tag:blogger.com,1999:blog-16841577803543368882024-03-19T09:46:24.320+01:00Physics PerspectiveInspiration from physics for thinking about economics, finance and social systemsMark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.comBlogger270125tag:blogger.com,1999:blog-1684157780354336888.post-4484320431541887922017-04-11T15:31:00.001+02:002017-04-11T15:31:39.865+02:00Market complexity also makes for instability
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<span style="font-family: Times New Roman, serif; font-size: small;">Since
the financial crisis of 2008, an explosion of research has aimed to
understand what makes financial markets prone to sporadic crises. The
potential sources of trouble are many, including debt and leverage,
financial concentration and the problem of “too big to fail,” as
well as perverse incentives for bankers to take on large risks.
Markets go wrong in any of a thousand ways, and, unfortunately, it
seems that understanding each one requires intimate familiarity with
the fine details of the financial architecture, contracts, legal
regulations, individual incentives and so on. </span><span style="font-size: small;">
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<span style="font-family: Times New Roman, serif; font-size: small;">Yet
a narrow focus on details can distract attention from profund
similarities. Network scientists know that the topology of a network
– the pattern of links or relationships that hold it together –
can have a decisive influence on its properties. In the context of
financial networks, <a href="http://www.nature.com/articles/ncomms14416">new
research</a> suggests that subtle changes in network topology may be
the key to understanding a common pathway by which financial markets
become unstable. For all the forbidding complexity of the modern
financial system, they suggest, instability tends to follow from the
emergence of particular cycles or closed circuits of dependence
within the network topology, as these tend to amplify disturbances or
distress. </span>
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<span style="font-family: Times New Roman, serif; font-size: small;">I'll
explain the basic logic of the work briefly below. It's a theoretical
paper, and not meant as a recipe for detailed practical policy. But
it does help clarify a basic mechanism that drives instability, and
offers broad insights on the kinds of policies that could avoid it.</span></div>
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<span style="font-family: Times New Roman, serif; font-size: small;"><span style="font-weight: normal;">First,
a little background. Some of the motivation for this work comes from
the history of thinking in ecology. Back in </span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><span style="font-weight: normal;">the
1970s, ecologists widely believed that the stability of an ecosystem
would generally be enhanced by increasing complexity, as reflected in
the presence of a large number of interactions between a diverse set
of species. But the theoretical ecologist Robert May overturned this
intuition, at least partly, by showing in simplified network models
of food webs that complexity can in some cases undermine stability.
His analysis indicated that networks with a larger number of
interactions could be less stable, and inspired ecologists to begin
searching for possible new factors that might account for ecosystem
stability – for example, the presence of specific topological
motifs within food webs. </span></span></span>
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<span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><span style="font-weight: normal;">Just
after the financial crisis, May – who was formerly the Chief
Science Advisor to the UK Government – joined with the Bank of
England's Andrew Haldane <a href="http://www.nature.com/nature/journal/v469/n7330/abs/nature09659.html">in
arguing</a> for the relevance of this insight to the stability of
financial</span></span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><span style="font-weight: normal;">
</span></span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><span style="font-weight: normal;">systems
as well. Financial networks have grown enormously more complex in the
past 30 years, and, as May and Haldane noted, the pre-crisis
literature in economics and finance mostly viewed this as a good
thing. Traditional thinking held that more complexity, achieved
through a wider spectrum of financial instruments, greater
diversification and wider spreading of risks, would improve
stability. Yet May and Haldane pointed to a handful of studies,
mostly in the last decade, linking rising complexity with increasing
instability. </span></span></span>
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<span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><span style="font-weight: normal;">Six
years later, this idea that too much complexity can cause trouble is
becoming less “radical,” although the story also remains
unsatisfyingly complicated. Models serving as examples tend to
include fairly</span></span></span><span style="font-family: Times New Roman, serif; font-size: small;"><span style="font-weight: normal;">
intricate details of how financial institutions interact –
particulars of contracts, for example, or mechanisms for debt default
resolution. Do such details always play a decisive role? Or is there
a simple and general story about how changes in network topology
create instability that stands above the details?</span></span></div>
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<span style="font-family: Times New Roman, serif; font-size: small;">This
is the question asked – and answered, in the affirmative – by
this paper. What </span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">Marco
Bardoscia </span></span><span style="font-family: Times New Roman, serif; font-size: small;">and
colleagues do is to study a class of models of the Interbank network,
and probe the stability of the network as they vary two parameters
characterizing its complexity. These are 1) market integration,
reflecting the number of banks participating in the financial system,
and 2) diversification, referring to the proliferation of financial
contracts. Importantly, the study doesn't test stability in the usual
way of running stress tests and estimating the total losses likely to
amount from some assumed shocks to the system. This approach </span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">requires
specific assumptions on the nature of the financial contracts and
mechanisms of distress propagation, making it difficult to draw general conclusions.</span></span></div>
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<span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">Instead,
Bardoscia and colleagues study how gradual changes in the
interconnection pathways in the network can create mechanisms that
tend to amplify small disturbances, rather than dampening them away.
For example, the figure below illustrates h</span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">ow
the network goes from being stable to unstable just due to gradual
diversification, normally thought of as beneficial for risk
management. It shows a network eigenvalue </span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">λ</span></span><span style="color: black; font-size: small;"><sub><span style="font-family: Times New Roman, serif;">max</span></sub></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">
reflecting whether the propagation dynamics of the network dampen
(</span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">λ</span></span><span style="color: black; font-size: small;"><sub><span style="font-family: Times New Roman, serif;">max
</span></sub></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;"><
1) or amplify (</span></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">λ</span></span><span style="color: black; font-size: small;"><sub><span style="font-family: Times New Roman, serif;">max
</span></sub></span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">>
1) small disturbances. The researchers used </span></span><span style="font-family: Times New Roman, serif; font-size: small;">the
balance sheets of the top 50 listed banks in the European Union as a
starting point, and then simulated a process in which banks gradually
increase the degree of diversifi cation by creating further exposures
towards additional counterparties. They carefully rebalanced the
network at each stage to keep the assets and liabilities </span><span style="color: black; font-size: small;"><span style="font-family: Times New Roman, serif;">consistent
with the original balance </span></span><span style="font-family: Times New Roman, serif; font-size: small;">sheets
and the interbank leverages of all banks fixed. As the degree of
diversi fication increases, a bank's exposures spread out across ever
more counterparties. Even though the total interbank exposure of each
bank remains constant, the banking system eventually goes unstable,
and it doesn't even take a lot of diversification to make it happen.
As the figure shows, instability first arises when contracts link
together just 3% of all the possible pairs that could in principle be
linked.</span></div>
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<span style="font-family: Times New Roman, serif; font-size: small;">This
example illustrates the transition from stability to instability as
complexity increases through diversification. The paper equally
establishes that a simular transition takes place if complexity
rises just through an increase in the number of banks. </span>
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<span style="font-family: Times New Roman, serif; font-size: small;"><span style="color: black;">The
conclusion is that more complex and highly networked markets should
generically tend toward instability. A financial system can go
unstable as the number of banks increases, or</span> as
the number of contracts among banks increases, even if the individual
leverage of banks does not increase. In either case, instability
appears as a holistic, network effect, even though each bank
individually has an unchanging risk profi le. The implication:
financial policies that seem wise from the point of view of the
risks to individual banks can actually – and counter-intuitively –
increase fi nancial instability to the whole system.</span></div>
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<span style="font-family: Times New Roman, serif; font-size: small;">The
paper also goes into some detail on the origin of such instability, which
lies in the fact that in both processes banks get increasingly
involved in multiple cycles (i.e. closed chains) of contracts. This
is an interesting technical detail that I won't get into, although
such factors might well prove useful as targets for monitoring by
authorities. In any event, it's clear that systemic risk cannot be
reduced through measures long thought to reduce risks in standard
economics. Banking proliferation and diversification, if excessive,
can create worse problems than they solve. </span>
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Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com500tag:blogger.com,1999:blog-1684157780354336888.post-80287684018571916682016-07-10T12:28:00.001+02:002016-07-10T12:28:44.947+02:00The (un)Wisdom of CrowdsDoes the Wisdom of Crowds work for elections? Should we think that the result of the British Brexit vote, because it was a free vote put to the people, was not only democracy in action, but also a wise method for a nation to make such a decision?<br />
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I've touched on this matter in <a href="http://www.bloomberg.com/view/articles/2016-07-07/brexit-casts-doubt-on-the-wisdom-of-crowds">my latest</a> Bloomberg View column, drawing on <a href="http://www.santafe.edu/media/workingpapers/15-12-051.pdf">a new study</a> on group decision making by researchers from the Santa Fe Institute and the Max Planck Institute for Human development in Berlin. This study asks under what conditions we should expect larger crowds to make better decisions, and finds that, in general, this is only the case when the problems being faced are relatively easy -- so that any any individual has greater than 50% chance of getting the right answer. When problems are diffficult, the wisdom of crowds tends to fail, and small groups make better decisions.<br />
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Most importantly, they find that if the problems faced by a group come in an unpredictable mixture of easy and hard -- the more realistic case -- then the best decisions are made by groups of fairly small size, ranging from 10 to 40 or so. This insight doesn't apply directly to the UK referendum, which didn't necessarily have a right or wrong answer, but I think it does back up the view that a referendum is an extremely crude means for a nation to decide such as complex matter as whether to stay in the EU or not. As the researchers point out, many democratic decision making bodies around the world -- from juries to town councils to parliamentary committees -- make decisions with a fairly small number of people, usally from 5 to 40. There may be good wisdom in this.<br />
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And maybe it suggests that the best path forward for the UK is for parliament to weigh the decision to leave the EU using all its resources, and not being constrained in advance by the referendum result. Whether they ultimately decide to leave or to stay, that also would be democracy in action. <br />
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The Bloomberg thing is <a href="http://www.bloomberg.com/view/articles/2016-07-07/brexit-casts-doubt-on-the-wisdom-of-crowds">here</a>.Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com130tag:blogger.com,1999:blog-1684157780354336888.post-34089215645232376112016-02-17T15:40:00.001+01:002016-02-17T15:40:56.490+01:00Improve technology -- and still use more stuff overall??<div class="separator" style="clear: both; text-align: center;">
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A while back I had a brief argument with Paul Krugman and some other economists over economic growth and the future of the planet. It's common knowledge, of course, that human use of materials has grown over time -- globally, we now use more steel, plastic, glass, oil, water, etc. than ever before. We use more energy than ever before, and our agriculture puts more phosphorous and nitrogen into the oceans than ever before, and these trends toward more usage of physical stuff of every kind continue. All of this puts <a href="http://www.stockholmresilience.org/21/research/research-programmes/planetary-boundaries/planetary-boundaries/about-the-research/the-nine-planetary-boundaries.html">pressure</a> on a variety of planetary processes, which we rely on, and threaten at our own peril.<br />
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As economies grow, I argued, they inevitably use more physical stuff, even if advanced economies do shift increasingly to providing services. Hence, economic growth (at least GDP growth as we presently know it) will need to be limited if we're to avoid over-burdening the planet, and to preserve its ability to support us in an acceptable environment.<br />
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The economists countered that my argument reflected a physical scientists' typical mis-understanding of economic growth. It needn't involve more "physical stuff," they countered, but could use less physical stuff over time as our technology makes us more efficient, and still generate ever more economic value. This is the idea of "de-coupling" between economic growth and physical materials use. I agreed with that point, in principle, but pointed out that -- for all economists' faith -- this hasn't happened so far, and we have no evidence that it will happen or even can happen. Economic growth is still closely associated with increasing consumption of physical materials and energy. Why should be think it won't be in future?<br />
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That was then, and we dropped the argument (although I just noticed that Tim Worstall at Forbes took <a href="http://www.forbes.com/sites/timworstall/2014/10/11/mark-buchanan-still-isnt-understanding-paul-krugman-or-me-on-the-limits-to-growth/#596d95fb20da">one more swipe at me</a>, and deeply mis-understood my point). But some new research offers an update on the story. It comes from some engineers who have looked at the best data they could find on technologies and technological development over the past half century, and asked if these technologies -- which have generally improved at an exponential rate on many measures, including efficiency -- have led to a decreased use of materials and energy. Their paper is <a href="http://arxiv.org/ftp/arxiv/papers/1602/1602.00090.pdf">here</a>, and the short answer they give is "no." I've written a <a href="http://www.bloombergview.com/articles/2016-02-15/humanity-s-race-against-itself">Bloomberg View piece</a> on the paper, and I'll just quote a short section:<br />
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<blockquote class="tr_bq">
Two engineers, Christopher Magee of the Massachusetts Institute of
Technology and Tessaleno Devezas of the University of Beira Interior in
Portugal, <a data-web-url="http://arxiv.org/ftp/arxiv/papers/1602/1602.00090.pdf" href="http://arxiv.org/ftp/arxiv/papers/1602/1602.00090.pdf">looked at two sets of data</a>
covering 116 different technologies existing between 1940 and 2010,
ranging from the chemical industry and electronics to metals, wood and
energy. Almost every technology over this period shows exponential
improvement (though at different rates) in prices, performance and
efficiency of energy and material use. Over 20 years up to 2009, for
example, the price of photovoltaics consistently dropped about 10
percent per year.<br />
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The improvements weren’t enough, though, to
outpace the combination of population growth, economic expansion and the
rebound effect. As a result, overall material use tended to increase:
Those photovoltaics, for example, consumed about 13 percent more
materials each year.<br />
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To be sure, the data are far from perfect.
