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Perhaps Sometimes Water Flows Up

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March 25, 2010 – Comments (26)

My biggest failure in writing these blogs is that I haven't delved into some of the deeper problems and philosophies that make economics such an unusual and difficult science.  At first, I didn't think there would such an audience for this kind of discussion, not here or anywhere.  However, you continue to prove me wrong, and so let's look at some of the background issues that plague economics.  This is a long post. You have been warned.

First, I want to touch on why these issues are important.  Look around today and you can readily identify that you are indirectly a victim of bad economic theory.  These ideas include protectionismm, inflationism, welfarism, various broken window fallacies, and many more.  Since economic ideas, good or bad, can have such a tremendous effect on your economic well being, any person that cares about their wealth and the wealth of future offspring should take the time to consider the foundations of these ideas. 

Health care has passed.  I am not surprised:

"They caused the problem.  They'll do whatever they want to fix it, including making the problem worse.  That's government". - whereaminow. March 19,2010.

The Democrats are facing a violent backlash.  Again, I am not surprised:

"Hatred toward, or paranoia about, a person's government is not a trait monopolized by any one ideological group.  It is an individual's reaction to a real or perceived threat to control over his own destiny. " - whereaminow, March 8, 2010

People want to get fired up about health care, about Liberals vs. Conservatives, about any issue where we can identify it as a two-sided issue.  But before you run off to facebook and post something you will regret, take the time to understand how we ended up here.  If you don't, you are certain to find yourself confused and angry over and over again.  If you don't understand economics and politics, how can you ever expect to change things for the better?

Praxeology vs. Empiricism

Before Milton Friedman, the dominant position among economists was that economic truths can be determined apodictically, that is to say that there are certain things about our objective reality that are true or self evident. If our premises are sound, we can then deduct certain consequences that must also be true.  This was not only the position of the Classical Marginalists like Menger, and eventually his student Ludwig Von Mises, but also of J.M. Keynes. 

Let's look at some statements that I believe are self evident truths about our objective reality as it applies to economics:

Two parties that engage in a voluntary transaction must perceive that they will benefit, or else the transaction would not take place.

How would we falsify this statement?  Can we say that people will enter into voluntary transactions even when they will not benefit?  Which planet do these persons reside on, because it certainly wouldn't be on the Planet Earth.  But how could we prove such a falsification is wrong?  Should we stand at the grocery line and ask each consumer if they feel better off with the food they bought than they did before they bought it?

That which the party to a transaction foregoes must be lower in value to them than that which they gain.

So a consumer that buys groceries must value the food more than they value something else they could purchase with the money they have available.  Again, this describes the objective reality of our world just as saying "two objects can not occupy the same space at the same time." 

There are things that we can say about our world that match reality that are not merely hypotheses to be tested or definitions of commonly understood terms.  We call these statements axiomatic. 

However, this is not the dominant position in economics today.  To say that the revolt against logical deduction started with Milton Friedman is unfair.  Friedman, a champion of Capitalism and father of the Chicago School, merely attempted to apply Karl Popper's insights on what he called "Logical Positivism" (a contradiction in terms as I will show you) to his own economic insight.  The followers of Keynes, particularly Paul Samuelson and his followers Paul Krugman and Brad DeLong, are the most prominient Economic Positivists today, and are often referred to as Neo-Keynesians to mark the distinction between their ideas and Keynes' classical approach.  Nearly all universtiy economists in every country today are influenced by Positivism.

(As a side note of humorous implications, if you are an avid reader of Krugman or other positivists, notice how often they make statements which appear to be apodictic.  They will often claim that their opponents' ideas are not rigorously tested, but that there own insights are self-evident. Ah, the irony.)

So it would help to understand what is Positivism.  Then you'll start to understand why Krugman writes as he does, why the mainstream economists rarely disagree on major spending issues, and why they are so completely wrong so often.

Positivism is based on the idea that we can not know anything about our objective world that is of any value without testing it.  In the Positivists' playbook, there are two types of statements: Hypotheses and Definitions.  Let's look at this statement:

If you double the amount of money in an economy, while the amount of producer and consumer goods remains constant, prices will increase.

To a Positivist this is a Hypothesis.  It must be tested before we can say it to be true.  So the Positivist solution is to double the money supply and see what happens.  However, should the money supply rise as the axiomatic statement indicates, what can the Positivist do?  They can then say, "Well there are certain variables that we did not account for.  Once we account for them, we can show this to not be true."  And so, they will try the experiment again. 

We can say:

If you raise the minimum wage above the existing price of labor, to say $1,000 per hour, unemployment will follow.

