Archive for October, 2002


October 31, 2002


Sorry and all that, but it’s been a hell of a busy week. I’d just like to make this point however. Whatever you think about this weblog, remember that there are dozens of far worse morons on the Internet than me. If you single me out for condemnation without first pointing out that I am by no means as ignorant or ill-informed as these other bloggers, you are clearly guilty of the worst kind of hypocrisy. Or something.


October 29, 2002

Free, as a bird

I’m a profound believer in free speech. I believe that everyone should be able to speak their mind, unencumbered by fear of persecution, the intimidation of social ostracism or the slow poison of indoctrination. I think it’s fundamental to the progress of humanity that ideas should be tested out through public debate, with each person giving his own views. And I think it’s vital to human flourishing that we should be able to express our being without regard to constraints or social norms.

I’m also a profound beliver in human flight. I believe that everyone should be able to fly like Superman, unencumbered by the surly bonds of gravity, swooping and wheeling in the updrafts and downdrafts, soaring through the air at the greatest of speeds, causing no pollution, each in a cubic mile of free space, breathing the high free air and exulting in weightless splendour.

Of the two, I think that human flight is somewhat more likely to be a reality during my lifetime.

This is a real belief; I happen to think that “free speech”, in the sense in which most people use the term, is about as possible for people living in any social group larger than two people (which is to say, “people”; I have no idea what great apes of the species homo sapiens might be like if living a non-social existence, but I’m pretty sure they wouldn’t be very much like human beings), as Superman’s flight. The version of free speech which I’m exulting in the first paragraph above is a condensed and most likely parodic version of what John Stuart Mill attempts to advocate in On Liberty. It’s certainly, and pretty near provably through direct lineage, the ideal to which the First Amendment of the United States Constitution is appealing. And it’s a much, much stronger concept than the vast majority of people who invoke it believe. Mill understood, as vast numbers of people don’t (mainly because they are interested in pushing tendentious and legalistic theories of political morality), that laws passed by governments are about the ninetieth most important restriction on our freedom of speech. He also understood that the most savage restriction on people’s freedom to say what they want is the simple social urge to conformity; people don’t like to say things which they know people will disagree with. I get but scant pleasure from doing so myself.


October 24, 2002

Dial 419 for fun

Along with shrill accusations of anti-Semitism and fan mail, the major component of my email inbox these days is Nigerian “419” advance fee fraud letters. I get about one every couple of days; some day I may be bored enough to add up all the ill-gotten gains I’ve been offered a share of over the last year and compare it to Nigerian GDP. But for the time, being, let’s note that according to the 419 coalition, over $5 billion had been extracted from hapless mugs by 1996, and according to Howard Jeter, by 2000, Americans alone were losing $2 billion a year to “white collar crime syndicates based in Nigeria”. Pretty big business.

Let’s also note, however, that I think that both of those estimates are bullshit. Unless industrial economics works completely differently in the criminal world from the way in which I learned it by reading Tirole (and Steven Levitt seems pretty convinced that it doesn’t), the observed facts of the 419 fraud industry are not consistent with its being hugely profitable, or for that matter profitable at all.

What am I talking about? Well, let’s look at it this way. If 419 really were taking in $2bn (from Americans alone!), it would be an incredibly profitable criminal industry. Two billion dollars a year roughly two-thirds of the size of the UK heroin market measured by turnover, and one would have imagined that white-collar fraud was a higher-margin and less capital-intensive industry than heroin smuggling. It’s not true that sending spam emails is “basically costless”; the logistics costs of more usual spam are quite a significant component of the spammer’s cost base, particularly as one needs to invest in a continual software development expense to keep pace with developments in anti-spam technology. But even so, I don’t see how sending 419 emails can be more costly than manufacturing and smuggling heroin.

So what do we know about profitable criminal industries? Well, we know that they tend toward monopoly, or at least oligopoly. But, we can be absolutely sure that the 419 email scam industry is not dominated by a monopolist. How?

Basically, think about the number of Nigerian fraud emails you receive in a year. Does their credibility grow with repetition? I insinuated something along these lines when I suggested comparing the total amounts in a year’s worth of 419 email to Nigerian GDP. The fact that these scam letters are so common makes it much more likely that any individual one will be ignored.