Information on many of the 116 technologies exists over intervals of
only one or two decades. Still, the fact that none of the data fit the
usual story of decoupling suggests that the concept is at the very least
highly questionable. The only six exceptions were technologies for
producing substances such as asbestos, mercury and thallium -- all toxic
materials that were ultimately controlled by policy intervention and
legal restriction.<br />
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The results don’t imply that humans won’t ever
achieve decoupling. They simply suggest that the historical record so
far isn’t encouraging, and that there’s no reason to expect it to happen
on its own.</blockquote>
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I don't think this is the end of any argument; just more information to consider.<br />
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One final comment on the Forbes Worstall post, which I've just now seen. He suggests that I was arguing, <a href="http://www.bloombergview.com/articles/2014-10-05/economists-are-blind-to-the-limits-of-growth">here</a>, that economic growth will eventually have to end because we will face "hard limits" to available energy. I'm not sure where he got that; it's not anywhere in my article. I don't think we're ever going to run out of energy, at least not for a very long time. I've even gone to some lengths to <a href="http://www.bloombergview.com/articles/2015-09-28/only-solar-power-can-meet-human-needs-in-long-term">examine how much energy is available</a> from solar sources (it's immense).<br />
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My argument was never that we will run out of energy, but that we will be forced, by deteriorating environmental conditions, to reduce and restrict how much energy we use. The energy we use always ends up in the environment, changing the environment, modifying its chemical makeup, the nature of its flows, and even its temperature. There's no getting around it; this is thermodynamics. And the effects, over time, are not small. Of course, somewhere along the way, even if we do restrict our energy use to some safe level, we might be able to eek out a bit more growth and extra GDP by improving energy efficiency, but that will come to an end too -- there are limits to efficiency. Once we've reached maximum efficiency in our technologies, we'll be limited in how much we can do.<br />
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Worstall suggests we might have another "13 millenia of exponential growth" before running into any problems, but this is a vast misunderstanding. See physicist <a href="http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/">Tom Murphy's famous post</a> in which he estimates how long it will take continued exponential growth in energy usage -- along the trajectory we've seen the past few centuries -- to make the oceans boil due to waste heat. It's not 13 millenia, and not even close. It's 400 years. <br />
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My point in all of this, of course, is not to predict with precision the situation we will face in this future point. I don't know any more about it than the economists do. The point is that, according to the current data, the rosy picture economists often paint about near term de-coupling look mostly like wishful thinking. Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com303tag:blogger.com,1999:blog-1684157780354336888.post-45975241550780455922016-02-16T19:22:00.000+01:002016-02-16T19:22:10.691+01:00Economic growth -- vastly slower than we thought (maybe)<div class="separator" style="clear: both; text-align: center;">
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You'd think that by now we'd have a pretty good empirical understanding of how economies grow, i.e. what the normal pattern of growth is through time. We've been studying economies for a couple of centuries, and have had reasonably good numbers of the (crude) measure of GDP for half a century. In economics -- and among the financial media generally -- it's almost beyond question that the normal pattern of economic growth is exponential growth. Indeed, almost no one ever supposes it might be different; we only debate how fast or slow recent exponential growth has been.<br />
<br />
But we might be wrong, especially for mature economies. That's the conclusion of <a href="http://arxiv.org/abs/1601.04028">some recent research</a> by a team of European economists and statisticians who looked at the data on 18 mature economies from 1960 onwards. They find that the best fit to the data isn't exponential at all, but linear, suggesting that if growth was ever exponential (in young economies), it isn't like that any more.<br />
<br />
I wrote a piece<a href="http://www.bloombergview.com/articles/2016-01-28/economics-might-be-all-wrong-about-growth"> in Bloomberg</a> about this a couple weeks ago. I wasn't aware of this line of work, but apparently a handful of (mostly) German economists have been pointing to this evidence for nearly twenty years.<br />
<br />
It would hardly be surprising, of course, if human economies -- like individual people themselves, cells, bacterial colonies, trees and anything else alive -- turn out to have natural stages of growth, with fast growth eventually slowing toward something more gradual and, eventually, stopping altogether (which wouldn't imply the end of change, just some kind of balance). Current ideas in economics might need considerable re-thinking, of course.<br />
<br />
But that wouldn't surprise me either. <br />
<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com141tag:blogger.com,1999:blog-1684157780354336888.post-11335460608236879222016-02-01T22:59:00.000+01:002016-02-01T22:59:45.559+01:00Shifting viewHey, I've changed the title of this blog!<br />
<br />
Why? Because I'm going to shift its perspective a little. As all of you will know, I've (mostly) stopped blogging here in the past 4-6 months. Reason? Because much of what interests me now has no immediate link to "finance," and so "physics of finance" doesn't seem quite right. I'd like to eliminate this psychological barrier (for myself). <br />
<br />
So, expect more posts, but maybe on different topics.<br />
<br />
Cheers<br />
<br />
Mark<br />
<br />
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com105tag:blogger.com,1999:blog-1684157780354336888.post-82928988729774705692015-05-18T14:16:00.000+02:002015-05-18T14:16:19.889+02:00Warfare isn't getting less likely -- conclusions from a new analysis<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjisrQFU_zCyj2ldd2R1LVuch4dCHl65rMKCjPwRDz2AYGWHiot-LkfHdqvubhqeVkf151WmOHSN5NPpjw2ptnxsio-QAiOGi9pV2YW49SgekPdr_j_toWrHXNQHUZ0A4Krhr5MO1jo_4d9/s1600/nuc2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjisrQFU_zCyj2ldd2R1LVuch4dCHl65rMKCjPwRDz2AYGWHiot-LkfHdqvubhqeVkf151WmOHSN5NPpjw2ptnxsio-QAiOGi9pV2YW49SgekPdr_j_toWrHXNQHUZ0A4Krhr5MO1jo_4d9/s320/nuc2.jpg" width="320" /></a></div>
<br />
<br />
Is warfare getting less likely? Are we entering a new and more peaceful era of history? Quite a few people -- Steven Pinker and Niall Ferguson among them -- have suggested as much. But the mathematics of war statistics over the past 2,000 years doesn't back up the idea. At Bloomberg, I have <a href="http://www.bloombergview.com/articles/2015-05-18/is-the-world-getting-safer-maybe-not">a short piece</a> describing some excellent new work by Pasquale Cirillo and Nassim Taleb. Also, <a href="https://medium.com/bull-market/violent-warfare-is-on-the-wane-right-99223faa45e6">more detail</a> over at Medium.Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com94tag:blogger.com,1999:blog-1684157780354336888.post-69520091101963914032015-05-06T09:45:00.002+02:002015-05-06T09:45:19.943+02:00To save the world -- give up on nature?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ8R8MnpVWBZYD43ofQCM1IR43VOFMhKCNrazbfgY8fik8Eu-blTA2vRN6nhbIvGOCDc3lDLvZtOsV3qPFhBcZ-ijyzBM4xFldQVySO8TCaPXjJA8ODtekyetfRzBI7hhBheULvuumdeb9/s1600/nature.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJ8R8MnpVWBZYD43ofQCM1IR43VOFMhKCNrazbfgY8fik8Eu-blTA2vRN6nhbIvGOCDc3lDLvZtOsV3qPFhBcZ-ijyzBM4xFldQVySO8TCaPXjJA8ODtekyetfRzBI7hhBheULvuumdeb9/s1600/nature.jpg" /></a></div>
<br />
Here's a radical idea -- we can best safeguard the future of humanity not by learning to live with nature, but by turning our backs on her and learning to do without her. We should use our technology and science to isolate ourselves from nature, so that we can live without requiring nature. In so doing, we can also eliminate the burden we put on nature, and preserve it as well.<br />
<br />
Does that sound crazy? A little, I think, but it is a creative idea and maybe some tempered and humble version of it isn't so crazy. Perhaps with better science and technology we can learn to help humans while also, to some large degree, eliminating our impacts on nature and carving out some safe space for her. That, at least, is the provocative idea suggested in <a href="http://www.ecomodernism.org/">The Ecomodernist Manifesto</a>, a document published recently by folks from The Breakthrough Institute.<br />
<br />
Many things in this manifesto seems just a little too optimistic to me -- they seem to suggest that we're already reducing our impact on nature, for example, despite causing the sixth greatest mass extinction in history -- but it is worth reading. We do need more creative thinking. I've written <a href="http://www.bloombergview.com/articles/2015-05-05/can-we-save-the-world-by-leaving-nature-behind-">more</a> at Bloomberg. Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com140tag:blogger.com,1999:blog-1684157780354336888.post-59713897366152374722015-03-30T15:44:00.000+02:002015-03-30T15:44:14.124+02:00Common core and common rancorMy most recent <a href="http://www.bloombergview.com/articles/2015-03-26/common-core-and-common-values">thing in Bloomberg</a> touches on the Common Core standards for learning. It's amazing how some things that ought to be pretty good for everyone can be controversial, but...<br />
<br />
<blockquote class="tr_bq">
Learning how to distinguish between fact and opinion would seem to be
a pretty fundamental piece of any education. In the bizarre world of
U.S. public schools, though, it's proving to be controversial.