Again, to a Positivist this is not a truth of our objective reality.  And if this policy does result in widespread unemployment, that only means they have not accounted for certain variable factors.

You can be rescued from Logical Positivism with your old friend logic.  A Positivist can say that every statement is either a Hypothesis or a Definition.  A Definition, according to Positivists, must be in the form of an  If, Then. (A definition of any other kind is merely an agreed upon meaning on the arrangement of symbols and as such, carries no significance in their eyes.) But what kind of statement is: "every statement is either a Hypothesis or a Definition?"  And since Logical Positivism asserts that everything must be tested before we can be certain of its veracity, how do we know that Logical Positivism itself is correct?  Shall we look at every statement in history and measure it up to Positivist standards?

Water always flows down

Logical Positivism is an exercise in turning the sublime, like "water always flows down", into the ridiculous, "perhaps water sometimes flows up."

There are great benefits to being a positivist.  Can you guess how many people Ludwig Von Mises had on his research staff in Vienna, at the height of his intellectual activity?  The answer is zero.  He worked from a priori maxims, self-evident truths of our objective reality, and attempted to deduce logical outcomes of various economic policies.  (More on this method in a bit.)  If everyone were a Misesian, most mainstream economists would be unemployed.

A final blow against positisivism is the case for Ethics.  Positivists do not recognize ethical statements as having any value.  They are normative statements purely subjective to the tastes of individuals.  One of the most curious aspects of Positivism is that its supporters, often liberals and progressives, use Positivits arguments as Ethical arguments.  This is clearly a contradiction.  If Positivists believe that ethical statements have no value, then Liberal arguments for health care, climate science, welfare, and a host of others, based on Ethical beliefs have no value either.  Water truly flows up in a Positivists' world.

All economic action is purposeful action - Ludwig Von Mises

So what type of science should economics be?  Should it be based on empirical testing or on logical deduction?  I don't think that either should be ruled out completely as useless.  One of the cheap shots you will see leveled at the Austrian School is that they do not believe anything should be tested empirically.  Simply not true.  Take this statement for example:

Children prefer Burger King to McDonald's.

Is this the sort of economic statement that is axiomatic?  Or should we perhaps test this idea somehow before we are sure it is true?  And even then, should we declare it true through testing for all time, or should we revisit it as tastes change? 

Or this statement:

Americans visit India more often than Australia as a tourist destination

These are not apodictic statements like "all economic action is purposeful action."  Where the Austrian School differs from the Positivists is that they have a clearer understanding of where is the difference.

For Austrians, the study of economics begins by finding self evident truths about our objective reality and logically deducing from there.  The a priori maxim of the Austrian School is that "all economic action is purposeful action."  The science of praxeology (the study of human action) is the foundation of the economics of Ron Paul, his mentor Murray Rothbard, and Rothbard's mentor Ludwig Von Mises.  The conclusions derived through this type of analysis differ dramatically from the ideas of the mainstream economic schools, both the Chicago School and the Neo-Keynesians. (Even though, ideologically, the Chicago School and the Austrian School share many commonalities.)

I hope this discussion enlightens a few Fools.  It doesn't reverse the Health Care bill or end Federal Reserve control of our currency, but if you want those things to happen you can't achieve your goals unless you understand what you are up against.

David in Qatar

26 Comments – Post Your Own

#1) On March 25, 2010 at 2:11 PM, nzsvz9 (< 20) wrote:

David,

"Two parties that engage in a voluntary transaction must perceive that they will benefit, or else the transaction would not take place."

Contracts are based on the components of offer, acceptance, competent parties, and legal purpose. In general what you say is true, but as a member of a large family, I do not always enter into contracts wiuth family members based on my personal benefit - which may be the exception, sure.

Maybe that's the definition of charity.

Known as the softer side of nzsvz9

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#2) On March 25, 2010 at 2:16 PM, whereaminow (22.93) wrote:

nzsvz9,

Don't forget that it is the "perceived" benefit that is the reason for the transaction.  The perceived benefit may not be a wealth-adding benefit.  For example, we enter into charity voluntarily, not because we percieve that we will be wealthier, but because we will benefit from such an action in other ways (via karma, religious obligation, peer pressure, feeling better about yourself, making the world a better place, etc...)

David in Qatar

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#3) On March 25, 2010 at 2:16 PM, binve (< 20) wrote:

whereaminow,

This is seriously among the best Caps blog posts I have ever read. Really top-notch and heady stuff. But down to earth it's presentation. You excel at that approach.