This is an “externality”. Each spammer is considering the potential guesstimated return to himself from his own 419 operation, but ignoring the cost he imposes on other spammers by marginally decreasing the credibility of 419 spam in general. If 419 were the work of a monopoly, or of a small number of gangs, this cost would be internalised; the monopolist would prefer to have fewer, more effective scam letters. The proliferation of advance fee fraud letters from Nigeria looks much more to me like the output of a competitive industry characterised by small producers.

But even if we accept that 419 fraud is a cottage industry rather than the work of organised gangs, it might still be profitable. The French wine trade is made up of lots of small producers, and that’s pretty profitable (though nowhere near as profitable as the Californian industry, dominated by fewer but larger producers). I don’t even accept that this is the case.

Why not? Well, basically, the language. There are plenty of Nigerians who can write coherent, elegant English prose. Apparently, the 419 industry isn’t profitable enough for them to get involved. Not only that, but it isn’t worth anyone’s while to invest the capital in producing a convincing-sounding form letter for use by the spammers. This doesn’t fit the profile of a profitable industry to me. People make capital investments in profitable industries.

So what’s going on here? Well, my guess is that the figure of “$6bn by 1996” is a lot more likely than the figure of “$2bn/year by 2000”. In the early 1990s, before email, the vehicle of distribution for 419 scams was the fax machine. Sending faxes is a lot more expensive than sending emails. Since retail use of fax machines is less widespread than retail use of email, most of the targets were businesses rather than individuals. Businesses tend to have larger sums of money in their bank accounts to be emptied than private individuals (people who didn’t read the first link about “419s”; this is what happens after you give the guy your account details). So we’re looking here at a business with large unit sums and significant overheads; that looks a lot more like the kind of business in which you might get organised gangs operating.

But then email hit the market, and with it, 419 scammery fell within the price range of the common man (or at least, the common man who could write some semblance of English). At about the same time, the Nigerian economy suffered the entirely predictable consequences of its IMF programme, and a large number of middle-class people, with diploma-level English literacy, became unemployed, with some fraction of them entering the criminal class. They started adapting the 419 scam for their own ends; because there were so many of them, the old fax-using gangs couldn’t keep a lid on them, and now the profitability of the 419 industry is gutted.

In all honesty, my guess is that the real “419 scam” is these days perpretrated on gullible Nigerians. I’m pretty sure that there are people selling lists of email addresses (and perhaps even poorly written form letters) to greedy but none-too-bright Nigerian chancers, presumably using the fantastic claims of wealth generation implied by the 419 coalition and Jeter by way of bait. As far as one can tell, most 419 scammers aren’t very bright, and many of them don’t even seem to know what to do with responses when they get them (don’t appear to have follow up letters written, don’t have bank accounts in which to deposit the stolen cash etc). To me, this just looks like a kind of pop culture multilevel marketing scheme, which may explain why it doesn’t seem to have caught on anywhere else in the world. Maybe one in a thousand gets lucky and finds a mug, but I don’t think so.


October 24, 2002

Bad tree with bad roots, never bore no good fruits

James Lileks, whose “Gallery of Regrettable Food” has amused us all at one time or another, apparently has a line in unthinking political commentary. Fair enough; I certainly wouldn’t want to risk the blowback from saying that people should be castigated for that. But today, he’s thrown down a challenge, and that’s something I can never resist.

If it is Islamic terrorism, it will be delightful to watch the root-causers explain this one

As far as I can tell, “root-causers” refers to people whose reaction to the news that someone is trying to kill them does not include immediately shutting off all thought about why that might be the case. Since I’m not stupid, or even usually suicidal, I suppose that means that I’m a root-causer, and James Lileks will be delighted to watch me explain it. Which is good, because I was delighted with his collection of recipes for cooking with 7-Up from the 1950s, so it’s sort of an opportunity to do something in return.