<br />
For several years, schools across the U.S. -- with significant help
from the Bill and Melinda Gates Foundation -- have been putting in place
something called the Common Core, a set of standards on what students
from kindergarten through 12th grade should learn on topics including
English, mathematics, science and history. Along the way, they’ve faced
ample criticism, some of it reasonable. Teachers, in particular,
think they haven't had adequate preparation.<br />
<br />
<a class="quicktake" data-tout-type="quicktake" data-web-url="http://www.bloombergview.com/quicktake/common-core" href="http://www.bloombergview.com/quicktake/common-core"> <span class="news-tout-content">Common Core</span></a><br />
<br />
One strain of criticism in particular, though, sounds more like an
assault on learning itself. Consider the argument of philosopher Justin
McBrayer, of Fort Lewis College in Colorado: ... </blockquote>
Read more<a href="http://www.bloombergview.com/articles/2015-03-26/common-core-and-common-values"> here</a>.<br />
<br />
UPDATE:<br />
<br />
One thing that deserves a comment is the criticism, voiced by one philosopher in the comments, that teaching kids to know the difference between fact and opinion is somehow confusing them into thinking that opinions, if they're not the same as facts, must be false:<br />
<br />
<blockquote class="tr_bq">
The reason that someone might criticize the teaching of a
fact/opinion distinction is quite obvious: such a distinction is
specious.<br />
<br />
I am constantly criticizing this distinction when my students try to make it in my philosophy classes.<br />
The main problem with the distinction is that it makes it seem like all opinions are subjective or not well-supported.<br />
<br />
But
it is my opinion that the earth revolves around the sun. That is my
opinion. I really do believe that. It also turns out that such an
opinion is true and well-supported. It is a fact that the earth orbits
the sun. Thus, the fact/opinion distinction is specious. It doesn't
tell us anything important about either the facts or the opinions
involved. Some opinions are about factual matters.<br />
<br />
Philosophers don't talk about a supposed fact vs. opinion distinction because it is not a valid distinction.</blockquote>
<br />
I find this rather strange. The distinction between fact and opinion is specious? As in meaningless? Saying that two words are not identical does not imply that they therefore refer to opposing, disjoint sets. We may talk about some mathematical equations as being beautiful, and others as being true, and agree that truth and beauty are not the same thing, but this wouldn't make anyone think that the beautiful equations must be false, or that the true equations must be not beautiful. We simply have two categories with partial overlap.<br />
<br />
Perhaps I am wrong, but I equally do not think that teaching kids to distinguish the notion of "fact" from the notion of "opinion" will make them think that there's no overlap between the categories, with some opinions being facts, and others not. Come on. Kids aren't that silly. Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com64tag:blogger.com,1999:blog-1684157780354336888.post-2682188968329375602015-02-16T12:01:00.000+01:002015-02-16T12:01:12.568+01:00Macroeconomics: "not remotely scientific"<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKpCuU-G1MsVTsB8odLlgtbbBA-HRBMglghEoZyRJk3NEzJALDI7mM0Y4jYpyILuNAZE2z9A5pIROP6iveKRbooUkRaqPdr_CzstaJRcjfWo-WoYmT1d8EnhRBaSWNUI-nsjxjc268HN_T/s1600/ignorance.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKpCuU-G1MsVTsB8odLlgtbbBA-HRBMglghEoZyRJk3NEzJALDI7mM0Y4jYpyILuNAZE2z9A5pIROP6iveKRbooUkRaqPdr_CzstaJRcjfWo-WoYmT1d8EnhRBaSWNUI-nsjxjc268HN_T/s1600/ignorance.jpg" /></a></div>
<br />Excellent <a href="http://noahpinionblog.blogspot.fr/2015/02/why-do-non-experts-think-they-know.html">post</a> by Noah Smith examining the question of why so many people who aren't trained economists like to weigh in with views on macroeconomics. One reason, he suggests, is that people look at macro and see a modelling approach that doesn't seem terribly plausible, and they also see lots of macroeconomists disagreeing over fundamental points. What they see mostly looks like ideology dressed up to look like something else. As he notes,<br />
<br />
<blockquote class="tr_bq">
<b>There is the perception that macroeconomists don't understand their own subject. </b>The
Great Recession convinced a lot of people that macroeconomics hasn't
solved any of the problems it was created to solve. Contrast that with
physics or bio or chem, which have very obviously given us a lot of the
awesome stuff that makes our society rich. In addition, you have very
public and acrimonious debates between macroeconomists like Krugman,
Cochrane, and Sumner. That convinces a lot of people that there is no
consensus within macro, which in turn makes them suspect that
macroeconomists haven't gotten any answers out of the Universe. If the
experts don't understand anything, why can't the amateurs weigh in?<br />
<br />
I am not annoyed by normal people's penchant for butting into macro
debates (though the "Austrian" and "heterodox" people do annoy me, since
they approach things in a tendentious rather than an inquisitive
manner). I think it's natural. Sure, a lot of stupid stuff gets said,
but let he who is without sin cast the first stone!</blockquote>
<br />
I would agree that this is the main reason. By chance, I came upon this post just as I was reading <a href="http://www.stifterverband.de/oekonomie/coyle.pdf">a speech</a> given two years ago by Manchester economist Diane Coyle. She is by no means a heterodox renegade. In general, she argues that there's lots of value in today's economic theory, though not necessarily in macroeconomics. The problem there, as she see it, is pretty clear:<br />
<br />
<blockquote class="tr_bq">
Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline.</blockquote>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com62tag:blogger.com,1999:blog-1684157780354336888.post-54358187911653138332015-01-20T11:39:00.001+01:002015-01-20T11:39:48.990+01:00Presuppositions and idealizations...<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMfjnNQ4QKc3Q064lVDun2xyFFZaTVKgLaZzJOg1yU6bNv0diUUOPecytnke9mcJIBxcdJF4EzqoXlEKX2MRegIkIyUrGmsB8zhvc6dEdc3SQyppLTynVVVD-WQmnWGrQwknLpbZ6uMIep/s1600/assumptions1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMfjnNQ4QKc3Q064lVDun2xyFFZaTVKgLaZzJOg1yU6bNv0diUUOPecytnke9mcJIBxcdJF4EzqoXlEKX2MRegIkIyUrGmsB8zhvc6dEdc3SQyppLTynVVVD-WQmnWGrQwknLpbZ6uMIep/s1600/assumptions1.jpg" /></a></div>
<br />
Lars Syll <a href="https://larspsyll.wordpress.com/2015/01/20/on-abstraction-and-idealization-in-economics/">quotes</a> an interesting passage from Hans Albert on the weird use of theoretical abstraction in economics; "weird" as in very unusual and rather questionable from the perspective of the rest of science. As Albert writes,<br />
<br />
<blockquote class="tr_bq">
Clearly, it is possible to interpret the ‘presuppositions’ of a
theoretical system … not as hypotheses, but simply as limitations to the
area of application of the system in question. Since a relationship to
reality is usually ensured by the language used in economic statements,
in this case the impression is generated that a content-laden statement
about reality is being made, although the system is fully immunized and
thus without content. In my view that is often a source of
self-deception in pure economic thought …<br />
<br />
A further possibility for immunizing theories consists in simply
leaving open the area of application of the constructed model so that it
is impossible to refute it with counter examples. This of course is
usually done without a complete knowledge of the fatal consequences of
such methodological strategies for the usefulness of the theoretical
conception in question, but with the view that this is a characteristic
of especially highly developed economic procedures: the thinking in
models, which, however, among those theoreticians who cultivate
neoclassical thought, in essence amounts to a new form of Platonism.</blockquote>
<br />
In other words, economists (many of them) start with some assumptions or presuppositions, derive some conclusions, and then feel as if they've made a real and lasting contribution to understanding the world. They've produced an "if... then" statement; established a logical connection. It's often a secondary consideration whether this "if...then" has anything at all to teach us about OUR world. Economics, in this sense, is just a branch of mathematics. Pure mathematics, not applied mathematics.<br />
<br />
This is interesting as it resonates quite strongly with the conclusions of<a href="http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12128/abstract"> the recent work </a>of Itzhak Gilboa and colleagues, who try to understand how economists see economics in relation to the rest of science. Their conclusion is much the same -- that many if not most economists (theorists, at least) see their task as producing "theoretical cases," which cannot possibly be refuted, as they are merely logical connections between antecedent suppositions and logical implications.<br />
<br />
I wrote about the article in <a href="http://www.bloombergview.com/articles/2015-01-12/what-economists-mean-when-they-say-explain">a recent Bloomberg column</a>, the beginning of which goes below: <br />
<br />
<blockquote class="tr_bq">
When economists say they can "explain" something, beware: Their understanding of the word might be very different from yours.<br />
<br />
Several years ago, in the immediate wake of the financial crisis, economist Ricardo Caballero <a data-web-url="https://www.aeaweb.org/articles.php?doi=10.1257/jep.24.4.85" href="https://www.aeaweb.org/articles.php?doi=10.1257/jep.24.4.85">wrote about</a>
what he called the “pretense-of-knowledge syndrome” in academia.
Economists, he argued, had become “so mesmerized” with the internal
logic of their theories that much of the discipline -- even that part
concerned directly with policy making -- had spiraled off into fantasy.
Even when they studied issues close to the crisis, such as bubbles,
panics and fire sales, they relegated them to the periphery of
macroeconomics, which at its core valued mathematical elegance over
usefulness.<br />
<br />
Not much has changed since then. That, at least, is the conclusion of
Itzhak Gilboa and a group of economists who recently tried to
understand why their profession operates so differently from most
sciences. Academic economists, they say, use the term "explanation" in a
way that other scientists never would. Instead of developing realistic
and testable theories like those in biology or physics, they often aim
only to develop "theoretical cases" -- imaginary mathematical worlds
with their own rules of cause and effect.<br />
<br />
Suppose, for example, that an economist wants to explain a persistent recession following a financial crisis.... </blockquote>
<br />
Read more <a href="http://www.bloombergview.com/articles/2015-01-12/what-economists-mean-when-they-say-explain">here</a>.<br />
<br />
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com39tag:blogger.com,1999:blog-1684157780354336888.post-37457277545954049572014-12-03T10:04:00.003+01:002014-12-03T10:04:59.737+01:00Yeah for Mark Thoma!How many economists go out of their way to examine in public what they got wrong in their past views, and what they learned by making such mistakes? I'd say the list is exceedingly short.<br />
<br />
So three cheers for Mark Thoma, who does just that in <a href="http://www.thefiscaltimes.com/Columns/2014/12/02/Why-Next-Recession-Will-Be-Different">an excellent column </a>in the Financial Times. This is how you inspire trust. Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com29tag:blogger.com,1999:blog-1684157780354336888.post-66860478371495461632014-11-28T11:39:00.000+01:002014-11-28T11:39:51.763+01:00Has big business "captured" the economics profession?<div class="separator" style="clear: both; text-align: left;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-vuI76Hw4-5xXUGukHTa4mZ-eYI-Z_ILjmlgdFnCioyKQtXSGBRX9je6LsgH4z3FhUVzKMPFJkmuu44HE4Jlj0EwAUz7WPbgF35U9l9ogISK1nhbRKrCtoljSzI2hMD9zs9dvbLBjCZax/s1600/venus-flytrap-facts-for-kids.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><br /></a></div>
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The idea of regulatory
capture is a good one, and it’s the principal explanation that academic
economists offer for why regulators often — as a rule, in fact — don’t
act as firm and wholly independent judges of those they’re meant to
regulate. Whether they’re working to make manufacturers meet safety
standards, or banks avoid undue risks, regulators rarely act as stern
overseers, and often end up softening regulations to appease industry
desires. It’s not generally because they’re incompetent or corrupt
(although that’s sometimes true). Regulators are human beings, and hold
opinions which can be influenced by others. They happen to interact
mostly with those they regulate, and so end up getting influenced by the
regulated — not surprisingly, in ways that favor those parties.<br />
<br />
<div class="graf--p" name="948a">
For
example, regulators need information to do their jobs, and cooperation
with those they regulate is a good way — probably the best way, and
almost certainly the easiest — to get it. They try to get along with
those they regulate, and that implies some give and take, some
understanding and sympathy. Moreover, as regulators needn’t always
remain regulators, prospects for later employment also play a role. A
while back, my Bloomberg Views colleague Megan McArdle <a class="markup--anchor markup--p-anchor" data-href="http://www.bloombergview.com/articles/2014-09-30/it-s-normal-for-regulators-to-get-captured" href="http://www.bloombergview.com/articles/2014-09-30/it-s-normal-for-regulators-to-get-captured" rel="nofollow" target="_blank">summarized</a>
the natural logic of regulatory capture. It’s not really surprising at
all (although it may be surprising that we don’t do more to at least try
to avoid it).</div>
<div class="graf--p" name="948a">
<br /></div>
<div class="graf--p" name="a27f">
Economists
are rightly proud of this analysis. It’s an example where thinking
carefully about ordinary human behavior, as people do their best to meet
their goals and get along with one another, goes a long way to
explaining an important phenomenon. However, I suspect that economists
may be less happy , possibly even a little alarmed, with the direction
in which one of their tribe — Luigi Zingales of the University of
Chicago — suggests the analysis ought to be extended.</div>
<div class="graf--p" name="a27f">
<br /></div>
<div class="graf--p" name="77da">
What
about economists themselves? Are they the free authors of their ideas,
or are they, like regulators, significantly influenced in their thinking
by their interactions with business interests? Zingales <a class="markup--anchor markup--p-anchor" data-href="http://faculty.chicagobooth.edu/luigi.zingales/papers/research/Preventing_Economists_Capture.pdf" href="http://faculty.chicagobooth.edu/luigi.zingales/papers/research/Preventing_Economists_Capture.pdf" rel="nofollow" target="_blank">suggests</a>