This line is so awesome, I can't even tell you how big my smile was when I read it:

And since Logical Positivism asserts that everything must be tested before we can be certain of its veracity, how do we know that Logical Positivism itself is correct?  Shall we look at every statement in history and measure it up to Positivist standards?

LOL! Perfect!!

And the engineer in mean really responds to clear logical arguments

Logical Positivism is an exercise in turning the sublime, like "water always flows down", into the ridiculous, "perhaps water sometimes flows up."

So priniciple in thermal analysis. Heat **ALWAYS** flows "downhill" (i.e. it will always flow in the direction of a positive temperature gradient, or more simply, from high temperature to low temperature). Just exactly like you cannot have water flow going against a pressure head.

I have stated several times that I believe engineers would largely make better economists than economists. Dwot and I had a good conversation about that here: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=350910.

We crappy economic policies (and crappy economists) because nobody understands the marginal utility of debt!! It is such an *obvious* conclusion! "jobless recovery" my ass. That is a positivist statement based on false reasoning. Here is the real cause and the real effect: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428

But there is a blurry line in all of this because while economics trys to be a science and give causes and effects, valuations (of *any* asset) are problematic because not everybody agrees what something is worth: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=305849.

Unfortuantely neo-Keynesians take this and run with it and uses this confusion to come up with all kinds of dangerous and illogical (to tie back to your point) policies.

Again, my man, Awesome post!! You are such an asset here, and it is most appreciated! Thanks!!..

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#4) On March 25, 2010 at 2:37 PM, ChrisGraley (29.85) wrote:

This is a really great post.

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#5) On March 25, 2010 at 2:38 PM, whereaminow (22.93) wrote:

binve,

Thanks! It's amazing that our style of writing can be dramatically different, and yet, we come to the same conclusions so often.  I love it!

I'm glad you found this post worthwhile.  I was very hesitant in writing it.  Not because I think it's "too smart" for people, but maybe "too dry."  I don't think there is anything about economics that the average person could not comprehend if they were introduced to it properly.  But a lot of it is freaking boring!

David in Qatar

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#6) On March 25, 2010 at 2:41 PM, whereaminow (22.93) wrote:

Thanks Chris!

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#7) On March 25, 2010 at 2:52 PM, carcassgrinder (38.28) wrote:

David....

oh, if I had your eloquence I could do some major damage.  I attempted to touch on this same thesis here...http://msncaps.fool.com/Blogs/ViewPost.aspx?bpid=241632&t=02008557375599908511 without any of the intellectual extrapolations you displayed in your post.  But, I believe that I was argueing, more or less, the same point......just in more of a rant format.  As always, I am amazed and humbled by your ability to harness ideas into a cohesive flow.  Your are truly a gifted thinker and writer.  Thank you very much for stating what I rant about in a cited and credible fashion.....it holds sooooo much more wieght than my rants, and helps me to understand how to make my contrarian ideas more palletable. +1

 

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#8) On March 25, 2010 at 3:14 PM, kdakota630 (29.71) wrote:

Agreed with others... one of your best.

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#9) On March 25, 2010 at 3:32 PM, catoismymotor (20.97) wrote:

I've been wondering why we have not seen you on TMF as much in recent days. Well done.

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#10) On March 25, 2010 at 3:34 PM, AvianFlu (35.40) wrote:

+1

David;
Could you possibly do a separate posting describing life in Qatar? I'm sure most of us have no idea about that. I don't even know where it is. But if life gets much worse around here I may very well want to leave the country and settle in a place with more personal freedoms.

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#11) On March 25, 2010 at 3:38 PM, Darvo285 (61.09) wrote:

Thanks David, another truly fantastic post.

 

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#12) On March 25, 2010 at 3:54 PM, lemoneater (77.78) wrote:

How does one describe a geyser? Would that be an instance of water flowing upwards? :)

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#13) On March 25, 2010 at 4:32 PM, whereaminow (22.93) wrote:

carcassgrinder,

I read your rant and I liked it. I like the laziness angle, too.  I work in IT, and I like to say that all IT inventions are the product of laziness :)

kdakota630,

Thanks!

catoismymotor,

I was plotting the revolution:)

AvianFlu,

Sure, I could do that.  If you don't see something from me in the next week or so, remind me.  Better yet, email me if you get a chance.

Darvo285,

Thanks a ton!

lemoneater,

LOL, well I'm sure you mean that as a joke, but I'll say there is a difference between "flow" and "force."  A Keynesian, however, would say that force (paying taxes, running deficits) is no different than flow (voluntary transactions)!

