to be paid over a set amount of time. When the borrower pays back the loan early, the lender no longer gets interest payments. The pre-payment penalty compensates the lender for this "lost" income. Typically loans are repaid early because the borrower has found a lender with a lower interest rate. The pre-payment penalty keeps borrowers from jumping ship.

When the Storm Comes

Danger comes from disorderly times. Unfortunately, destructive feedback cycles magnify small problems and guarantee that there will be disorderly times.

The economy as a whole is incredibly interconnected with money flowing from person to person and organization to organization. This network does not just involve formal loans, it involves all non-immediate transactions. As an employee you are typically paid for work some time after it is done. This is not a formal loan, but you have loaned your labor with the expectation of a future repayment.

When expected cash stops coming in, the person or organization that expects the money does everything possible to recoup the loss quickly and to reduce the exposure to future problems. The response is typically two sided. One side is trying to replace the lost money, the other side is to reduce expenses so that the losses do not affect payments to others.

To replace lost money, organizations will typically try to be first in line for future repayment. In addition they will add fees and penalties to the amount due. Virtually every business invoice contains a provision for interest to be paid when the amount is past due. Usually there is increased emphasis on finding new customers.

Everyone who has worked for a large organization has seen it protect itself against cash flow problems. The first step is to reduce discretionary spending. The "Tuesday doughnuts" disappear. Training and travel are curtailed or eliminated. Then come hiring freezes, furloughs, and layoffs. When the problems are severe, expenses that are expected to yield future profits are eliminated. First to go is administrative staff followed by research and development. The sales force is a company's most immediate investment in profit. When layoffs hit the sales force it is a sign that the company is close to insolvency. Bankruptcy often follows.

Layoffs extend the problem from the business to individuals and families. Individuals and families protect themselves in much the same way as businesses. They try to increase income by finding new work or starting new businesses. Expenses not directly related to day to day survival are eliminated. Then credit card payments (past expenses) are ignored. Utility and shelter payments are next to go and finally food.

In our interconnected system, problems are infectious. If those who normally give you money pull back, you cannot spend as much with others. Those expecting your spending must, in turn, pull back. When a large portion of the economy is affected it is called a recession or depression. Recession and depressions are an economic infection so large that no single individual or organization can adequately respond.

Not every downturn spreads widely and there are different causes. When a single company fails, the surrounding economy usually replaces the missing goods or services and the workers find jobs in other firms. Some downturns are more widespread but do not affect the whole economy. The mechanization of agriculture causes farm labor needs to plummet while production remains high. Individuals lose their jobs and are forced off the land. When this happens the workers generally move to urban areas with more opportunities. This often leads to an increase in urban population and a large number of unemployed people, sometimes for a generation or more. This is devastating for the individuals, but the economy as a whole is often largely unaffected.

Personal Protection

Loans are about hope and the future. Don't discount your potential and your future, but try not to sabotage it either. There may be a time when you make a decision to "go for broke" because you think the potential rewards outweigh the potential risk. This is a good thing, but walk in with your eyes open.

The first step in protecting yourself and your family against financial trouble is to accept that trouble will come along. Someone will lose a job. The car will require expensive repair or replacement.

Temporary setbacks can be smoothed over by a reserve of cash. If the car breaks and you have some extra cash, you simply repair or replace the car. If you lose your job, the cash may see you through until you find another source of income.

Low income families may not be able to create any reserve. These families have no recourse and must respond to events the best they can. There are government programs (food stamps, section 8 housing ...) that may help, but basically you are on your own. When thinking about government aid, just remember:

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread. (Anatole France from The Red Lily, 1894)

One of the first responses to financial trouble is to reduce expenses. It is in this area that loans become dangerous. Loans are typically a fixed monthly expense. That is, they are an expense that cannot be reduced without starting a chain of negative repercussions.

Once again the poor get the short end of the stick. If you have no cash reserve but do have access to a line of credit, you can smooth over trouble by borrowing. Long term, this is a losing strategy. Loans always involve fees and interest and short term loans are the most expensive. If you cannot afford to create a cash reserve, you probably cannot afford the fees and interest. However, such loans may be the only recourse available.

Currently I am fortunate. I have sufficient income to cover my expenses and to create some reserve. Part of this is income, part is inherent conservatism. It is in my nature to avoid ongoing expenses.

If you can afford them, I recommend some rules of thumb.