the latter — and argues that we should, therefore, consider economists’
views with considerable skepticism. Overall, he concludes, the
profession and its publications most likely display a significant
pro-business and pro-markets bias, because many economists are captured.</div>
<div class="graf--p" name="77da">
<br /></div>
<div class="graf--p" name="77da">
Read the <a href="https://medium.com/bull-market/has-big-business-captured-the-economists-435473c661aa">whole thing</a> at Medium.com. </div>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com22tag:blogger.com,1999:blog-1684157780354336888.post-49819987575666480572014-10-10T12:09:00.000+02:002014-10-10T12:09:11.291+02:00Slow steaming is still dreaming -- a response to Paul Krugman<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiy-P3eIky9ig0UVT71zZOdWi9LEzjL-01dRbIyu6oMnQxBbd8TllvMDAEkbHEsoerS0Tf4Jdn5DUZdj_WTQMcY3KfP1s8DWBcMi9TPLtoTH8vRjq-KndwwirsHTkDe8kVJ0PEUYVfZwEI4/s1600/steamer.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiy-P3eIky9ig0UVT71zZOdWi9LEzjL-01dRbIyu6oMnQxBbd8TllvMDAEkbHEsoerS0Tf4Jdn5DUZdj_WTQMcY3KfP1s8DWBcMi9TPLtoTH8vRjq-KndwwirsHTkDe8kVJ0PEUYVfZwEI4/s1600/steamer.jpg" /></a></div>
<br />
I've just published <a href="https://medium.com/bull-market/steaming-slowly-toward-the-limits-of-growth-cc455dccd829">a response</a> to Paul Krugman's criticism of my recent Bloomberg article on limits to growth. It's over at Medium.com in the new collection Bull Market. I don't think Krugman's arguments carried a lot of weight, as you'll see. First paragraphs below....<br />
<br />
********** <br />
<br />
A few days ago I wrote <a class="markup--anchor markup--p-anchor" data-href="http://www.bloombergview.com/articles/2014-10-05/economists-are-blind-to-the-limits-of-growth" href="http://www.bloombergview.com/articles/2014-10-05/economists-are-blind-to-the-limits-of-growth" rel="nofollow" target="_blank">a column</a> in <em class="markup--em markup--p-em">Bloomberg</em>
exploring some ideas about possible physical (and
biological/ecological) limits to economic growth. I pointed out that
total global energy consumption continues to grow even as we learn to
use energy ever more efficiently. And I suggested — based on empirical
data from the recent past — that there’s little reason to believe, as
many economists quite confidently do, that our energy use will soon
“decouple” from economic expansion, enabling us to fly off into a future
of unlimited betterment through increasing economic output, even as we
come to use less and less energy. I also examined a few reasons why
continuing to use ever more energy is a certain path to ever worsening
ecological problems; it’s really not a wise option.<br />
<div class="graf--p is-withNotes" name="bd26">
<br /></div>
<div class="graf--p is-withNotes" name="bd26">
Economist and prolific <em class="markup--em markup--p-em">New York Times</em> columnist Paul Krugman was irritated, even exasperated, and fired off <a class="markup--anchor markup--p-anchor" data-href="http://krugman.blogs.nytimes.com/2014/10/07/slow-steaming-and-the-supposed-limits-to-growth/" href="http://krugman.blogs.nytimes.com/2014/10/07/slow-steaming-and-the-supposed-limits-to-growth/" rel="nofollow" target="_blank">an “acerbic rebuttal”</a>
(to use Noah Smith’s elegant description). He was aggravated that I, as
a physicist, was weighing in on topics he thinks should be left to
economists. He also suggested that I was just recycling an old argument
originally put forth by other physical scientists, which his fellow
economist William Nordhaus had completely demolished long ago. Now
Krugman had to rise up to do it again! How tiring!</div>
<div class="graf--p" name="0e52">
<br /></div>
<div class="graf--p" name="0e52">
But
Krugman’s actual argument was surprisingly weak, and I think grossly
misleading, so here’s an attempt to bring a little more clarity to the
discussion. I do think Krugman is a brilliant columnist, and I agree
with him on lots of things, maybe even most things. But he very much has
the wrong end of the stick on this one. Read more <a href="https://medium.com/bull-market/steaming-slowly-toward-the-limits-of-growth-cc455dccd829">here</a>.</div>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com29tag:blogger.com,1999:blog-1684157780354336888.post-63724198526914595792014-10-02T10:39:00.002+02:002014-10-02T10:39:41.941+02:00Economic numerology<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjX7x0AvFuk6zkkfaDilHALymW8DqgaJLw4Qo7G9PWg3s_2UfsOq_IdzprtGDPYG5vuqGBon8P89cU7KmuQasqjxzKF91-ah89sHKXKxG328MnhMVGHaoFbKt_xXFTLINgSz_fpqdPIRYD5/s1600/numbers.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjX7x0AvFuk6zkkfaDilHALymW8DqgaJLw4Qo7G9PWg3s_2UfsOq_IdzprtGDPYG5vuqGBon8P89cU7KmuQasqjxzKF91-ah89sHKXKxG328MnhMVGHaoFbKt_xXFTLINgSz_fpqdPIRYD5/s1600/numbers.jpg" /></a></div>
<br />
A few days ago, Paul Krugman made reference in one of his columns to <a class="markup--anchor markup--p-anchor" data-href="http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=92&pid=46&aid=2&cid=regions&syid=1980&eyid=2011&unit=BTUPUSDM#" href="http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=92&pid=46&aid=2&cid=regions&syid=1980&eyid=2011&unit=BTUPUSDM#" rel="nofollow" target="_blank">some data</a>
compiled by the US Energy Information Administration on trends in
energy use over the past few decades. The data touch on the question of
how much energy different nations use to generate $1 of GDP. Are we
getting more or less efficient in our use of energy? The numbers, as
Krugman argued, show we’re generally getting more efficient. Below I’ve
listed the numbers for US energy usage from the year’s 2001 through
2011, in sequential order, from left to right, separated by commas, the
units being BTUs per dollar of GDP:<br />
<br />
<div class="graf--p" name="b409">
<br /></div>
<div class="graf--p" name="b409">
8,482.307, 8,459.179, 8,274.763, 8,178.463, 7,944.349, 7,688.294, 7,671.837, 7,543.901, 7,414.716, 7,503.361, 7,328.424</div>
<div class="graf--p" name="1e8f">
<br /></div>
<div class="graf--p" name="1e8f">
So
you see, the amount of energy used to generate each bit of GDP is going
down. Same is generally true for other nations. Fair enough. I’m not
going to question that.</div>
<div class="graf--p" name="a892">
<br /></div>
<div class="graf--p" name="a892">
But
isn’t there something fishy about these numbers? The energy units are
BTUs, and the final entry says we used precisely 7,328.424 BTUs per
dollar of GDP in 2011. There are 7 specific digits reported in this
number, implying that we know our energy/GDP figure to an accuracy of 1
part in 10 million. It’s incredibly impressive. Think about that “.424"
at the end. It’s not “.425" or “.423" but exactly “.424".</div>
<div class="graf--p" name="6750">
<br /></div>
<div class="graf--p" name="6750">
Is
this at all meaningful? Of course not. It’s ridiculous. Unfortunately,
this kind of illusory accuracy infects economics and finance quite
widely. It may not be the most important issue in the world — even
writing about it makes me feel like a grumpy old man — but we’d all
think more clearly if we paid more attention to the numbers. So, what’s
wrong here? <a href="https://medium.com/bull-market/economic-numerology-4a3262fc2331">Read the rest</a> in the new collection <a href="https://medium.com/bull-market">Bull Market</a> at Medium.com</div>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com21tag:blogger.com,1999:blog-1684157780354336888.post-33991344972424615632014-09-26T12:28:00.001+02:002014-09-26T12:28:53.294+02:00Political polarization -- now WORSE THAN EVER!!!!<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiG3XURuZCBzPgaMgufBUF8m1jzYNbr96AurUyYkylheC7XN_OJ0FDqeWWJKfwsN1EyQpuTtykKbW4xtjj2oBAtSIjzUOR7zcDIkCcmYAV4Ke6g-OuB3MCGlLQdmlnaM4yiYE0e4OU61Ece/s1600/voting-republican1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiG3XURuZCBzPgaMgufBUF8m1jzYNbr96AurUyYkylheC7XN_OJ0FDqeWWJKfwsN1EyQpuTtykKbW4xtjj2oBAtSIjzUOR7zcDIkCcmYAV4Ke6g-OuB3MCGlLQdmlnaM4yiYE0e4OU61Ece/s1600/voting-republican1.jpg" height="275" width="320" /></a><br />
<br />
I do think the above image captures a truth. But I'm also not convinced that the forces driving politics from the Democratic side are all that much better. Anyway, I have <a href="https://medium.com/bull-market/political-polarization-is-worse-than-ever-d7cf1fa52f7c">a new thing </a>up at Medium.com on political polarization and how it is worse now than ever, according to voting patterns in congress:<br />
<br />
<blockquote class="tr_bq">
Political polarization and gridlock. It’s worse that ever, or at least
it seems that way. In fact, it is worse than it has been for 65 years.
That’s the conclusion of <a class="markup--anchor markup--p-anchor" data-href="http://www.santafe.edu/research/working-papers/abstract/263c5f6518c2dd9dd61e89418d009e9e/" href="http://www.santafe.edu/research/working-papers/abstract/263c5f6518c2dd9dd61e89418d009e9e/" rel="nofollow" target="_blank">a recent study</a>
by researchers who looked at the history of political polarization in
the US since 1949, as judged by congressional voting records. The study
found that cooperation between members of different parties is now
lacking more than ever before. Things were actually a lot better back in
the Nixon era, even during the most divisive days of the Vietnam War
and Watergate, when a President and Vice President were forced to
resign, and even in the aftermath of the assassinations of Martin Luther
King Jr. and Robert F. Kennedy.</blockquote>
<br />
The whole (short) thing is <a href="https://medium.com/bull-market/political-polarization-is-worse-than-ever-d7cf1fa52f7c">here</a>. <br />
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com11tag:blogger.com,1999:blog-1684157780354336888.post-3574448261117291422014-09-25T14:01:00.002+02:002014-09-25T14:01:52.589+02:00Is the Internet messing up our economies?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNREeCoSMwfQ3dr6N4c0dMZQA9uxU7-ulRXMCxu0K8KBGvKfIy3UAP5vIzdvBahZoYbVpyYzZjNbUuZNI9BcKF5a1Gl_UsHbLhQJBaWzBMosCt8uEgaNeJwAAbX20eDJ7LLxtug-T3we2N/s1600/net4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNREeCoSMwfQ3dr6N4c0dMZQA9uxU7-ulRXMCxu0K8KBGvKfIy3UAP5vIzdvBahZoYbVpyYzZjNbUuZNI9BcKF5a1Gl_UsHbLhQJBaWzBMosCt8uEgaNeJwAAbX20eDJ7LLxtug-T3we2N/s1600/net4.jpg" height="198" width="400" /></a></div>
<br />
I just published a short essay reviewing the amazing book <i>Who Owns the Future?</i> by Jaron Lanier. It is published as part of a <a href="https://medium.com/bull-market/">new business collection</a> over at Medium.com, where I'll be writing with a number of other business and finance writers. First two paragraphs below. I really encourage everyone to buy and read this book. It's changed my entire perspective on the Internet and how it is affecting our economic lives:<br />
<br />
<blockquote class="tr_bq">
Imagine that someone told you
that three of the biggest stories of the past few years — the financial
crisis, exploding economic inequality, and the National Security Agency
spy scandal — weren’t actually different stories at all. Different in
detail, yes, but essentially identical in their deeper cause. The cause,
they go on to say, wasn’t greed or fear or the age of terrorism or
anything else linked to human fallibility, but
technology — specifically, computation and its networked manifestation,
the Internet. Sound crazy?<br />
<br />
<div class="graf--p" name="2a2e">
Well,
it doesn’t if you hear out Jaron Lanier’s full argument. Lanier is a
Silicon Valley guru and one of the pioneers of virtual reality
technology; he’s helped build today’s technological reality and is
anything but a Luddite about technology and its potential for helping
people. But he does think the Internet has gone off the rails, that
we’re developing it in the wrong way, benefiting technology more than
people, and by design driving our economies into the swamp. I’ve come a
little late to Lanier’s book of last year — <a class="markup--anchor markup--p-anchor" data-href="http://www.jaronlanier.com/futurewebresources.html" href="http://www.jaronlanier.com/futurewebresources.html" rel="nofollow" target="_blank"><i class="markup--em markup--p-em">Who Owns the Future?</i></a><i class="markup--em markup--p-em"> — </i>but I think it’s one of the most important things I’ve read in a decade.</div>
</blockquote>
<br />
<br />
<br />
Read the whole thing <a href="https://medium.com/bull-market/our-economies-are-messed-up-and-the-cause-is-the-internet-aeb4a16a2a23">here</a>.Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com12tag:blogger.com,1999:blog-1684157780354336888.post-66908226855574885762014-09-10T11:29:00.000+02:002014-09-10T11:29:03.511+02:00How to build roads without destroying the Earth<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW0U5jtUrGwXYvP7eKAcoD75hyphenhyphenyaABOusTEOA6ZbuDasLOBzfGKiCTm4QVjqPjRUwBdodCz2P6vjgH6vFro-OVdAYnDm5JKVE65uhl94UALVzM7bwVckTGMwRPkb8CRSnW22ept5QJv3NR/s1600/roads.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjW0U5jtUrGwXYvP7eKAcoD75hyphenhyphenyaABOusTEOA6ZbuDasLOBzfGKiCTm4QVjqPjRUwBdodCz2P6vjgH6vFro-OVdAYnDm5JKVE65uhl94UALVzM7bwVckTGMwRPkb8CRSnW22ept5QJv3NR/s1600/roads.jpg" /></a></div>
<br />
And <a href="http://www.bloombergview.com/articles/2014-09-04/how-to-build-roads-without-destroying-the-earth">one more</a> from Bloomberg:<br />
<br />
The human race faces a huge quandary: The economic growth required to
support increasing living standards around the globe will, if we
continue with current practices, inevitably put the planet under extreme
and unsustainable stress. The case of road construction shows how the
process might be managed -- and how difficult it will be to do so.<br />
<br />
Global
population and economic activity won’t keep growing as they have since
the Industrial Revolution. If they did, the ever-accelerating <a href="http://arxiv.org/abs/cond-mat/0002075" rel="external">path</a>
would lead to absurd infinities somewhere around 2050 or 2060. Growth
will hit natural limits well before then: We'll either destroy our
environment, or we'll learn to act very differently. As the late
computer visionary James Martin wrote in his book <a href="http://www.jamesmartin.com/book/" rel="external">"The Meaning of the 21st Century,"</a>
what's needed is a revolution in skills and means for managing the
consequences of our explosive technological growth so people can keep
improving their well-being while also preserving the planet. <br />
<br />
Consider
the relatively simple challenge of building roads. Humans have already
laid some 30 million miles of roadways and are on course to build about
20 million miles more by 2050, a 60 percent increase in 40 years. Almost
all will be built in developing nations and regions of huge
biodiversity. New routes are today penetrating many of the world’s most
precious surviving wildernesses, including the Amazon, New Guinea,
Siberia and the Congo Basin. <br />
<br />
This activity is a perfectly
understandable response to human needs. Industry is seeking valuable
resources such as timber or oil, farmers are clearing new land for
crops, governments are trying to make transportation and trade easier.