Here goes, the “root cause” explanation of the Washington sniper shootings, if they turn out to be Islamic terrorism, and if they turn out to be the work of the guy mentioned in the news reports. If not, I calculate that I am approximately 603rd in line among webloggers to make an apology.

The US Army, like the British Army and most other armies, does a reprehensibly bad job of looking after its people. It recruits them, largely from broken homes, keeps them on low wages for a short while, all the while making it unconscionably difficult for them to get or stay married, and then dumps them back on the labour market with surprisingly few marketable skills to show for several years of their life. It has various programs to deal with this problem, but, judging by the results, those programs are badly administered. As Norman Dixon pointed out in his classic “On the Psychology of Military Incompetence”, western armies systematically attract people with psychological problems with respect to violence, provide them with a means of coping with these problems while they are in service and often reinforce personality traits through training which can prove to be disastrous when these people are put under stress.

The American economy is very bad at providing steady jobs for black men with low educational qualifications. The American economy has many strengths, but this is not one of them.

American culture strongly stigmatises young male unemployment, and makes young unemployed people feel ashamed of themselves. People who feel shame often develop a psychological self-defence mechanism which involves blaming others for their predicament.

The Muslim religion has almost exclusively nonwhite figureheads, and as a result has a magnetic effect on black Americans who have developed a grudge against what they see as a white-dominated synstem which has pushed them to the bottom of the heap.

Because of this, particularly at a time when the national mood is more than slightly conducive to paranoia, a black man with psychological problems and a military background decided to follow the figurehead of Osama Bin Laden and murder people in order to support the cause of Islamic terrorism.

There are the root causes. Delighted?

You may note that the vast majority of these root causes have nothing to do with anything outside America.


October 21, 2002

Foreign Policy

Updates to the official foreign policy of D-squared Digest coming in …

First, a clarification on the issue of the State of Israel. Since giving Thomas Friedman that award for saying something silly about divestment (which got me a lot of criticism on weblogs I don’t read), I’ve been worrying that people might see me as an anti-Semite of some sort. If people were disposed in that direction, I get the uneasy feeling that they might take my description of Michael Hardt’s hair as an “Isro” in something other than the spirit of fun in which it was intended. I don’t think there are any other racial slurs on this weblog at the moment, unless you count my reference to Ann Coulter as “Bog Irish rather than Mick Irish”, but even so, some clarification of my Middle East policy would appear to be in order.

Basically, I regard the Palestinian Authority, or whatever it’s called, as the moral equivalent of the IRA. In other words:

  • I think they have a genuine grievance and a genuine right to have their claims taken seriously

  • I think that their grievance, and their case, is by no means as strong as their more vocal supporters think it is
  • I think that the population that they claim to represent is being made the victim of unacceptable governmental repression and are the chief victims of an unconscionable political situation
  • I think that their chosen method of warfare is cowardly and disgusting, and not to be tolerated or apologised for
  • I deeply doubt that they really represent the people they claim to represent
  • They are, on balance, the villains of the piece, but the cause that they support in their villainous manner is at bottom, just.

You will have to take my word for this since it predates my appearance on the Internet, but I was never, unlike a lot of the British Left (Paul McCartney, I’m looking at you. And John Lennon too), an apologist for the IRA. I always thought that it was possible to believe in the case for a united Ireland without simultaneously thinking that the Protestant Ulstermen should be driven into the sea, or that it was ever acceptable to put bombs in shopping centres. However, the time comes when one realises that if what you care about is stopping the senseless killing, you have to hold your nose and negotiate with people who you regard as slightly worse than serial killers, and accept that they quite likely think the same about you. Like the Israelis, the Protestant Irish have a sincerely held belief, which is not at all unreasonable to hold given the evidence, that the people they were until recently forced to deal with at Stormont fundamentally want to eradicate them from the face of their homeland. But still they negotiated. I think that what this brings home to me is that a) what a bloody shame it is that there does not appear to be any Palestinian equivalent of John Hume and b) that when you extend this analogy to judge the Israeli forces by the standards of the RUC and the B-Specials during the worst periods of the Troubles, they still appear to have behaved bloody badly. Actually, in all honesty, I do understand why sensible English people supported the IRA despite knowing about the carnage; most of the people lined up against them were so transparently arguing in bad faith, which is also the case these days …

Now, on to war …

A further development in my Iraq policy as well. I am now, after comments from Brad DeLong and others, revising my opinion of the murderousness of the sanctions policy and concluding that it might not be as terrible as a number of quite possibly interested parties have portrayed it. On the other hand, I am also convinced by Max Sawicky’s argument that Iraq is likely to be the first excursion of an American policy of empire-building in the Middle East, which is likely to be disastrous under any possible performance metric.