• Never use a credit line except to consolidate payment. I use a cash-back card for many purchases but I pay the balance in full every month without dipping into cash reserves. In fact, I go one step further. I do not put anything on the card unless I currently have enough money to pay for it. That is, I do not buy something on the fifth of the month with the expectation that my paycheck on the fifteenth will cover it.
  


• Do not incur a regular payment that prevents you from saving a little every month.
  


• Only borrow as leverage. That is, the money should be used in a way that will pay for the total amount of the loan. For a family, a mortgage is in this class. Shelter is an expense that cannot be avoided. If you intend to live in a place for some time, paying a mortgage rather than rent may make sense because the non-interest portion of the payment buys property that can be sold later. This can be a good long term investment even if the property decreases somewhat in value. Rent is simply lost.
  


• In flush times, pay down debt. I bought my current car with a loan. A couple of years after the purchase I got some unexpected cash. I used that to pay off the car which eliminated a fixed monthly expense.
  


• One way to create a cash reserve is to pay ahead on loans. I am several months ahead on my mortgage. When a cash crunch comes, that gives me an expense I can eliminate for some period of time.
  

Student Debt is Bad for All of Us

In the Atlantic (online) Conor Clarke wrote a blog entry called "Let College Students Get Into Debt". One statement in the note really stands out.

The second problem is more specific: if the the point of credit-based consumption is to bring lifetime consumption more in line with lifetime income -- as I believe it is -- then college students more than anyone else should be getting into debt.

An interesting rebuttal can be found at
Problems With Clarke's Student Debt Post.

The practical absurdity of the Clarke's statement can be seen in the phrase "bring lifetime consumption more in line with lifetime income". Let us make the giant leap of faith that individuals and lenders are rational enough to take expected lifetime income into consideration. In order to smooth out our consumption we would have to have an accurate notion of an individual's lifetime income. This brings to mind my favorite John Kenneth Galbraith quote. "The only function of economic forecasting is to make astrology look respectable." It is the rare person of any age who can accurately predict their income even five years in the future.

The best information about lifetime income comes from statistics about current and past incomes for people in various occupations. This information is useless to an individual for several reasons. First, it is out of date. If the buggy whip apprentice in 1890 had access to these kind of statistics, he would feel good about borrowing money because his future was so secure. Second, it assumes an occupation. Apparently the average college student changes majors two to three times during the course of their studies. Most basically, aggregate statistics may not accurately describe the situation for any individual Averages and Actuals.

Every debt you incur and intend to pay limits future options. Suppose you are a college student anticipating a career with a relatively high income and you borrow commensurately while you are in school. When you graduate, you must quickly (usually within six months to a year) generate sufficient, steady income to service the debt. This puts lower income jobs out of reach. The problem is, many career paths demand some time at a low income. If you cannot tolerate a low income for a period of years, you may not be able to start a business of your own.

Student debt is pernicious because it limits options at a time of life where options are most important. Individuals and society gain when bright people are free to pursue their dreams. These people often give us the new ideas and new businesses that are the lifeblood of the future. One of the natural times for this adventure is the time between schooling and family. Many of our brightest and most educated end their schooling not with a clear field of opportunity, but with the almost immediate need to generate a steady income to service school debt. For many, this pushes them down the employee rather than the entrepreneur path.

Can't we all just get along?

A new coffee shop opened across the street from the office where I work. The local paper had a small article and the online version allowed readers to comment. At another location of the same shop a couple people had bad experiences and posted them. The two incidents were a pregnant woman (eight months) who was feeling ill and put her stocking feet (shoes off) up an a chair to raise them. The owner came by and asked her to take her feet off the chair. The second incident was when a couple of families had strollers that were blocking an aisle. Again, the owner told them to move the strollers. In both cases the people did not complain that they were asked to stop what they were doing. They were upset because the owner yelled at them and treated them badly. Some people called the owner "a jerk".

A second group spoke up in favor of the owner saying the original posters were unbearably rude and deserved the treatment they received. Terms used for the (ex) customers included "self-entitled yuppies", "self entitled a-holes", and "self absorbed". The vitriol was strong.

In thinking about it, I think the "self absorbed" title is probably not far off. The customers engaged in actions that I find completely innocuous, but apparently offend a fair number of people. I think "self entitled" probably better describe the group that defended the owner. Self entitled seems a perfect title for people who expect everyone around them to conform to their notion of correct public behavior. As for the owner, yelling at people probably does make him a jerk.

