Archive for August, 2002

80925527

August 30, 2002

Democracy for the common man …

This story is a couple of months old, but it’s obsessing me. I can’t get it off my mind. Unlike the majority of commentators, I don’t really ever expect the government to do the right, or even the sane thing, plus I would certainly accept any bribes I was offered myself so I don’t feel I have the moral standing to criticise others for doing so. So it’s not concern for the British Steel Industry which keeps me awake at night, nor agonies over the corporate takeover of democracy, nor even nostalgic angst at the Labour Party’s descent into Blairism. Here’s a measure of how much I don’t care about these things; I haven’t even really fact-checked this story properly. No, what has me waking up screaming is the following thought:

“That guy managed to buy the intervention of the British Prime Minister for a �125,000 donation. Shit, I could afford that!”

I mean it seriously. I have that much equity in my house. Any one of our fine British banks would probably lend me 125 grand with only a short delay for the paperwork. If I teamed up with a few mates, I could probably put together a syndicate capable of donating a cool million, which is getting on for the sort of sum that Bernie Ecclestone paid for a special exemption for Formula One racing from the European ban on tobacco sponsorship of sports events. Lakshmi Mittal swung a hugely profitable privatisation deal for a Romanian steelworks for less than the price of a fully loaded Porsche Boxster. The return on investment on these political contributions is just fucking unbelievable, even by Internet standards. What’s keeping me awake at night is that I can’t think of any reasonably discreet ways in which the government could make me rich, because I know that if I had that idea, I could pay them to do it. It must have been like this to be a web developer without a business plan in the 1990s.

Somehow, I think that the Americans have it right on this one. Over there, you’re laying out $20K just to sit at a table on the opposite side of a crowded dining hall from Al Gore, and he isn’t even the President. Like investing in futures, bribing politicians is something which really should not be available in unit sizes which the average Joe punter can afford. It’s just too high octane fuel.

80914809

August 30, 2002

Juvenophilia …

I don’t usually read The Economist, mainly because I once had to go through ten years’ worth in a single sitting and that does funny things to your head. But I pick up a copy if I have a long or dull journey; although their economic analysis is usually at the level of a baby with a hammer discussing how the world is made of nails, the factual information is always on point, and I can always find a use for a new way to sneer at Europeans for living in Europe. So I bought it last week.

Irritatingly, I can’t link to the article because the Economist keeps it on some weird Bizarro network which appears at first glance to be like the Internet, but which isn’t free. But basically, it was about differences between the demographics of the USA and Europe. Now this is a pretty interesting and serious topic, which I will probably write more about in future, but the Economist’s take on it was pretty bizarre. Basically, in their lead editorial, they kept going on about what they seemed to regard as the main problem for Europe; that an “aging population” will leave Europe “short of entrepreneurs”. The idea being that only young people have ideas, and only young people can do anything new.

A quick glance at the NASDAQ might suggest that right now, the world needs more entrepreneurs about as much as Al Gore needs more anthrax. In fact, one could probably make a case that the USA is actively endangered by the toxic levels of entrepreneurial spirit and that it will be all it can do in the 21st century to keep up with the task of clearing up the messes its hyperactive young businessmen create. In other words, it’s true that young people have a lot of ideas, but that’s mainly because young people have a lot of stupid ideas.

Well, that would be an entertaining idea if I could spare the time and bitterness to set it out at length, but what interested me was how completely the Economist seems to have swallowed the idea that technology only progresses by the efforts of individual entrepreneurs. That’s about as far as one can get from the old Schumpeterian theory of innovation. In actual fact, it’s a matter of horses for courses. Some kinds of inventions are best suited to gifted entrepreneurial inventors, and some come about as the result of organised and structured research programs. And there’s no particular way of knowing right now which kind of technical progress will dominate the next fifty years. (If I had to guess, I’d say that most of the smart money is on biotechnology, and biotechnology is the example sine qua non of an industry in which the main method of innovation is exhaustive programmatic search.)