But, I retain my original belief that improvement in Iraq is politically impossible unless there is some sort of shooting war in the area culminating in the removal of Saddam Hussein. I don’t set much score by “national-building”, and don’t really believe that what the Gulf needs is more US client states, and I never believed any of the scare stories related to the “WMD” acronym which is currently doing such sterling duty in picking out weblog authors who don’t have a fucking clue what they’re talking about. I just think that Saddam needs to go, because it’s just one of those Damned Things which Has To Happen. I’m a fatalist, not a moralist.

So, how can we square these beliefs a) that something has to be done and b) that if something is done, it will be a disastrous imperial adventure by George Bush. Here’s how, and it’s so simple it’s beautiful:

The official policy of D-Squared Digest with respect to Iraq is now that we support a policy of containment until after the 2004 Presidential elections, and after that, we will support immediate war with Iraq if and only if someone other than George W Bush is elected

I could dress that up by going “WHEREAS” a lot and turning it into a manifesto, but I’ve never really had any problems with thinking of new ways to call anyone who disagrees with me an idiot, so it seems a bit pointless to bother. Basically, the idea is that I’ll support a war just so long as that idiot currently in charge has nothing whatever to do with it. Thinking about it, I don’t want to sign up to a different figurehead for the Perle/Wolfowitz Axis of Idiocy, so maybe I should just tell the truth and shame the devil; I’ll only support a war if it’s the Democrats fighting it. I would like to find some warblogger with a decent argument against this view; strikes me that I can accept all the arguments about containment, inspection, risk, etc, etc and still hold the statement in bold italics just above. Nobody believes that Saddam will have nukes by 2004 ….


October 18, 2002

Friday random links

The latest issue of the Post-Autistic Economics Review is out, including at long last an article which at least attempts to get to grips with the movement’s rather distasteful name. Always worth checking out the PAE crowd, even if some of them are about a yard too far up their own arses.

Some monkey in the increasingly godawful Slate is of the opinion that America has the highest productivity growth in the world because it’s more innovative in technology than Japan, and chooses to illustrate this with examples from the fields of personal electronics and the auto industry … Good God, this nutter is apparently an “undersecretary of commerce in the Clinton administration” and a “fellow of the Brookings Institution”. Is there another Brookings Institution in the town of Brookings, South Dakota or somewhere, selling “fellowships” for $10 in the back pages of The Economist?

And good luck to the Irish, who vote on the Nice Treaty this weekend, and who shouldn’t be blindsided by the likes of Polly Toynbee, who is here pushing the line that Nice is all about being friendly to the Poles, Romanians, etc, and has nothing to do with making the EU even more profoundly antidemocratic than it already is. I have a horse in this race; since Antinomianism is much less prevalent in the UK than in Europe, I face the risk of actually living under stupid laws passed by Europeans who sensibly never intended to enforce them.

This is about right in my experience, and should be good for a chuckle for Americans who don’t like Europe.


October 18, 2002

God doesn’t work for the Yankee dollar; God doesn’t plant bombs for Hezbollah

OK, time for a few more book reviews. First up, “Butterfly Economics” by Paul Ormerod. This is all about Ormerod presenting his alternative version of how economic modelling should be done, and how to correct some of the more egregious errors of conventional neoclassical theory by relaxing the key assumption that agents are independent of each other. Ormerod illustrates most of his arguments by reference to a simple model of the behaviour of ants making their decisions over which of two food sources to visit. So why isn’t it called “ant economics”? Presumably because either Ormerod or his editor wanted to sell the book to the James Gleick pop chaos theory crowd, and wanted to use the “butterfly flaps its wings in Venezuela and causes a storm in Stockholm” metaphor as a shorthand, despite the fact that butterflies aren’t discussed in the book as being relevant to economic modelling; ants are. Which gives you some idea of how much care and attention has been lavished on this book; pretty close to bugger-all.