David in Qatar 

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#14) On March 25, 2010 at 4:43 PM, lemoneater (77.78) wrote:

:) I'll ask my husband the difference between "flow" and "force." Perhaps physics should be a required course for all economists. They need to be challenged to apply their discipline to reality! 

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#15) On March 25, 2010 at 4:56 PM, devoish (98.21) wrote:

Perhaps we should accept that "water always flows downhill", as a "self evident truth". A "logical positivist" might be forced to consider that the water got up there somehow, but of course since it always flows downhill, it did not get up there somehow, yet will always be flowing downhill to satisfy our "self evident truth".

Of course a "logical positivist" might have to realize he failed to  consider "certain variables" like "wicking", "evaporation", and pressure differentials and then nuance the statement. Your Mises would learn the same things because he would observe water flowing downhill and instantly realize it came from uphill. Although he might consider that water vapor is not water, so "water still always flows downhill" is still true and should not be nuanced and that water vapor flows upward in order to create uphill water. Whether or not water vapor is water that flowed uphill or something different that condensed to form water, you and I might be arguing until the end of time.

I think this is my favorite paragraph today:

A final blow against positisivism is the case for Ethics.  Positivists do not recognize ethical statements as having any value.  They are normative statements purely subjective to the tastes of individuals.  One of the most curious aspects of Positivism is that its supporters, often liberals and progressives, use Positivits arguments as Ethical arguments.  This is clearly a contradiction.  If Positivists believe that ethical statements have no value, then Liberal arguments for health care, climate science, welfare, and a host of others, based on Ethical beliefs have no value either.  Water truly flows up in a Positivists' world.

Since you created the "positivist" today, I suppose you can assign to him whatever characteristics you choose including confusion. Perhaps though you might want to consider the possibility that your belief system is wrong and "positivists" believe that ethical statements actually have value not the reverse and the liberal arguments for healthcare, climate science, welfare, and a host of others based on ethical beliefs, actually do have value. That choice is yours though, since "positivists" are your creation.

Do a good deed daily,

Devoish

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#16) On March 25, 2010 at 4:56 PM, TMFCrocoStimpy (94.48) wrote:

Actually David, Lemoneater's question isn't a joke, and does point to an inherent hazard in the idea of describing something as a self evident truth.  By referring to "flow" and "force" as two separate self evident truths, all you really demonstrate is that the concept of flow that you are using is flawed in its understanding, since "flow" in this sense is simply the movement of water along the force gradient created by gravity.  Water does not always "flow" downhill - water does always flow down the net force gradient that is acting upon it.  This may seem overly pedantic, and it isn't meant to be, because it does point up one of the great abuses of self evident truth.  While in principle I do agree in the use of self evident truth, what is all to common in practice is that people misunderstand the underlying cause upon which they base their perception of truth, and consquently substitute their "perception of the self evident truth" for the actual self evident truth.  This works in practice until you apply your "truth" to a situation that falls outside the situation in which you formed your perception of the truth.  In Lemoneater's example your "truth" failed because you define it in terms of direction, only considering the downward gravitational gradient, and failed to consider an upward pressure gradient that is able to overcome gravity.

As always, the devil is in the details.  Now, pass me a beer and continue.

-Xander

 

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#17) On March 25, 2010 at 5:10 PM, PeteysTired (< 20) wrote:

TMFCrocoStimpy

Good point!  I suppose that is why we are in the state we are in today.  When the constitution was written their truth was pretty well self evident.

But all you need is a little time and a lot of confused individauls and you get different versions of the word  "it"  :)

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#18) On March 25, 2010 at 5:11 PM, PeteysTired (< 20) wrote:

oops, I didn't mean to bold everything.

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#19) On March 25, 2010 at 5:27 PM, binve (< 20) wrote:

devoish,

Perhaps we should accept that "water always flows downhill", as a "self evident truth". A "logical positivist" might be forced to consider that the water got up there somehow, but of course since it always flows downhill, it did not get up there somehow, yet will always be flowing downhill to satisfy our "self evident truth".

Of course a "logical positivist" might have to realize he failed to  consider "certain variables" like "wicking", "evaporation", and pressure differentials and then nuance the statement. Your Mises would learn the same things because he would observe water flowing downhill and instantly realize it came from uphill. Although he might consider that water vapor is not water, so "water still always flows downhill" is still true and should not be nuanced and that water vapor flows upward in order to create uphill water. Whether or not water vapor is water that flowed uphill or something different that condensed to form water, you and I might be arguing until the end of time.

I think you are being tongue-in-cheek. But in case you are not...