After all, Japan is your classic example of the “aging population”, and it’s pretty hard to make a case that they haven’t made any technological innovations …

80863636

August 29, 2002

Nobody the Dread

There’s a very good article by Noam Chomsky which I dig out whenever the Great Man has said something stupid about Camobodia, or got caught in posession of a dodgy fact, to remind me that he is not entirely bad. It reminds us of two important points from Sen and Dreze’s Hunger and Public Action, one of which is approaching a platitude and the other of which is an equally well-substantiated claim, but one which is incendiary enough to quite easily get you accused of the equivalent of Holocaust denial for mentioning it. The two facts are:

  • Mao’s forcible “modernisation” of Chinese agriculture which caused between 25 million and 40 million deaths from famine in the period 1958-61, the so-called Great Leap Forward, could not possibly have taken place in a liberal capitalist democracy.
  • The inequality of distribution of incomes, medical resources and food in India, which by Sen and Dreze’s estimates resulted in an average “excess mortality” of 4 million deaths per year (compared with China, a country starting from an equivalent position at the beginning of India’s “experiment” with democracy in 1947; the estimates were for the period 1947-79), exists as a direct consequence of India’s liberal capitalist democracy.

We all know who to blame for the 40 million Chinese who died of famine and disease between 1958 and 1961; Chairman Mao, who is recorded as one of the great monsters of the twentieth century chiefly for this reason. But where should our righteous anger be directed on behalf of the 128 million Indians who died in a similar manner between 1947 and 1979? Whose face do we imagine looking out over this pyramid of corpses?

Perhaps the smiling countenance of Gandhi, the original author of the Indian state? Or perhaps Nehru and his family, who might have done more? Or the face of some British colonial administrator, who left the nascent state holding such a bad hand? Or the face of Adam Smith, who would still tell us that this inequality of resources is the only possible path to development? Or is this nobody’s fault? Are we really so sure of the doctrine of acts and ommissions that we think 128 million people can be dead from entirely predictable consequences without it being a very terrible crime indeed?

Or maybe, we should grow up a bit and accept that History is just one Damned Thing after another; it is a horrendous engine that eats unrealised possibilities. We the living are the tiny, lucky tip of an enormous iceberg of disastrous outcomes and missed opportunities, and there is more or less nothing that anyone can do about it. To accuse a man of one murder is to say something concrete; to accuse him of twenty million is just to make a political statement of your own. If we want to condemn Stalin, Hitler or Mao, then we have ample material to do so, because we know what kind of people they were.

80789585

August 27, 2002

Like I care what you think ….

Hmmmm …. well a glance at the original NetComments comments link suggests that they’ve gone to a place where no amount of whining from me will get comments back, so it’s “Bye Bye NetComments, and your bizarre generosity” but “Hello, E-Net-Ation comments, and your equally bizarre generosity”. SInce the new comments company has both an “e”, a “net” and a pun in its title, I’m guessing that they may be something of a “dot com” company, so don’t post any 500 word essays without saving a copy. I’ll try and find out what’s happened to the old NetComments comments, but my guess is that they’ve gone forever.

You can’t get the service for free, these days, I ask you …. still, I learned quite a lot in this quest; specifically, I learned that no matter how you tweak the code, it is not possible to fool other peoples’ comments servers into hosting comments for me.

update: “enetation server busy”. Some things speak volumes louder than comments, and the voice of God telling me not to have comments is one of them.

80776000

August 27, 2002

I fought the law and we all won

Well, I’ll take the opportunity of comments being down to put up a pair of pretty unpopular opinions. Each of these opinions is unpopular separately with a different group; taken together, they annoy people all over the place. But hear me out, there is a certain internal logic to my position:

  1. People should take cannabis if they want, without feeling guilty about doing so.
  2. The possession of cannabis should remain aginst the law, with harsh penalties.

Basically, this is me once more using issues I don’t care about to push a political agenda. I don’t really have any personal interest in dope at all, so I can take an objective view of the problem, and the objective view is this:

If it wasn’t for the illegality of cannabis, middle class white people wouldn’t care about prison conditions at all

and indeed

If it wasn’t for the illegality of cannabis, many white people would never have any dealings at all with black people on anything approaching an equal basis

So I think we can be agreed that the ongoing War on Drugs is probably the only thing which maintains any degree of genuine respect (as opposed to the patronising and/or self serving kind) between the races at the moment. Obviously there is a degree of collateral damage, but who cares about that these days?