Unfortunately, there's far too little coordinated effort to reduce the
environmental impact. As a result, wildlife habitats will suffer huge
losses and ecosystems will be destroyed, ultimately undermining Earth's
capacity to support human life as well.<br />
<br />
New <a href="http://www.nature.com/nature/journal/vaop/ncurrent/full/nature13717.html" rel="external">research</a>
by a group of environmental scientists suggests that better
coordination could go a long way toward avoiding this disaster. The key
is that vast tracts of settled land, where ecological damage is already
significant and probably irreversible, still aren't very productive.
Better access to fertilizers and modern farming technologies would
greatly boost the productivity of such areas, thereby reducing the need
for development in more sensitive areas. <br />
<br />
The researchers have produced a global <a href="http://www.nature.com/nature/journal/vaop/ncurrent/fig_tab/nature13717_F3.html" rel="external">map</a>
showing places on Earth where new roads or road upgrades could have big
human benefits, and others where little benefit would be expected
despite large environmental costs. If countries worked together, such
information could be used to guide road building over the coming
decades, helping to preserve the fragile biosphere without compromising
beneficial economic growth.<br />
<br />
Such a global zoning plan would allow
building to take place in an intelligent way. Inevitably, of course, it
would also mean that some local interests would have to give way to
global demands. Governments, individuals and firms would sometimes be
constrained by the needs of the greater whole. That's what coordination
implies, and it's what we need if we're going to preserve our world and
still boost agriculture to meet the global demand for food, which will
likely double by 2050.<br />
<br />
Will it happen? The prognosis is not good.
Politicians are too focused on the next election -- and often too
corrupt or beholden to local economic interests -- to think globally and
for the long term. For many conservatives and libertarians, any step
toward even minimal global governance seems to produce near hysteria,
even when it's obviously beneficial. Markets aren’t likely to help much,
either: Research has shown that they're <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech495.pdf" rel="external">not good</a>
at reflecting the costs and benefits of events that might happen 10 or
more years in the future. Humans are naturally inclined toward inaction
in the face of great uncertainty.<br />
<br />
The challenge is the same for
handling the biggest looming problems of global growth such as climate
change and water supply. Instead of turning inward and closing off,
humans need to cooperate and coordinate on an unprecedented scale. In
essence, we're in a race to learn fast enough to avert our own demise.
If we want to win, we'll have to change strategy soon.<br />
<br />
<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com9tag:blogger.com,1999:blog-1684157780354336888.post-83949159265487172832014-09-10T11:18:00.001+02:002014-09-10T11:18:46.617+02:00Economics beyond shocks??<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTYK1XKzNLojxYgLNEOj8E3C8Z37rp15EEkfyIEl-6KDY7JkokK2AWM0lxQ2iW0TWoRJSOfr9RAd8bRPqaNI8PPIHW-X6TdiAnX2Q1V1jGGEEJPo-G6-IhT6rgthImKp2Z4VrZ-5k_Efk5/s1600/unstable2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTYK1XKzNLojxYgLNEOj8E3C8Z37rp15EEkfyIEl-6KDY7JkokK2AWM0lxQ2iW0TWoRJSOfr9RAd8bRPqaNI8PPIHW-X6TdiAnX2Q1V1jGGEEJPo-G6-IhT6rgthImKp2Z4VrZ-5k_Efk5/s1600/unstable2.jpg" /></a></div>
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
Place a lit cigarette in an ashtray in a closed room where the air is perfectly still. As everyone knows, the smoke will rise, but not in a simple regular flow; the rising flow is unstable, begins to wobble, and then breaks out into a tangled mess -- turbulence. You don't need any outside cause or shock to the rising smoke to make it happen.<br />
<br />
Economies do highly irregular things too, as a rule, going through repeated booms and busts, and yet economists seem quite hesitant to see such fluctuations as the result of similar natural instability. In recent decades, at least, they seem to have greatly preferred the idea that fluctuations around average growth must be caused by "shocks" to the economy of some kind. Noah Smith recently gave <a href="http://www.bloombergview.com/articles/2014-08-18/recessions-and-hunks-of-junk">a nice summary</a> of the Real Business Cycle theory of Kydland and Prescott, which Prescott and colleagues are still pushing today:<br />
<br />
<blockquote class="tr_bq">
Here’s how recessions work. Sometimes, scientists and engineers
invent less new stuff than normal. Fewer new inventions this year mean
fewer new inventions next year, too. Anticipating this, companies invest
less, and they also cut workers' wages. When wages go down, workers
decide to take a vacation instead of work. Voila -- a recession!<br />
<br />
Actually, I’m kidding. I don’t think this is how recessions work at all. But the theory I just described <i>is</i> a real macroeconomic theory. It <a href="http://www.minneapolisfed.org/research/prescott/papers/timetobuild.pdf" rel="external">came out</a>
in 1982, and its name is the Real Business Cycle model. In 2004, its
creators, Edward Prescott and Finn Kydland, won a Nobel Prize for their
work. The theory inspired a generation of researchers, and became the
dominant theory in certain places, such as the University of Minnesota.<br />
<br />
You might be forgiven for thinking that Real Business Cycle theory, or
RBC for short, doesn’t deserve its moniker. Just as the Holy Roman
Empire was none of the above, RBC theory doesn’t seem to have much to do
with business or cycles, and for that matter doesn’t sound particularly
real. Most people think that recessions are caused by asset-price
crashes, by disturbances in the financial sector, or by Federal Reserve
tightening of the money supply. <br />
<br />
RBC says we’re all wrong about
that. The financial sector, RBC adherents claim, isn't important. Asset
prices crash because people see a recession coming ahead of time and act
accordingly. And the Fed, according to Prescott in a recent <a href="http://noahpinionblog.blogspot.com/2014/01/the-econ-nobel-prize-is-really-weird.html" rel="external">interview</a>,
has no more effect on the economy than a rain dance has on rain. In
fact, RBC is really sort of a giant null hypothesis -- a claim that the
phenomenon known as the business cycle is just an illusion, and that
recessions are the normal, smooth functioning of an efficient economy.</blockquote>
<br />
In Bloomberg,<a href="http://www.bloombergview.com/articles/2014-08-26/recessions-and-the-big-shock-theory"> I've written about</a> some new work that puts this RBC theory into a very new light. It suggests, in fact, that theories of this basic class, if examined more closely, actually predict the existence of inherent instabilities in economies. Specifically, if you relax even slightly some of the heroic assumptions usually employed in such theories -- regarding agents' perfect rational foresight, or the ability of firms to adjust their output instantaneously to changing economic conditions -- then these models become unstable, so that large recessions will happen even without any external shocks, simply because of coordination failures within the economy.<br />
<br />
More people should know about <a href="http://arxiv.org/pdf/1406.5022.pdf">this work</a>, which is the result of a serious collaboration between some physicists AND economists. Full text of the Bloomberg piece below:<br />
<br />
****<br />
Economists still don't know what makes it happen. An economy thrives
for years, and then suddenly, without warning, falls into a hole.
Unemployment soars until somehow, sooner or later, growth resumes. Every
economy on the planet has experienced these painful, mysterious and
apparently unavoidable slumps.<br />
<br />
Among academics, the most popular
theory is the Big Shock, which has many variations. In this view, you
get a recession when some big thing like an oil crisis whacks the
economy, causing a corresponding reaction. Conservative economists
assume individuals and businesses will react in the best and most
rational possible way, creating an optimal economic response, so the
government shouldn't get involved. Others take the less extreme view
that governments and central banks, acting wisely, can intervene to help
an economy recover. <br />
<br />
A few economists instead prefer what you might call the <a href="http://economics.mit.edu/files/8135" rel="external">amplification theory</a>.
They suggest that interactions between different parts of an economy
might make it possible for even tiny shocks to have big consequences,
much as a spark in a parched forest can trigger a vast fire. A small
downturn for an auto manufacturer might hurt its suppliers, undermining
their ability to supply other auto makers and creating a growing cascade
of distress. The cause is less the shock and more the links that
amplify it.<br />
<br />
For most economists, that's the end of the discussion:
Recessions are either the result of big shocks, or of small shocks with
amplification. They ignore a third possibility: that an economy might
sometimes get seriously out of shape with no shock at all. The omission
is odd, because this way of thinking was quite common in economics some
50 years ago. <br />
<br />
Fortunately, a group of economists and physicists
is reviving the old “no shocks” idea. Interestingly, they start with a
mathematical model of the economy built by Big Shock theorists --
specifically, the so-called Real Business Cycle <a href="http://www.bloombergview.com/articles/2014-08-18/recessions-and-hunks-of-junk" rel="external">model</a>,
which still garners lots of attention from economists. Like many
mainstream economic models, it assumes that individuals and businesses
make perfectly rational, optimal decisions, which lead the economy to a
stable economic equilibrium. The <a href="http://arxiv.org/pdf/1406.5022.pdf" rel="external">new research</a>
then makes some adjustments to this picture: It assumes that
individuals, rather than having perfect foresight when predicting future
prices, sometimes make small errors. The result is radically different.
The interactions of firms and individuals now create an ongoing
turbulence with sporadic recessions arising from a natural lack of
coordination, without any shocks at all. <br />
<br />
The researchers go on to
show that if you make the model more realistic along any of a number of
dimensions -- firms taking a little time to adjust their production to
new levels, for example, rather than doing so instantaneously -- you
always end up with an inherently unstable economy. The conclusion is
pretty much the opposite of what the Real Business Cycle theory's
creators originally intended. They wanted to defend the notion that
markets work perfectly, not to entertain the possibility that recessions
might reflect an inability of markets to coordinate supply and demand.