If something poses a danger to you or others, step in and fix things. But be aware we live in a very large world among people with vastly different upbringings and customs. What is outrageous to one group of people is ordinary to another. I am reminded of the Scandinavian nanny who was arrested in New York because she left the baby in a stroller outside and went into a store. In her home city that was ordinary and expected behavior.

Each of us is upset by different things. In the face of this, we should give each other a little slack. If you find yourself getting upset, ask yourself if your feelings are well grounded. In the case of stocking feet on a chair there is essentially no chance of harm being done to anyone. If you feel strongly about feet on chairs, have a serious discussion with a shrink about why that is. If you are irritated by strollers in the way, politely help to correct the situation, but be aware that people are pretty good at avoiding obstacles.

Also, put yourself in the other person's shoes. Almost everyone has had a crummy day and blown up over some small thing. All of us have had other things on our mind and inconvenienced those around us. Let's all sigh and smile a little more at what we perceive to be bad behavior and try to dial down the outrage. Can't we all just get along?

Josie is Gone

My dog is dead. Josie was almost fifteen. For a long time she had been in decline. First calcification of tendons in her legs and arthritis. Then she lost her hearing and her eyesight became dim. She became progressively weaker in her legs and would sometimes just fall over. Yesterday morning she had her second bout of a vestibular problem that removed her sense of balance. Her eyes jerked spasmodically and she could hardly get up. The first bout of balance problems was a couple of years ago. On the vets advice, we just let her work through it. This time, faced with all her other difficulties and obvious pain, I decided to euthanize her. She died in my arms at the vets office this afternoon. Silver was there with me and it was a good thing. I don't know how I would have handled it alone.

Josie was a border collie. She lived to please and serve. When she was a puppy I took her to an obedience class. It was difficult for her because, like many border collies, she was extremely shy. Most dogs were given treats as a reward, but Josie would not take them. A simple word of praise was all she wanted. For discipline, a disapproving glance was usually enough. When we house trained her and she would have an accident, I would look at her and say "uh oh". This became a curse word for her and for years afterward I had to be careful about muttering "uh oh" under my breath lest she think that she had done something terrible.

Border collies need something to do. Josie was a runner and a tennis ball dog. Josie was a wonder. She didn't just run, she ran full out and she ran where she was told; in and out of gates, right and left based on both verbal and visual cues. She was obsessed with tennis balls. Sometimes I work from home. One day I looked down and had seven tennis balls at my feet. Inside we would throw balls across the room or down the hall. It was so unconscious that I did it without interrupting my work. She would put a ball on my lap so that it was convenient. Outside, she vastly overestimated my strength. If I was throwing the ball, she would run out two hundred yards and look back saying "throw it to me here!". Even using a tennis racquet as an aid (which I often did), I couldn't get it that far.

Josie always tried to get visitors to play her tennis ball games. For her, the game was to see how much she could get the ball thrower to work. She would drop the ball some distance from the thrower. Many people assumed that she was shy and a dog that almost knew how to fetch. She just required a little more training to bring the ball all the way back. A few minutes would do the trick. In fact, Josie was training them to work just a little harder to get the ball. If you walked ten feet to pick up the ball, the next time she dropped it, it would be twelve feet away.

In another blog post, http://colin-quodlibet.blogspot.com/2008/07/running-dog.html,I talked about the legal trouble we got into. When I was forced to stop running Josie in the park I never forgave the city. To this day I view the city bureaucracy as malevolent and incompetent. This city and its inhabitants love order over freedom and for no reason destroyed the fun that Josie and I had in the park. Even though I have no plans to move, I do not feel at home here.

We got Josie as a family dog, and so she was. She played with and loved all of us. As is common with Border Collies though, she needed a master. I was that person. I trained her and I think it is fair to say that she was my dog. For most of her life, Josie slept on our bed. That stopped only when she got too old to jump up. Through her whole life, Josie followed me around. If she didn't see me for a while, she would come looking.

I say that I trained her, but as everyone who has a good companion dog knows, that is not true. We trained and adjusted to each other. I talk about verbal and visual signals, but that does not convey the subtlety of the communication. We had a sound and gestural system that involved known signals, but also the tilt of a head or the lilt of a word or bark. We were partners.

She was a puppy. She grew up to be a strong and proud adult, then declined in her old age. She had as good a life as we could give her. Now she is gone. My right arm is missing and I will not get it back.