The official political philosophy of D-squared Digest, if you haven’t guessed by now, is Atheistic Antinomianism, the belief that if you’re an all right bloke and you’re doing things in the right spirit, you probably shouldn’t feel too guilty about breaking the law (this is how we stayed onside for Clinton, for example). It’s an entirely salutary thing in our view to have something like the War On Drugs, which makes criminals out of 75% of teenagers — teenagers can be a bloody judgemental lot in our experience, and it’s good to have them reminded from time to time that life is complicated, the world is a morally grey place and there isn’t a fine moral dividing line between Us and Them.

So, kids, this is advice your ma and pa probably aren’t going to give you, but cops are stupid, first-time offenders are treated leniently and prison rape is by no means as prevalent as the advertising industry might have you think. Strong Laws, Frequently Broken, is the campaign slogan by which we hope to ride to victory on an anarchist/conservative “broad church” ticket.

‘Course, if I catch anyone near my kid with any of that shit, I’ll tear their bloody arms off and hit ’em with the sticky end.

80772687

August 27, 2002

More more more, for me me me

As you can see below, comments on this weblog are “currently unavailable”. I have no idea why this might be so, or what reason there might be why the strange Internet benefactors who make the comments possible might have had problems with their “servers” or whatnot, but I am almightily pissed off. Bastards! How dare they provide such a shoddy service! I want to look at my comments now NOW NOW! For Christ’s sake! I am the Internet Age consumer. I want things Free, Perfect and Now. Anyone failing to provide me with the five-nines reliability and ease of use that I expect (nay demand), runs the risk of losing forever the five nanoseconds of my attention which I deign to pass their way, missing forever the chance to show me a small banner ad, which I will also complain about.

In retrospect, it’s sort of easy to see why those 1999 stock valuations weren’t sustainable.

update : They’re still not working. Here’s a short explanation of why I’m so angry:

This is clearly a violation of my rights. One might make an analogy between my creation of D-squared Digest and the development and settlement of the United States of America. I came along, and found a “virgin territory” (the servers of blogspot and netcomments.co.uk). There were some other people who might have been regarded as having a claim to them, but they weren’t using them in any meaningful sense; they weren’t adding any value to them and many might have seen their ownership as wasteful. I came along, and mixed my labour with the territory of the blogspot servers, thus creating a property right for myself under natural law. Now those bastards at netcomments are despoiling my territory by not running the comments thing properly, while those thieves at blogspot are polluting my land claim by putting that banner ad at the top of the page (which I don’t personally care about, but it’s de rigeur to complain about such things). I would, as far as I can see, be quite within my rights to retaliate with massive force in defence of this, my little “homestead” on the vast wasteland of the Internet.

Doesn’t all the above suggest that there might be something just a little bit wrong with Locke’s theory of the acquisition of property rights?

update: Still not working! damn to hell and back. In the meantime, I have a theory of why it’s impossible to make money out of content on the Internet. In my entire life, I have “supported” precisely two internet things; Left Business Observer and Counterpunch. Both times, I’ve done so by taking out a subscription for their associated newsletters. There’s a very simple reason for this.

My girlfriend reads my credit card bills. And while I am a cyber-aware, e-enabled character, who is in many ways the apotheosis of the information age, aware of “netizens” and “online communities” and such (I’m even thinking of buying a wireless telephone!), the dear girlf is more of what they call a “sensible person”, always concentrating on “how we pay the rent and feed the baby”, and such Old Economy worries. If she were to see on my credit card bill that I had donated a sum of money to a website, she would think either:

  • That I had started donating money for something that others were offering me for free (ie, that I had gone out of my tiny mind), or
  • That it was in some way a pornographic site

Either of these would be likely to reduce her perception of my Darwinian fitness as a mate, and since I prefer sleeping in my house to sleeping with the winos, that would be a negative outcome for me.