Their own model actually destroys that hope.<br />
<br />
It's an amusing and
ironic outcome, with implications beyond recessions. For years, many
economists have argued that their assumptions of perfect rationality,
self-interest and equilibrium are merely convenient elements in valuable
thought experiments; they learn about the real world despite the
manifestly false assumptions. That position now looks completely
indefensible. It looks more as if Big Shock theorists are worried that
relaxing their assumptions will lead to some very different and very
inconvenient conclusions.<br />
<br />
<div class="footnotes">
</div>
This isn't to say that we know for sure what really causes big
recessions. Big shocks, little shocks and inherent instability may all
play a role. It will take some honest science to figure that out. <br />
<br />
<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com10tag:blogger.com,1999:blog-1684157780354336888.post-19702648679865601212014-09-10T10:27:00.000+02:002014-09-10T10:27:12.968+02:00Make people be nice!!<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhV4eFXe8_8rawkV1MaX_14S8CwFTBIpBnkypZhyphenhyphen5dl58JCcSxnTYH2GA-U_7TB-j6vz_9ezMnZszfQmc2-rHnVlrhG7hSgzwnprq-myMeSJlo-vD71YfVPXTjPi2w1BRi-q15X9xG5jupV/s1600/nice.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhV4eFXe8_8rawkV1MaX_14S8CwFTBIpBnkypZhyphenhyphen5dl58JCcSxnTYH2GA-U_7TB-j6vz_9ezMnZszfQmc2-rHnVlrhG7hSgzwnprq-myMeSJlo-vD71YfVPXTjPi2w1BRi-q15X9xG5jupV/s1600/nice.jpg" /></a></div>
<br />
<br />
I've been quite lazy recently and haven't managed any posts. I haven't even managed to post several things I've written for Bloomberg. Jeez. So, catch up time. <br />
<br />
First, I encourage everyone to watch <a href="https://www.youtube.com/watch?v=fgfQLTIhi1U">this</a> great TED talk by British comedian Tony Hawkes. It's inspiring. He makes a crazy proposal for a maximum income scheme; it's crazy but also really different and creative. He doesn't want to limit rich people or tear them down, but to help them do even better, and to help everyone else in the process. It's an idea of how we could set up institutions so that people work hard to be nice and to do socially beneficial things.<br />
<br />
I wrote about this for Bloomberg <a href="http://www.bloombergview.com/articles/2014-08-06/can-a-british-comedian-end-inequality">here</a>, but full text follows also below. I'm sure this isn't exactly the RIGHT idea, but there's a nub of something really cool here. It would be great if ideas like this were actually discussed in real policy circles:<br />
<br />
******<br />
Concern about rising wealth and income inequality has generated all
kinds of solutions, often focused on improving the lot of the people at
the bottom with measures such as minimum wages. But instead of putting a
floor on what people get, why not put a ceiling on how much they get to
keep?<br />
<br />
The idea of a cap on income sounds crazy, and most economists find it unthinkable -- as <a href="http://mainlymacro.blogspot.fr/2014/07/if-minimum-wages-why-not-maximum-wages.html" rel="external">evidenced</a>
by the cries of incredulity Oxford professor Simon Wren-Lewis recently
elicited when he brought up the idea in an academic discussion. The
obvious response is that anything of the kind would automatically kill
economic creativity by destroying the wealth incentive that drives
entrepreneurs to start new businesses. <br />
<br />
But is this really true?
Or does this way of thinking merely lack imagination? Maybe there's a
clever way to design an income cap that wouldn't deter business at all.<br />
<br />
One idea comes, unexpectedly, from Tony Hawks, a British comedian and writer. Hawks is best known for his <a href="http://www.tony-hawks.com/books.php?id=1" rel="external">best-seller</a>
"Round Ireland With a Fridge," a recounting of his effort to win a
100-pound drunken bet by hitchhiking around the circumference of Ireland
with a medium-sized refrigerator (he did it). He later wrote another
book, "Playing the Moldovans at Tennis," about his quest to track down,
play and beat each of the members of the Moldovan soccer team one-on-one
at tennis (he did that, too).<br />
<br />
The poverty Hawks encountered in
Moldova, though, made him rethink the value of the wealth and fame he
had achieved. He decided to donate 50 percent of the royalties from his
second book to a trust fund for beneficial projects in the country. A
few years later, after the money had paid for a new care center in
Chisinau for children with cerebral palsy, Hawks had an epiphany.<br />
<br />
“I met the children and their parents, saw their smiles,” he recalls,
“and the experience really enriched my life. I now actually feel good
about myself. Undoubtedly, I feel happier since I did this.” <br />
Hawks's realization that doing good could prove far more valuable to him
than the foregone 50 percent of his royalties led to an <a href="https://www.youtube.com/watch?v=fgfQLTIhi1U">idea</a>: an income cap that would apply to money but not to wealth in the broadest sense. <br />
<br />
Suppose that people, after paying ordinary income taxes, would be
allowed to keep up to, say, $500,000 of their income, then would be
obliged to give away the rest to the charities of their choice -- or, if
they like, to a charity of their own design and creation. Such a policy
would encourage a rapid proliferation of philanthropic organizations
competing to attract the money -- much like the amassing of financial
wealth has fueled the money-management industry. More people would be
able to find jobs doing good things, and society would benefit from
their efforts and resources.<br />
<br />
The wealthy, too, would benefit. Many studies have <a href="http://www.pnas.org/content/early/2010/08/27/1011492107" rel="external">shown</a>
that the more money one has, the less happiness one derives from each
added dollar of income. This may explain why many of the super-wealthy,
such as Warren Buffett and Bill Gates, ultimately turn to philanthropy
-- making yet more money matters little to them in comparison with what
they can get back by helping others. <br />
<br />
With Hawks's income cap
policy, the wealthy would end up competing not just to earn the most
money, but also to outdo others in making wise and useful gifts to the
best charities, or to start and manage charities reflecting their
values. A virtuous circle would be created. The philanthropic activity
generated by such a policy might significantly reduce the need for many
taxpayer-funded government programs, reducing the need for income taxes.
<br />
<br />
The idea actually resonates quite well with the spirit of
capitalism. Huge taxes on the rich don't work: They naturally breed
resentment and stifle creativity. Governments are often very bad at
redistributing the money efficiently. Besides, people shouldn't be
punished for working hard and being successful. They should be rewarded
and encouraged. <br />
<br />
People care about more than money, and our
policies should harness this fact in a smart way. Hawks has at least the
nub of a very good idea. It might not be the ultimate answer, but it
has the seeds of something very clever in it. We need to work harder at
imagining what might be possible with policies that encourage the better
parts of human nature, rather than merely channel people toward gaining
as much wealth as possible.<br />
<br />
As a result, they might be happier. <br />
<br />
<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com8tag:blogger.com,1999:blog-1684157780354336888.post-24877772943229530562014-08-11T17:19:00.000+02:002014-08-11T17:19:27.395+02:00Arrow-Debreu Derangement Syndrome<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAwB5hjnrGfmvn3DD5PsDRmRvJZQ3EVQ_28UMVtr1MdJOcc3_9ww5h2341LTAJMDQRCH2DGgA01UVd7F-pqkKLdm_Lm_AMmJZj6-YJ5DslQezUxZ581n62A9Y0CjgSTeLzYDa_30kus6kL/s1600/deranged.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAwB5hjnrGfmvn3DD5PsDRmRvJZQ3EVQ_28UMVtr1MdJOcc3_9ww5h2341LTAJMDQRCH2DGgA01UVd7F-pqkKLdm_Lm_AMmJZj6-YJ5DslQezUxZ581n62A9Y0CjgSTeLzYDa_30kus6kL/s1600/deranged.jpg" /></a></div>
<br />
<br />
<br />
Imagine you had never read any textbook economics, or studied any academic research papers. You didn't know the THEORIES of economics, especially in their mathematical form. But suppose you did know some mathematics, and were also generally well informed about the realities and complexities of real world economies. Now, suppose a demon sat you down and made you read and study the famous theorems concerning the existence of a competitive economic equilibrium as developed in the 1950s by Ken Arrow and Gerard Debreu. What would you think?<br />
<br />
My belief is that you would quickly conclude that these theorems probably held little or no importance for understanding any real world economic system. If the demon tried to tell you that these theorems were at the very core of today's theoretical approach to (much of) economics, you'd think he or she was joking. If the demon insisted, you'd suspect you were dealing with an insane demon; and if you discovered the demon was right, you suspect the economics profession of being deranged. At least I would...<br />
<br />
I've never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all. So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the <i>idea</i> of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the ability to think in even minimally logical terms; they fail to distinguish necessary from sufficient conditions, and manage to overlook the issue of the stability of equilibria.<br />
<br />
I just came across <a href="http://www.nakedcapitalism.com/2012/02/robert-shiller-has-arrow-debreu-derangement-syndrome.html">this old post</a> from Yves Smith which makes the point rather nicely:<br />
<br />
<br />
<blockquote class="tr_bq">
The scientific pretenses of economics got a considerable
boost in 1953, with the publication of what is arguably the most
influential work in the economics literature, a paper by Kenneth Arrow
and Gérard Debreu (both later Nobel Prize winners), the so-called
Arrow-Debreu theorem. Many see this proof as confirmation of Adam
Smith’s invisible hand. It demonstrates what Walras sought through his
successive auction process of tâtonnement, that there is a set of prices
at which all goods can be bought and sold at a particular point in
time.42 Recall that the shorthand for this outcome is that “markets
clear,” or that there is a “market clearing price,” leaving no buyers
with unfilled orders or vendors with unsold goods.<br />
<br />
However, the conditions of the Arrow-Debreu theorem are highly
restrictive. For instance, Arrow and Debreu assume perfectly competitive
markets (allbuyers and sellers have perfect information, no buyer or
seller is big enough to influence prices), and separate markets for
different locations (butter in Chicago is a different market than butter
in Sydney). So far, this isn’t all that unusual a set of requirements
in econ-land.<br />
<br />
But then we get to the doozies. The authors further assume forward
markets (meaning you can not only buy butter now, but contract to buy or
sell butter in Singapore for two and a half years from now) for every
commodity and every contingent market for every time period in all
places, meaning till the end of time! In other words, you could hedge
anything, such as the odds you will be ten minutes late to your 4:00
P.M.meeting three weeks from Tuesday. And everyone has perfect
foreknowledge of all future periods. In other words, you know everything
your unborn descendants six generations from now will be up to.<br />
<br />
In other words, the model bears perilous little resemblance to any
world of commerce we will ever see. What follows from Arrow-Debreu is
absolutely nothing: Arrow-Debreu leaves you just as in the dark about
whether markets clear in real life as you were before reading
Arrow-Debreu. <br />
<br />
And remember, this paper is celebrated as one of the crowning achievements of economics.