Singular Memories

I have noticed a memory phenomenon that I haven't heard discussed. Memory is normally discussed in terms of persistence. There are at least three layers of memory: sensory, short term, and long term. As is often the case, wikipedia has an excellent primer on this, http://en.wikipedia.org/wiki/Memory. What I have noticed is what I will call a singular memory. This is a specific long term memory where we only remember one of a series.

The quintessential example of what I call a singular memory is the combination for a lock. If you ever went to school in the United States, you undoubtedly owned a series of combination locks. Every day you unlocked the lock, perhaps several times. If you ask someone the combination of the lock they had two years ago, they probably will not remember it. It is as though there is one spot in memory for a lock combination and remembering a new one erases, or at least substantially dims the memory of the old one.

Another example is parking spots. When you park your car at a store, you remember its location for hours. This implies that the memory is long term. on the other hand, if I asked you where you parked at the same store two weeks ago, you may have no recollection at all.

Though I call this a singular memory, in fact it is not completely singular. One year at school I absent-mindedly wandered to a locker I had several years before. I was in the middle of dialing the combination I had for that locker before I realized I was in the wrong place. In the same way, if I remind you of exactly what you bought at the store two weeks ago or an incident that occurred on the way out the door, you may remember where you parked the car that day.

I believe that these singular memories may be a byproduct of the mechanism of recall. Memories are not replayed. They are reconstructed. This reconstruction is a mini re-enactment where the neurons involved in the original experience are re-activated. During this reconstruction the original memory is subject to change. I think that when we memorize a new combination for a lock, it is as though we misremembered the old combination and re-stored the new combination as the original memory. When I wandered to my old locker, I was not just trying to remember a combination, I had the entire sensory experience of an earlier year. That sensory experience triggered the original memory in context as opposed to the more abstract number whose memory was normally reinforced by a new locker location and other details.

To summarize I have proposed a new type of memory, a singular memory. I gave a couple of examples, then demolished part of my own argument by showing that the memories are not actually singular. Finally I proposed a mechanism that might explain how this type of memory, which may not exist, works.

Limits of Analytics

If you read many of my posts, you will discover that I am an analytic person. That is, I tend to look at situations from the outside and try to figure out what is actually going on through the use of observation and reason.

Despite (or perhaps because of) this natural tendency, I am well aware of the limits of this sort of analysis. There is a strong strain in my culture that believes rational analysis is the primary basis of human knowledge and that this sort of knowledge should underlie action. I think this is a pernicious view that cheapens us as humans. Our ever increasing scientific knowledge base can protect us from some of our cruel and irrational tendencies. For example, the existence of the well respected Centers for Disease Control in the United States will keep us (unlike the Egyptians) from slaughtering all our pigs because we are threatened with the "swine flu". In general though, analytic knowledge is too incomplete, too prone to error, and too slow to serve us in most situations. We have other, more effective tools to make our way through the world.

Violin construction is an excellent example of how humans actually learn and change. the golden age of violin construction occurred three or four centuries ago. To this day we do not understand why the Cremona violin construction produced what we feel to be superior instruments. In the intervening centuries we have developed mathematics and simulations that have improved our understanding of vibration and acoustics. We have used this and our knowledge of consistent manufacturing to create increasingly better musical instruments in increasingly large numbers. As with so many other things, we live in a golden age. It has never been easier or cheaper to own a fine musical instrument. That is, our analytic knowledge has raised the bar, but it has not allowed us to attain the level of mastery achieved by people without these formal analytic tools.

So how do we actually learn and progress in areas that cannot be understood by current analytic techniques. In short, trial and error. Humans rarely invent, but we have a marvelous capacity to vary what we do and to detect the effects of the variations. Most of what we call invention is really applying existing knowledge to a new area or amassing small sets of variations to achieve a shifting goal. Violin makers have rules accumulated through experimentation. These rules govern the choice of materials, their manufacture (strike here with your fingernail and if it sounds "dead" thin the material over in this area). These rules do not come from any kind of mathematical analysis and only rarely from a rigorous program of experimentation. Instead they come from the accretion of experience over generations. This experience is based on a deepening, visceral understanding of the desired end and the practical means to achieve it.