Basically, the pornographers have poisoned the well for any other business model on the Internet. Any time anyone thinks of “paying for content”, they think “pornography” and then they think “I don’t want to pay for content”. So, enjoy this weblog while its hosting providers still have the cash to maintain it; I’m buggered if I’m paying for it when the ballon goes up.

80617972

August 23, 2002

Found Poetry on Brad Delong’s Website

Due to being better at techie things than me, Brad Delong has a list of the headlines of all his old posts in the right hand column. If you read them with a glass of wine inside you (Friday afternoon, innit?), you can play the game of trying to find the longest sequence of consecutive titles which read together, look like they make a twisted kind of sense ….

there are two liners …

Paul Krugman Sounds Nervous
Yep, He Has a Two-Year-Old

Open Foot, Insert Mouth–
Lunch with Arabist Bernard Lewis

three liners …

How to Run an Auction
The Fruit Detective
With the Nine-Year-Old in the Grocery Store

a fair few four-liners …

Green Consumption
Look What Crawled Out From Under the Rock…
Sated?
Identify Things Before Eating Them
——— this one is my favourite

Koba and Adolf the Dread —
A Good Reason to Be a Democrat.
Blue Blood
Resistance Is Futile

It’s a Party
Live Bait Vending Machines
Dow 36000 Once Again
Time to Cut Interest Rates Further?

Treasury Secretary Paul O’Neill
Twelve-Year-Old Humor
Gresham’s Law of Policy Debate
Rudi Dornbusch Is Dead at 60

But I can only find one five-liner:

Amazon Made Usable–
Small-Scale Terraforming.
Forecasting Growth and Unemployment
Brushfire
Health Insecurity

If anyone can do better, there’s a comments button below.

80616910

August 23, 2002

Friday thoughts on risk

I have no real idea whether yesterday’s attempt to get all serious was a success, but it got more comments than anything else, and I’m all out of stupid economics ideas, so here’s another seriously held opinion of mine. Apologies for the fact that the following will be incomprehensible to all but three people in the world, all of whom have already heard it from me already:

The “equity risk premium” is worse than useless as a measure of anything at all.

(Quick primer to bring the dunces at the back of the class up to speed: the “equity risk premium” is the number which you occasionally hear talking heads spout on CNBC or such like to explain why the market’s through the floor/roof this year. It became popular about the time that the “Price/Earnings ratio” went out of fashion because it made the fatal error of telling people that stocks were overvalued when they were. Here’s an article going over the territory. You might note that the ERP is often calculated as the difference between the “earnings yield” on equities and the yield on government bonds. Smart readers will notice that the earnings yield is the reciprocal of the PE ratio, and that in effect, the new more scientific Equity Risk Premium is a linear transformation of the old, unscientific PE ratio which it was meant to replace. Nobody who has any familiarity with economics will be remotely surprised that this didn’t ring any bells at all.)

The interesting thing about the Equity Risk Premium is that, in its analytically rigorous form, it has nothing to do with equities and very little to do with risk. Let me explain:

It’s nothing to do with equities. The way that people describe the ERP is that they characterise it as the premium that people demand to hold a risky investment, as opposed to a risk-free one. Which would be fine, except that they then go on to estimate it as the difference in yield between a share of common stock and the yield on a ten year government bond. And this carries the implication that ten year government bonds are a risk free investment. Which they aren’t. Check out this chart. If you got in and out of ten year government bonds at the wrong time, you could have been absolutely carried out. Ten year government bonds are only a risk free investment if your holding period is precisely ten years (remember this point because I come back to it below). In actual fact, there is a risk premium embedded in the return on every security except cash.

It’s nothing very straightforward to do with risk. The basic problem with the ERP is that it’s a classic business school kludge. It’s derived from the Capital Asset Pricing Model, an extremely elegant application of quadratic programming to the problem of optimising a portfolio of risky securities over a fixed time period. That’s the problem with the CAPM; it’s intrinsically a two-period model and most of the simple, intuitively appealing features of the model (the ERP among them), are highly dependent on the assumption that there are only really two time periods; period 1 when you set up the portfolio and period 2 when you liquidate it and consume the proceeds. This ties in to what I mentioned above; there can only be a truly “risk free” rate in the context of a two period model, because interest rates change at all maturities from day to day.