Like in my comment #3 "Water (or heat) flows "downhill" " is a *very* common engineering expression

It means that heat (or flow) ***ALWAYS*** moves in the direction of a temperature (or pressure) gradient ... or "downhill".

It is a holdover expression from gravity feed systems where downhill was a literal one and the pressure gradient aligned with the gravity gradient. 

But pumps can move water against a gravity gradient by having a higher pressure gradient. So even though water is flowing "uphill" from an gravitationally based direction perspective, from a meaning perspective (based on pressure gradients) water is most definitely not moving uphill.

Same with lemoneaters comment (which is obviosly a joke).

So there is nothing to argue, as no laws of physics have been violated...

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#20) On March 25, 2010 at 5:32 PM, whereaminow (22.93) wrote:

TMFCrocoStimpy,

"Water flows down" is not an economic statement, so I don't mind your nitpicking.  I am only making the point that if you turn on your faucet, assuming it is working properly, while you hang from the ceiling, you will remain dry.  Now, we can empirically test this idea if you'd like, but if you so choose I would suggest you use your own money to research such a crackpot idea, rather than mine.  I simply recognize gravity as a truth about our objective reality.

As it stands, however, this blog was about economics and not physics.  The former relies on the behavior of human actors that make choices based on subjective evaluations.  The latter studies physical realities that do not involve human choice. Scientific methods that work in physics but are applied to economics are not scientific.  They are "scientistic," in that they mimic the other science but do not produce the same result, for reasons that should be obvious.

Back to the point of the blog: what should the science of economics be?

David in Qatar

 

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#21) On March 25, 2010 at 5:37 PM, chk999 (99.97) wrote:

David - nice post. You should write more like this.

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#22) On March 25, 2010 at 5:47 PM, whereaminow (22.93) wrote:

devoish,

I can tell that you haven't studied positivism very deeply.  Positivism's toughest critics are the positivists that have doubts about the ethical implications of a doctrine which claimes that ethical statements are purely normative.  Legal Positivism claims that there is no connection between law and morality or ethics.  The entry for Logical Positivism contains no reference to ethics.  Neither does the entry for Karl Popper, who embraced falsifiability over provability.

David in Qatar

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#23) On March 25, 2010 at 9:46 PM, devoish (98.21) wrote:

David in Qatar,

This is all fun and stuff, but to continue your analogy to far, what do you do the day when you observe water flowing uphill? Do you look for for the "certain variables" that might teach you something?  Do you deny the evidence in front of you because it violates your "self evident truth? Or something else?

And thank you for the compliment.

And from your OP, Look around today and you can readily identify that you are indirectly a victim of bad economic theory. The economic theorys that are victimizing us are "trickle down" and "deregulation".

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#24) On March 26, 2010 at 12:47 AM, FleaBagger (29.00) wrote:

Great article!

This next comment is not on David's article, but on the preceding comments: is today poor syntax day, or what? The chat TMFJake hosted had a mistake in every line, and now the comments here. I can take a few here and there in stride, but this surfeit of errors is driving me batty.

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#25) On March 26, 2010 at 10:38 AM, whereaminow (22.93) wrote:

devoish,

You kind of prove my point here about taking the sublime and turning it into the ridiculous.

I am not a Reaganite supply-sider and I think they are harmful economic policies as well.  You already know that I think deregulation is a scam.  Stop trying to fit everything into the fake Left/Right paradigm. It's a shell game.

David in Qatar

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#26) On March 26, 2010 at 12:02 PM, nzsvz9 (< 20) wrote:

So ... what should the science of economics be?

Science and Scientists have many tools and processes, including: question, hypothesis, observation, experimentation, theory, testing, formulation, statistics, peer review, publication, and laws. A "science" of economics should have the same, should it not? It certainly has the appearance of such, but so does the pseudo-science of AGW (but I digress).

There is also another branch of science, loosely called the "philosophy" of science. Some great thinkers used none of the scientific methods, but came to conclusions about issue sof science through mainly rigorous debate and thinking - about things for which there is no easy way to establish a law or experiment - often from a lack of constructs from which to formulate a theory.

My proposal for an institute of economics would have both of these disciplines as wings: The economic scientists and the economic philosophers. The institute staff would provide the forum under which economic issues could be brought forth, debated by both sides, and viewed regarding policy and observation in the market.

What a show it would be.

And aside from all the economic theory, and formulations of the economy which could be debated and advanced, the pet issue I would have the science institute work on would be the study of large groups of people in the market with an emphasis on market movement - to predict the future of the market. A psycho-history of economics.

Known as The Hari-Seldon Chair of Economics professor nzsvz9

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