I have to confess that I don’t know what Ormerod’s overarching prescription for the reform of economics is, because on page 157 he refers to Piero Sraffa as “an old Stalinist”, and sad to say, the book did not survive the outburst of rage this occasioned in me1. Which is certainly a weakness of this review, but I daresay I wouldn’t have been so impassioned if I wasn’t already in a bad mood because of the horrendously annoying tone of the previous 156 pages. Ormerod is of the school of writers which believes that you can leaven a dull passage by shoe-horning in a semi-related joke, after the manner of some Church of England vicars. And his jokes tend to be pretty weak; saying that someone’s book is so boring it might make you go to sleep is about the level. It reads like it’s been collected together from a really annoying column in the FT, but since Ormerod doesn’t actually have an annoying column, I can only assume he was kind of auditioning for one. The “ants model” is quite appealing, but you can pick that up by reading the first 15 pages in a bookshop (D-Squared Digest! Reviews You Can Use!).

Also … an oldie but a goodie. Some people in the comments section have been pleasant enough to say some nice things about the style of writing used on this weblog. Or at least, I say that they have, and the comments aren’t working so you can’t prove they haven’t. Anyway, if you like this prose style, you will like “The King’s English” by Kingsley Amis. The pop-didactive tone used on D-Squared Digest, and a fair proportion of the actual jokes, have been copied more or less completely from Amis’ workbook, except that I take much less care over my sentences, resulting in horrendous elongated run-on sentences like this one, and I use words like “basically” far too much because I’m typing this as an unrevised first draft and this is how I talk. It’s not a proper style guide a la Fowler or Strunk & White; it’s basically an alphabetised collection of Kingsley’s personal prejudices relating to linguistic matters, many of which tend to degenerate into cheap shots at unrelated hobby-horses and targets of opportunity. Check it out, although don’t blame me if your written output for the rest of your life starts to resemble a pale imitation of a studiedly facetious and overeducated patrician.

I listen to music! On the D-Squared Digest stereo at the moment are some of the finest moments of English Funk. This strange musical subgenre should be carefully distinguished from “Britfunk” which was funk and soul music produced by Black Britons in the 1970s and 80s (probably the most famous example being Cameo’s “Word Up” or, at a stretch, “You Sexy Thing” by Hot Chocolate; “Hot Chocolate” is probably the winner in anyone’s contest for Band Names You Simply Couldn’t Get Away With These Days).

Nope, by “English Funk”, I’m referring to a strange musical subgenre which stands in the same relation to funk as the Finnish Tango does to the tango. (For those unfamiliar with the Finnish tango, here’s the official history; basically, the Finns, for reasons best known to themselves, are still overcome by the worldwide tango craze of the 1920s, and are not put off in their enthusiasm by the fact that as a nation they are a) known for emotional reticence and b) more or less innocent of anything one might call natural rhythm. The resulting sound and dance has a distinctly military feel to its movements; it’s extremely precise and sort of jerky. The Finns greatly prefer it to the Argentine version, which is no longer really to their taste). English funk is simularly disconcerting; you’re sitting there listening to a piece of music with funk instrumentation and some semblance of a funk production, but it isn’t in the least bit funky.