Obviously, people have patched up the CAPM into a multi-period form, but a) the form that’s in common use and which is taught on MBA courses is the simpler version and b) the more rigorous explicitly multi-period model is a lot more ambiguous in a lot of its interpretation. For a start, it doesn’t deliver a single, unambiguous ERP in the way that we would want it to; the premium at any given time is dependent on investors’ expectations about their future consumption and investment plans. When you couch it in this way; that the ERP is what investors want because they don’t want to be caught with their money tied up in securities when they might want to consume it, then what you get, IMO, looks less like a “risk premium” and a lot more like Keynes’ (very ill-understood) concept of a “liquidity preference”.


But in any case, what is the big deal with the Equity Risk Premium anyway? As I mentioned above, in most empirical applications, it’s either a linear transform of the PE ratio, or it’s a pure piece of historical reportage; what equities earned in history treated as if it were a good estimate of what was expected ex ante when everyone knows that it wasn’t. Or to put it another way, since the demise through neglect of the Diamond-Water Paradox, economists haven’t really concerned themselves so much with the “true value” of anything in goods markets, so why do they seem to be so god damned hung up about the Equity Risk Premium, which if it isn’t a purely backward looking summary, is surely an attempt to tell us what the “objective” cost of bearing risk is?

I think it’s best to answer that question by putting forward my own pet theory: there is no such thing as the “price of risk”, because there is no such entity as “risk”, defined homogeneously. There is my risk, and your risk, and they aren’t comparable, aggregative or commensurable. In fact, there isn’t even “my risk”; all there is is “my risk right now”, and there is a price of “my risk right now”, which is the price that somebody will charge me in order to convert the particular investment which I am worrying about into the only risk-free security, cash.

But hang on … isn’t “the price that somebody will charge in order to convert a security into cash” just “the sale price of that security”?

Well yes.

Basically, I’m coming round to the view that securities prices (and much else in economics) are non-ergodic. There aren’t parameters like the Equity Risk Premium which can be used to rationally price anything (NB: this isn’t to say that these are unstable parameters which change over time; that’s would be much less of a problem. Describing the system as “nonergodic” means that the parameters which could describe the evolution of the system over time don’t exist at all.) As I mention below, lots of important economic quantities can’t be measured in a non-question-begging way, and this is just one more Damned Problem; it’s very arguable that many important economic phenomena just are Damned Things that happen to be that way because they happened to get that way.

And there we have it. Because Paul Samuelson, the Grand Old Man of Economics, set it down on tablets of stone that “economics is only a science if the world is ergodic“. I personally think this was dead wrong, but lots of people (particularly, economists with physics-envy) believe him. If the world isn’t ergodic, then there isn’t much point in spending vast amounts of time and effort constructing models which rely on the assumption that it is. You have to resurrect the careers of people like Veblen and Olin who had the bad taste to make important points in plain language rather than as the conclusions of axiomatic systems. You might have to take seriously the possibility that Keynes meant what he said, rather than what Hicks and Samuelson said he said. All sorts of things become terribly difficult for those of us who have a lot of invested intellectual capital in mathematical economics as it has been taught over the last fifty years.

Which is why it’s considered to be much better for economists to continue saying things about risk, time and liquidity which are not only downright wrong and provably so, but also completely inconsistent with the claim of neoclassical economists that they don’t believe in normative value theories. After all, as with the capital controversy below, it is often psychologically easier to deal with a massive single inconsistency than with a lot of little difficulties.

80613722

August 23, 2002

Don’t look at me in that tone of voice

I have to confess that, perhaps shamefully, I have something of a soft spot for George W Bush, the American President. Basically, it’s because, like me, he has what the British educational system refers to as an “unfortunate face“. Basically, I just have this face that makes it look like I’m smirking, even when I’m not, and I think that George does too. Robert Barro, the economist, appears to be a fellow sufferer.

80579051

August 22, 2002

How much capital is enough?