</blockquote>
<br />
<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com31tag:blogger.com,1999:blog-1684157780354336888.post-30771754406934255652014-07-29T10:48:00.000+02:002014-07-29T10:48:29.647+02:00Economic imperialism -- its pernicious effects in law<div class="separator" style="clear: both; text-align: center;">
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<br />
I've <a href="http://physicsoffinance.blogspot.fr/2013/07/economics-as-religion.html">written</a> before about the insidious stupidity of relying on simple minded economic cost-benefit calculations when thinking about complex issues such as climate change, trade policy and the like. The calculation gives the illusion of hard-headed quantitative analysis, unbiased by emotion, yet such calculations almost always make sweeping assumptions about what things get counted as costs or benefits and what things do not. There is often nothing scientific in the exercise at all.<br />
<br />
I'm not alone in finding this troubling.<br />
<br />
Economists in practice spend a lot of time
thinking about market failures and how to prevent them, and they derive much
of their policy advice from this recipe. Such analyses
inevitably tap into the analytical machinery for welfare analysis
(which, I admit, I find hard to take at all seriously, but that's another
story) and consider how some policy intervention, by removing obstacles
to possible exchanges in the market, can improve welfare and economic
efficiency. The trouble is, as economists Daron Acemoglu and James Robinson <a href="http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.2.173">pointed out </a>a while ago, is that the conceptual
framework used in such analyses often simply dismisses as irrelevant
other non-economic impacts of such policies, even though these may have
huge societal ramifications. Here's how they described one example (I'm selecting some text here from an earlier post):<br />
<br />
<br />
<blockquote class="tr_bq">
Faced with a trade union exercising monopoly power and raising the wages
of its members, many economists would advocate removing or limiting the
union’s ability to exercise this monopoly power, and this is certainly
the right policy in some circumstances. But unions do not just influence
the way the labor market functions; they also have important
implications for the political system. Historically, unions have played a
key role in the creation of democracy in many parts of the world,
particularly in western Europe; they have founded, funded, and supported
political parties, such as the Labour Party in Britain or the Social
Democratic parties of Scandinavia, which have had large effects on
public policy and on the extent of taxation and income red istribution,
often balancing the political power of established business interests
and political elites. Because the higher wages that unions generate for
their members are one of the main reasons why people join unions,
reducing their market power is likely to foster de-unionization. But
this may, by further strengthening groups and interests that were
already dominant in society, also change the political equilibrium in a
direction involving greater effifi ciency losses. This case illustrates a
more general conclusion, which is the heart of our argument: even when
it is possible, removing a market failure need not improve the
allocation of resources because of its effect on future political
equilibria. To understand whether it is likely to do so, one must look
at the political consequences of a policy—it is not sufficient to just
focus on the economic costs and benefits.</blockquote>
<br />
The paper goes on to analyze this problem in much greater generality,
looking at the push to privatization in Russia, and the drive to
deregulate financial markets over the past three decades in Western
nations, and how both led to huge shifts in the wealth and political
power of different social groups. In both cases, much of the
intellectual groundwork for making these changes came from analyses that
were ridiculously oversimplified and carried out with considerable
disregard for the larger complexity of society.<br />
<br />
On the same topic, <a href="http://www.salon.com/2014/07/26/why_law_schools_love_affair_with_economics_needs_to_stop/?source=newsletter">here's a must read article</a> at Salon.com by Ted Hamilton, a Harvard Law student, decrying the stultifying effects of the "law and economics" movement on the teaching of law. One of the most pervasive effects is the rise of the concept of economic "efficiency" in analyzing and judging the relative merits of different legal structures. The result, as Hamilton describes it, is the systematic narrowing of thinking and stamping out of any imaginative or creative analysis in law:<br />
<br />
<blockquote class="tr_bq">
Since September, I’ve been encouraged to think about the law less as a
journey toward justice and more as a means for distributing resources.
In Civil Procedure, we examined the wisdom of allowing average people to
bring lawsuits based on the overall court costs involved. And in
Property, the problem of whether to permit the building of a cement
plant in a residential neighborhood turned on the national industry’s
need for cement. In nearly every discussion of a given law or a proposed
policy, the first question was feasibility, and the second (or third)
was justice. “Feasibility” means financial soundness. Financial
soundness requires measurement. So in order to measure and mete out our
resources, legal questions grasp for the harsh insights of computation.<br />
<br />
According
to this oddly constrained worldview, the legal system is just another
(and comparatively imperfect) means for achieving “wealth maximization.”
We want a “bigger pie,” so the incessantly repeated metaphor goes, and
law is merely about deciding which yeast works best. The impassioned <i>cris de coeurs </i>of <a href="http://en.wikipedia.org/wiki/William_Blackstone">Blackstone</a>, <a href="http://en.wikipedia.org/wiki/Benjamin_N._Cardozo">Cardozo</a> or <a href="http://en.wikipedia.org/wiki/Sonia_Sotomayor">Sotomayor</a> notwithstanding, “the life of the law” is not, to paraphrase <a href="http://en.wikiquote.org/wiki/Oliver_Wendell_Holmes,_Jr.">another luminary</a>,
“experience” — it’s accounting. If only we would spend less time with
the romantic and messy concepts that have beguiled the likes of Holmes
and Brandeis for millennia, so the thinking goes, we might actually be
able to <i>make things work.</i><br />
<br />
In the obvious — and
obviously ideological — corollary to all this, law school has tried to
convince me that it’s not lawyers or judges that should decide the hard
questions of law: It’s economists. The white knights of the 21st century
legal academy, economists are uniquely equipped, so they claim, to
furnish us wishy-washy idealists with the quantitative rigor to perform
the difficult, and consummately serious, analysis that policy and
politics require.<br />
<br />
In other words, society is a problem. And legal economics is here to solve it.<br />
<br />
The
law and economics movement, born at the University of Chicago in the
1970s, gave birth to this type of thinking and now enjoys unquestioned
academic supremacy over the more prevaricating methods of legal realism,
critical legal studies and legal formalism. Law and economics’ doyen
Richard Posner, a professor at Chicago, Seventh Circuit judge and famous
advocate of all things market-oriented, is the most cited legal
academic of the 20th century. Ronald Coase’s “The Problem of Social
Cost,” which reduces debate over legal rules to the calculation of
transaction costs, is the most cited legal article. Passions have cooled
somewhat since the raucous debate in the ’80s and ’90s over law and
economics’ takeover of the legal academy — which was aided in no small
part by generous donations from private, free market-promoting
foundations — but that’s just because the movement’s methods have become
part of the background. No other approach to adjudication dominates
class discussion to such an extent, or shapes the way in which cases are
selected and read.<br />
<br />
The economic analysis of law, then, has become
the standard against which other approaches are measured. And even if
many professors still believe that cost-benefit analysis, with its
incessant focus on data and calculation, brandishes empiricism the way
Descartes brandished self-reflection (read: with excessive faith in a
promising but limited approach), only a cantankerous cynic would argue
that it’s all hogwash.<br />
<br />
But that’s not to say there isn’t much to pause over.<br />
<br />
Here’s
a typical example: Legal economists generally assess the value of a
resource — land, loans, even lives — by how much someone is willing to
pay for it. This makes sense at a very basic level: The sandwich is
worth $8 because you won’t pay $9 but you’ll pay more than $7. But how
effectively can dollars capture worth when people have different <i>abilities</i>
to pay? It seems a bit obtuse to claim that the owner “willing” to pay
$200,000 for her home values it less than the developer “willing” —
read: <i>able</i> — to spend $1 million. And that’s just marketable
assets. What about more elusive “resources”? How do we price, say, the
happiness of children? (Don’t worry: economists have tried.)<br />
<br />
Here’s
another example: Economic analysis evaluates environmental regulations
according to the net social value of restricting industrial activity
versus the activity’s economic value absent regulation. Even beyond the
difficulties of measuring such things, how do we decide where to draw
the line between what “counts” as value in such a calculation and what
doesn’t? When dealing with something as resistant to quantification as a
wild stream, this puzzle has no end. Is the stream only valuable to
those who live by it? To those who live in it? What about those who hear
stories about it, or who would drink from it in 90 years, or the
painters who might never see it? Does their value “count”?<br />
<br />
... we need to consider economic thinking’s ideological and imaginative effects. ... Simply
put, our social life is much more than a pie-eating contest. Our shared
resources are meant to serve our shared ideals, not vice versa. Yes: a
rising tide might sometimes lift all ships, and we need to enjoy our
bread before we can enjoy our rights. But the two biggest specters on
our communal horizon, climate change and inequality, demonstrate where a
singleminded obsession with economic growth can lead us. Taking care of
ourselves and our planet means much more than taking care of our
wallets.<br />
<br />
In an era crying out for radical thinking and radical
solutions, we can ill afford the strictures of the cost-benefit mindset.
The complete immersion of our legal class into this language of
economics has a corrosive effect on its imaginations, leaving our
lawyers unequipped to think outside the box. A singleminded pursuit of
efficiency loses sight of the inherent messiness of society and the
legal rules that grapple with it. By reducing everything to entries in a
formula and by seeing human behavior as limited to “rational pursuit of
maximum value,” law and economics conjures up a version of the
self-interested and self-destructive world that we now inhabit.<br />
<br />
After
all, when we concede that our society’s legal life is essentially about
growing the economy, it becomes very hard to argue against leaving the
tough decisions of rule design and market legislation to the growth
experts and wealth maximizers. Not surprisingly, those folks have lately
turned out to be expert mostly at maximizing their own wealth and that
of their friends, while minimizing the wealth, and the happiness, of
everybody else — those less willing, because less <i>able</i>, to pay for their share of our resources.<br />
<br />
Three
years of law school spent evaluating society according to the metric of
transaction costs will inevitably produce lawyers less attuned to the
more ephemeral, and more essential, considerations — the kind that could
actually inspire the reforms and revolutions we need. A law school
acculturation process whereby the hard facts of economic analysis are
constantly if implicitly vaunted over the less determinate methods of
ethical reasoning necessarily generates attorneys more sympathetic to
those who traffic in the material of such analysis — namely, bankers,
hedge fund managers, and their similarly-educated regulators — and it’s
just such economic essentialists who are overrepresented in the ranks of
the enemies of social change.</blockquote>
<br />
Read the whole thing <a href="http://www.salon.com/2014/07/26/why_law_schools_love_affair_with_economics_needs_to_stop/?source=newsletter">here</a> (h/t Mitch Julis) Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com12tag:blogger.com,1999:blog-1684157780354336888.post-51747648811598175882014-07-29T10:03:00.000+02:002014-07-29T10:03:21.689+02:00Gattopardo economics<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9Zi0Y8nPbMZBMohTRaUlv2PEhjJzFs0ZepT9I7UpO-tR7PUWZX1Tm8lmCsGTft_7Dhfo5Hg7af8IL7ICHMB-i4w4DRHNVy4JuSeru6dfHQL7ZY58eOWmZW-eNDLnUG_gflAxGQfVMDm-n/s1600/gatto.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9Zi0Y8nPbMZBMohTRaUlv2PEhjJzFs0ZepT9I7UpO-tR7PUWZX1Tm8lmCsGTft_7Dhfo5Hg7af8IL7ICHMB-i4w4DRHNVy4JuSeru6dfHQL7ZY58eOWmZW-eNDLnUG_gflAxGQfVMDm-n/s1600/gatto.jpg" /></a></div>
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Thomas Palley has written an interesting and provocative <a href="http://www.boeckler.de/pdf/p_imk_wp_112_2013">working paper </a>on "Gattopardo economics" -- his phrase for recent efforts to paper over the fundamental failings of mainstream economic theory by making superficial changes, thereby leaving the main structures intact. Such efforts seek "change that keeps things the same... Gattopardo economics makes change more difficult because it deceives people into thinking change has taken place. By masquerading as change, it crowds-out space for real change."<br />
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The name comes from the novel Il Gattopardo (The Leopard) by Giuseppe Tomasi di Lampedusa, about class conflict in Sicily in the 1860s. In the novel, the aristocracy engineers change of a sort that deflects the real threat to their power and leaves them still in charge. <br />
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I don't know if Palley's account of the causes of the financial crisis
and subsequent stagnation is definitely correct, but it rings true to
me. It was the end result of broad financial de-regulation, coupled with
relentless downward pressure on ordinary wages over the past few
decades driven by globalization. This set the stage for a three decade
credit bubble which ultimately burst. The part I'm not sure about is his
claim that stagnant growth now is due to a lack of aggregate demand
linked to soaring wealth inequality. Sounds plausible. Anyway, here's
his closing summary. The <a href="http://www.boeckler.de/pdf/p_imk_wp_112_2013">whole paper</a> is worth a read:<br />
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<blockquote class="tr_bq">
The structural Keynesian account of the economic crisis makes clear the role of mainstream economists and the neoliberal paradigm in creating the crisis. Scratch any side of the neoliberal policy box and you quickly find the ideas of mainstream economists. Corporate globalization was justified by appeal to economists’ comparative<br />advantage theory of free trade. The labor market flexibility agenda was justified by economists’ claims that unions and the minimum wage cause unemployment. The retreat from full employment was justified by the Friedman’s theory of the natural rate of unemployment which implied central banks should focus on low inflation as they cannot permanently affect unemployment. The attack on government and regulation was supported by Chicago School claims that costs of market failure are small relative the costs of government failure and policy induced market distortions. Government was also charged with diminishing freedom and paving “the road to serfdom”, so that freedom was best served by a minimalist government or night watchman state. Financial deregulation was justified by claims it would produce a free lunch by increasing efficiency of resource allocation.<br /><br />