A generation ago there was much work on "expert systems" that could replace humans in various areas. The general notion was: figure out the rules people use to solve problems, encode those rules, and replace the human with a computational engine operating over the rules. The first step was to find a competent expert and extract the rules. Usually this failed. Most experts could not express the rules and those who could were often wrong. Observation of actual problem solving shows that it is a wonderfully complex and non-linear activity. People try one approach, and abandon it midway. They put down the problem altogether and work on unrelated things. They try different approaches in seemingly random order. Some approaches seem to not make much sense. They pick up abandoned work and add to it. After the problem is solved, they explain (and remember) what they did as a linear sequence that led to the solution, but that does not fit the actual activity.

There are limits to most of our analytic techniques. Many practical problems are frightfully complex and often chaotic in the mathematical sense. I have little doubt that we will continue to increase our analytic tools, but the end result may provide only statistical rather than direct guidance. For these situations we can make informed guesses, but having a ninety percent chance of success doesn't help much if you find yourself on the ten percent side.

One reasonable response to complex situations is to make them simpler. This underlies much of modern manufacturing and business. If materials used in manufacturing are not uniform, manufacturing techniques must adjust to the differences. A good solution is to improve the raw materials to eliminate the variability. On the human side, we invent personnel rules that constrain how employees are treated. This simplifies management and gives people a sense of fairness and boundaries. At the same time it depersonalizes and turns the most unique of animals into an industrial part. I was once on a conference call where someone started referring to "human capital". I told him that if he called me that I would hit him.

As biological animals we have evolved to be incredibly adept at a rapid, subconscious, and often amazingly accurate analysis. The trick is to harness this biologic capacity while using our analytic knowledge to inhibit our more destructive automatic tendencies.

Over time, analytic knowledge tends to increase faster, be more reliable, and be transmitted more easily than experiential knowledge. Serious inquiry requires rigorous analysis and careful, controlled experimentation. But in novel situations (almost every situation we encounter) and in areas where we are expanding our knowledge, purely rational techniques do not serve us well. There is some special non-analytic human capability that allows us to succeed.

Language, Dialect, Idiolect and Beliefs

Linguists have a set of words to identify variations in speech. These are language, dialect, and idiolect. A language is a set of words and the grammatical rules used to put the words together. A language enables a set of people to communicate. Even when people speak the same language there are often regional or class differences in the pronunciation, word choice, and grammatical structures. These are called dialects. For example, on the East coast of the United States many people put an extra "r" sound at the end of words, so "idea" sounds like "idear". These same people usually have pronunciation that distinguishes the words "Mary", "Marry" and "Merry". In the mid-west, those three words usually sound the same and are distinguished by context. In "standard" english the word "you" can mean either one person or a group of people. In the southern United States these are distinguished. "You" means a single person, "y'all" means a group of people, and "all y'all" means every single individual in a group. Idiolect refers to a particular person's pattern of speech. Each of us has idiosyncratic patterns of words and expressions.

The division of speech into languages, and languages into dialects is not precise and different people will argue for different lines, but there are clearly different languages and different dialects. Even people raised together in the same family differ in word choices and modes of expression.

These same sort of groupings exist in many other areas of human life. For example, Christianity is analogous to a religious belief language, Lutherans have a "dialect" of Christianity. If you question closely you will find that each individual Lutheran has a particular and distinct set of beliefs. The same is true of politics. The industrialized democracies of Western Europe and (to a lesser extent) the United states have similar structures to create and change government officials through elections. This is the political language. The dialects typically have the words "liberal" and "conservative" attached to them, though the meanings of these words is different in different times and places. Finally, there are personal differences. Even the most ardent "conservatives" will differ on basic issues.

With belief structures, it is often true that the most violent disagreements occur between groups that agree on almost everything. For example, Shiite and Sunni muslims. In Christianity there were centuries of violence between Catholics and Protestants. When someone has beliefs that are completely foreign, it seems to be easier to dismiss them as outsiders to be ignored or tolerated. If someone almost agrees with you, then the differences are stark and it is hard to understand how the other person can be so sensible on some issues but so obviously and completely wrong on others.

There is a quote attributed to various people (including Wilde and Shaw) describing the United States and Britain as "Two great nations divided by a common language". In some sense we should treat everyone this way. Be aware that words and phrases, and hence the ideas they represent, have different nuances of meaning for each speaker. It is necessary and desirable in common conversation to gloss over these differences. But, when the stakes are raised and common understanding must be achieved, be very careful about examining these differences.