People often criticise economists for assuming that if they can’t measure something, it doesn’t exist. Nothing could be further from the truth. In fact, one of the biggest rackets in economics is taking something which doesn’t exist and measuring it anyway. Let me explain …

When we play economics, one of the things we’re often interested in is production, because it’s an important subject. In the simplest possible model of production, you have three inputs:

  • Land
  • Labour (if you’re an American, this is spelt “entrepreneurship”)

    and

  • Capital

So the first thing to do when you’re trying to say something clever about production in an economy is to measure the available inputs of land (in units of one acre), of labour (in units of one person, or if you’re a pinko like Maxspeak’s Tom “Sandwichman” Walker, one person/hour) and of capital (in units of ….. what?)

What is the unit of capital? It doesn’t come in more or less homogeneous chunks; it comes in all different types and there is no obvious way of squaring off a blast furnace against a computer controlled lathe. You can’t sensibly compare capital by its wattage, by the precision of its engineering, or whatever. You could in principle reduce the inputs of capital to labour by assuming that each piece of capital represented “frozen labour time”, but that leads down a path that we don’t want to go down right at this precise second. So what do you do?

My American readers will be asking two questions at this point:

  • What the fuck is “Labour”?
  • Why can’t you just measure capital in DOLLARS?

The second of these is quite a subtle question, and was the result of spilling a whole lot of ink and beer (perhaps blood, I dunno) in the 1970s in something called the Cambridge Capital Controversy. Basically an academic fight between Keynesian/NeoRicardian lefties at Cambridge UK and neoclassical hardnosed types at MIT. The Yanks won the fight because of their greater derring-do and vigour, but the Brits were actually right, is my summary of the issue (Joel Stiglitz disagrees, as is his right). But it left us with this argument about why you can’t measure the capital stock in dollars.

Basically, how many dollars?
Well, the market price of the machine.
But what determines the price of the machine?
Well, the amount of stuff it can produce over its useful life.
But we don’t want to know the value of the machine “over its useful life”, we want to know today!
So, project how much stuff it can produce, assume the price it will sell at and discount those cash flows back to today (discounting is an application of compound interest, to give less weight to cash flows further in the future).
OK laughing boy, what interest rate do we use to discount the cash flows?
Well, why not choose the current market rate, doofus?
(I’m adding a few mild insults to give you the acrimonious flavour of the controversy as it happened)
Well, OK, but what determines the market rate of interest?
Two things; a factor which reflects “impatience”, the reward you have to pay people for delaying their consumption, a factor which reflects risk aversion (because anything could happen in the time the money is out on loan) and another factor which is the reward you have to pay people for having their money tied up in a loan to you, rather than putting it to productive use.
What determines the third factor?
Well, the “productivity of capital”.

And what’s the “productivity of capital”, when it’s at home?
Well, it’s the amount of stuff that the average unit of capital can produce, divided by … the average cost … of a unit of capital

So how, my dear chap, are we going to work out what that is, given that the whole point of the exercise is to find an acceptable unit of capital to use????

“Oh dear, I hadn’t thought of that”
(NB for economic historians: up to a reasonable paraphrase, this is what Paul Samuelson actually said, to his credit).

So there we have it. Obviously, this doesn’t stop people from measuring the capital stock in dollars, nor indeed from measuring “productivity” numbers based on it. But it does give a pretty powerful argument that this aggregate dollar number, constructed by taking historical costs, assuming depreciation rates and adjusting for inflation, does not actually describe a particularly meaningful economic quantity. For example, if we were to say, oh I don’t know, maybe that the risk aversion component of the rate at which people discount future returns might have risen, say as a result of people becoming nervous after a load of corporate scandals, then that would be equivalent to a massive revaluation of the capital stock which would never show up in the estimated numbers. It’s a real problem, and perhaps a minor scandal of academic economics that undergraduates are still taught about aggregated measures of capital as if they were totally unproblematic. Geoff Harcourt describes the state of neoclassical economic theory on this basis as “is an uneasy state of rest, under the foundations of which a time bomb is ticking away, planted by a small, powerless group of economists who are either ageing or dead�

Still, not to worry. It’s not as if anything important turns on such trivial academic curiosa