After the financial crisis of 2008 many Keynesian economists hoped there would be profound change of theory within the economics profession. The profession stood discredited owing to its complete failure to anticipate the crisis, whereas Keynesian economists had anticipated the crisis and also showed how neoliberal economics contributed to it. However, change has been minimal.<br /><br />
That should not surprise anyone. Neoliberal economics supports the economic and political interests of powerful elites, and those elites have reason to defend it and block change. Even if only sub-consciously, professional economists also have a private (utility maximizing) interest in maintaining neoliberal ideas to the extent that they are intellectually invested in those ideas and their careers have been built on them.<br /><br />
Society is now engaged in a war of ideas, the outcome of which will greatly influence the future. That is because how we explain the crisis will influence the direction of future economic policy. Gattopardo economics is one of the mechanisms for blocking intellectual change. It works by muddying the water and appearing to offer change when in fact it keeps everything the same. That is why it is so important to expose gattopardo economics.</blockquote>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com10tag:blogger.com,1999:blog-1684157780354336888.post-84030863492663732072014-07-22T10:48:00.000+02:002014-07-22T10:48:05.332+02:00A weed you can eat...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUU7GplOvQx2zPecJzv6AlmmPNmOCdOSN2eQrb0uusYcQMslJdYvp4qJZOx1BVIUm5cNn7lpHF1AwAPWFMt26Gn7lWx3_6mE_Zs9psO52571P8QBubENvWUj6khRmDIPh8xTkbeTWO74AL/s1600/amarin.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUU7GplOvQx2zPecJzv6AlmmPNmOCdOSN2eQrb0uusYcQMslJdYvp4qJZOx1BVIUm5cNn7lpHF1AwAPWFMt26Gn7lWx3_6mE_Zs9psO52571P8QBubENvWUj6khRmDIPh8xTkbeTWO74AL/s1600/amarin.jpg" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgm3_RqaF56b28z3Kd2hjHRK3VFSIZdIF8zppnotMS7bTPAamfoZa_QuwwqLBEXCp4jFIZVwey-h2AXO_X5Zls-CnHUEqhSt8HmQrshy0rvPCoFPnKygMr8wR4Um1W6VA4C943piE31nZqV/s1600/amaran_image.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><br /></a></div>
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The thing you see above is a plant called Amaranth (this is Palmer Amaranth, one of many species). It's a superweed -- resistant to the ubiquitous and powerful herbicide Round Up -- and in many parts of the US an immense pain to farmers growing corn, soybean or cotton. They're spending millions to keep it from spreading in their fields, and not being too successful.<br />
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Now for the irony -- this plant is also completely edible and highly nutritious. It's been eaten for thousands of years around the world. Now farmers are trying to eradicate it in many cases so they can keep producing the cheap high-fructose corn syrup on which the soda and fast food and processed food industry depends. The very fuel of widespread obesity.<br />
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Talk about unintended consequences. You have to chuckle, really. <a href="http://www.bloombergview.com/articles/2014-07-20/the-downside-of-efficiency">More at Bloomberg</a>.Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com10tag:blogger.com,1999:blog-1684157780354336888.post-41450310214145400542014-07-11T19:08:00.000+02:002014-07-11T19:08:25.805+02:00How to cooperate with the future<div class="separator" style="clear: both; text-align: center;">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyTpyRLHakJfsaGiI4usevr-fKbWAPPyIeNB6ZPGQKZxkbTiLS2yEsUXFPFQxnqMHK5Q1jua83MlCE5IHux5KkPsuQqkxoyTHWgoWcNnCWLqvGAw-DH164gxyM6d0m9sC-j02VwHccBhJg/s1600/dogs+coop.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyTpyRLHakJfsaGiI4usevr-fKbWAPPyIeNB6ZPGQKZxkbTiLS2yEsUXFPFQxnqMHK5Q1jua83MlCE5IHux5KkPsuQqkxoyTHWgoWcNnCWLqvGAw-DH164gxyM6d0m9sC-j02VwHccBhJg/s1600/dogs+coop.jpg" /></a></div>
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<a href="http://www.nature.com/nature/journal/v511/n7508/pdf/nature13530.pdf">Very interesting paper</a> published yesterday in <i>Nature</i>. It's an experimental paper, reporting the results of a cooperation game in which people try (of course!) to cooperate, but also have incentives to cheat and take more for themselves. If each pursues his or her own ends without regard for others, there's a tragedy of the commons in which a common pool resource gets wiped out. It takes cooperation and control over selfish actions to avoid disaster for everyone. Lots of experiments have looked at such matters before, of course. This one adds a twist.<br />
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The twist is to make the experiment more relevant to some of the tricky issues we face today in thinking about climate change, how to preserve the environment, etc. Someone who is today 60 years old doesn't have the same personal stake in avoiding climate change as someone who is 10, because the older one is much more likely to be dead by the time serious effects kick in. The twist in the experiment is to include this cooperation between generations effect. In effect, the experiment probes our abilities to cooperate with the future -- with people we will never meet. Clever idea to try to do this in an experiment, and I think they've managed it quite well.<br />
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Oliver Hauser and colleagues placed volunteers into groups of five people, which they called "generations." In a typical run of the game, they would give the first generation a common pool of 100 units of wealth, with each of the five individuals in this generation able to "extract" between 0 and 20 wealth units from this pool. Their choice entirely as individuals. The people know that the wealth pool will be passed on to future generations ONLY if the current generation extracts no more than half of it (50 units). Hence, individuals caring about the future generation could choose to extract, say, 10 or fewer units, while those not caring could just take 20.<br />
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The individuals were told that there actually would be a future generation with some probability p -- say, 0.8. Hence, there's a 20% chance that the game will just end, so no need to worry about future the generation, and 80% it won't, in which case the wealth resource will or will not be passed on depending how people act in this generation. This game repeats for a number of generations as determined by the random process (on average 5 for p = 0.8).<br />
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So, what happens? The research was designed to look at two different scenarios. First, where people just act as they want to without any further pressures on their behavior, and second, in the presence of various kinds of mechanisms designed to help them cooperate more effectively, preserving the resource through generations. The results are interesting:<br />
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1. Anything goes -- no institutions at all<br />
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In this case, everything goes to the dogs immediately. Interestingly, many people aren't wholly greedy and readily reduce the amount they extract so as to preserve the resource for the next generation of total strangers. The study found that over 20 separate trials, about 68% of the individuals extracted no more than 10 units. Even so, this wasn't enough the overcome the anti-social actions of a greedy minority which extracted so many units that the common pool vanished fairly quickly. In this set of experiments, there were second generations in 18 games, and only in 4 of them was the pool passed on intact through one generation. In the other 14 it was immediately wiped out by over-extraction.<br />
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Lesson: people aren't all bad, most have pretty good intentions, but the persistent efforts of a small minority of greedy cheaters is enough to mess everything up. In no single case did the common resource pool persist past 4 generations.<br />
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2. Anything doesn't go -- behaviour control by democracy<br />
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Maybe democracy can help? An alternative might be to have people in any generation hold a vote on how much of the resource should be passed on. Then, the result (taken as the median or more common choice among the voters) would determine the actual behavior of each and every individual. Freedom would reside in having a vote, not in just being able to extract what you like.<br />
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As the paper notes, there are some results in game theory that -- in the context of rational, self interested agents playing normal public goods games -- show that this kind of trick gives very good results. When selfish individuals can be strategic about getting something back from their cooperation, they can do so. However, this standard result does not apply in this generational game because no individual can gain anything by being cooperative. The first generation of rational greedy people would simply vote to each take 20 units and the resource would be gone. Who cares about those people in the future, anyway.<br />
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But of course, that's only if people really are rational and greedy. What about real people? Here the experiments suggest something encouraging. In another 20 trials, the researchers tested this protocol and found that now the resource pools never vanished even once, but were passed on and replenished by the unselfish voting of people for as long as the games persisted. The non-greedy norms of the majority, when linked to the coordinating mechanism of democratic voting, can overcome the greed of the uncaring minority -- in this very simple setting.<br />
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The message that the simple institution of democratic voting -- IF the outcome of the vote is then effectively enforced on the behavior of all individuals -- can be hugely beneficial for overcoming intergenerational tragedies of the commons. Secondarily, that analyses of what is possible in overcoming these kinds of problems is misleading and naive if conducted in the framework of strictly self-interested agents; pro-social norms in the behavior of real people are a resource for cooperation that we can put to good use. As the paper concludes:<br />
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<blockquote class="tr_bq">
We have shown that in the absence of regulation, a minority of selfish players consistently deplete available resources. By implementing median voting, however, this negative outcome can be prevented—but only if all players are bound by the outcome of the vote. Votes that are only partially binding, such as the international Kyoto protocol, have little power.<br />
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More generally, our results emphasize the importance of institutional designers moving away from the assumption of universal self-interest. We extend the ‘behavioural public choice theorem’ by demonstrating how voting can allow amajority of pro-social individuals to override a purely selfish minority, leading to costly group-level cooperation with future generations. Real-world data are consistent with this suggestion: countries that are more democratic also have more sustainable energy policies... Policymakers can do much to promote the public good by using a behavioural approach that is informed by amore accurate understanding of human psychology. Many citizens are ready to sacrifice for the greater good. We just need institutions that help them do so.</blockquote>
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This final comment reminds me of a European economist who I met several years ago at a European Commission meeting. Very polished, frightfully clever, Oxford and Cambridge, LSE and all that. In conversation, he made fun of all those silly people who recycle and try to take small steps to conserve energy, and had a really good laugh (all on his own) about their little minds and cute intentions to push our world in a better direction. All very silly, he said, because it will never amount to much. Nothing would really matter until it was determined what to do by people such as himself and then put into practice at an international level.<br />
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What seemed not to register in his brain at all was what all that small-sacrificing behavior actually reflects -- a desire to help, to make a difference, to change things, to care. Many people aren't only self-interested, and all their tiny efforts show it. They want to help solve the big problems. So that final sentence in the paper is exactly right: "We just need institutions that help them do so."<br />
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<br />Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com7tag:blogger.com,1999:blog-1684157780354336888.post-35300122294175606462014-06-28T10:18:00.000+02:002014-06-28T10:18:02.548+02:00The cost of fixed ideas<div class="separator" style="clear: both; text-align: center;">
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Books on economic policy aren't generally page turners. But <a href="http://press.princeton.edu/titles/10207.html">a new book</a> by economist David Colander and businessman Roland Kupers certainly is. It makes the argument that some of the assumptions economists made many decades ago -- especially about people having fixed preferences -- have effectively created a trap for policy analyses. We're stuck as a result with endless, useless arguments about markets versus government. Change those assumptions, and it's possible to imagine policies that don't have markets and government in opposition; it ought to be possible to have free markets and a useful and smaller government at the same time, and achieve not only material prosperity but a wide range of social goals too.<br />
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I wrote about the book in <a href="http://www.bloombergview.com/articles/2014-06-24/is-there-a-way-to-escape-policy-gridlock">a Bloomberg column</a> a few days ago. That column has garnered all of 4 comments so far, which I think also illustrates another problem we have. The column is all about how we might find a way around all of the sterile arguments of markets vs government, and not too many people seem to be interested in that.... or at least not motivated to comment. From past experience, I know that any column which seems to take a side in those arguments stirs up a lot of protest. <br />
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Anyway, read Colander and Kupers' book. Here's the column:<br />
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<blockquote class="tr_bq">
From financial regulation to health care to climate change, we can't
agree on what to do about anything. Free-market enthusiasts celebrate
the creative power of markets and want smaller government; critics
counter that we desperately need government intervention to solve
problems that markets can't handle. Neither side can understand the
other.<br />
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Is there any way out? Well, if you're discouraged, I
suggest looking to an inspiring new book by an economist, David
Colander, and a businessman, Roland Kupers, who believe the deadlock
needn't be permanent. We can have better markets, they say, and more
effective (and smaller) government too, if only we can muster a little
more economic imagination.<br />
<br />
The book is called ``<a href="http://press.princeton.edu/titles/10207.html" rel="external">Complexity and the Art of Public Policy</a><em>,'' </em>and
its main point is that our policy debates have fallen into a trap that
economists inadvertently created some 50 years ago. That's when they
started building mathematical models of economic systems, and, to
simplify things, made the assumption that people have fixed or
unchanging preferences and desires. Sounds innocuous; it wasn't, and
isn't. <a href="http://www.bloombergview.com/articles/2014-06-24/is-there-a-way-to-escape-policy-gridlock">Read more.</a></blockquote>
Mark Buchananhttp://www.blogger.com/profile/11288455251267863265noreply@blogger.com7