I think it was James Brown who claimed, with good evidence, that white drummers fundamentally couldn’t play shuffles; they started off OK, but after about a minute you listen to them and they’re playing the rhythm of an oompah band. I also seem to remember this criticism was levelled in particular at Ringo Starr, but it’s a reasonably good description of the rhythm section of Ian Dury and the Blockheads. They start off like the Average White Band (oompah oompah), but by the first chorus they’ve given up any pretence of playing black American music and settled down for a right old knees-up, in which project they’re joined by a jaunty keyboard player. The rhythm guitarist and the horn section make a decent attempt at dragging the band back in the direction of Detroit rather than Dagenham, but there’s only so much you can do when you’re outnumbered. But this sounds like I’m slagging them off and I’m not; I’m a sucker for a good music-hall tune, and Dury himself is a poet. He’s got a fantastically dirty exaggerated London accent — actually, of course, he’s Essex, but who’s counting? — and a surprisingly deft lyrical touch which allows him to get away with absolutely outrageously filthy innuendi that, in less sensitive hands (missus) would just turn into rugby songs. “Reasons to be Cheerful”, the greatest hits compilation (marketed in the US as “Sex and Drugs and Rock and Roll”) is the one I’m listening to at the moment; I think I would be pretty scared of anyone who owned more than three Ian Dury albums, but less than one is probably too few.

With a similarly unfunky funky vibe, but a rather more serious tone and fewer Max Miller references, is the source of the headline quote above, the album “Mind Bomb” by The The, a bunch of earnest 80s types of approximately the same vintage of myself. It’s got The Smiths’ Johnny Marr on it (as far as I can tell, there was some sort of tax dodge in the 1980s which involved having Johnny Marr on your records), so a fair old number of Smiths completists will be pleased that it’s been reissued along with the rest of the The The (note capitalisation) back catalogue. In the UK, that is; I suspect that you Yanks can go whistle. I bought it for the single “The Beat(en) Generation”, an absolutely fabulous track about everything and nothing which to my mind demonstrates what a good band the Smiths would have been if they’d been a band rather than a vehicle for Morrissey’s ego. Elsewhere on the album it’s all pretty leadenfooted English nonfunk stuff, with more an electronic sound than the Dury album, but recognisably coming out of the same place, and always deeply intelligent. Matt Johnson can’t sing for toffee, obviously (the 1990s album of Hank Williams songs, “Hanky Panky”, which is also top stuff, proved that he didn’t learn), but in the right sort of environment (dark) and with a few glasses of whisky in the back of the neck, his half-spoken croon is really quite affecting. If you’re not ashamed to be British (which, arguably, you probably should be), you’ll enjoy it.

All the above provided without the usual whoring Amazon links, because I’m keeping it real and thinking about the kids.

1The facts of the matter are; in his youth, Sraffa was a fan (and a friend) of Antonio Gramsci, and Gramsci was a Stalinist by most peoples’ lights. But Sraffa fell out with the Gramsci crowd quite early on in his career at Cambridge, and it was very hard to work out what his politics were by the time “Production of Commodities By Means Of Commodities” was published. He was certainly never active in supporting Stalin, because he almost never said anything in public at all.

In semi-related news, Sraffa was one of the few people who Ludwig Wittgenstein considered an intellectual equal, and there’s decent evidence that a lot of the ideas of later Wittgenstein are heavily influenced by him.


October 16, 2002

Two Cheers for This Year’s Nobel Prize

Well three cheers for Daniel Kahneman, for he has won the Nobel prize, and he is by all accounts a very fine bloke. Vernon Smith shared the prize; about him I know nothing. But Kahneman’s paper with Tversky pretty much kick-started the behavioral finance revolution, bringing the experimental psychology literature into the economics of expectations formation. But only two cheers for the contribution he’s made to economics, for reasons that I will endeavour to explain.

For those people who read this blog without the benefit of an economics degree, fuck off and don’t come back until you’ve got one. In fact get a PhD. I’m certainly not going to waste my time talking to people who only have an undergraduate degree … sorry, I appear to be channeling the Monetary Analysis department of the Bank of England there. Anyway, for the benefit of people who aren’t up to speed on why Kahneman’s work matters, here’s a potted history of expectations in economics.

Expectations in economics matter because the whole point of an economic model is that people change their behaviour based on the interaction between their own preferences and the environment that they find themselves in. Lots of economics models are “static”, in that they basically abstract away from the fact that actions happen over time; these are “one-period” models and are popular because their mathematical simplicity means that they can be taught to even the stupidest undergraduate students and thus serve as a means by which one can get across the basic economic insights. The problem arises, of course, when the undergraduate students get elected to be President of the United States. But anyway, one-period, static models (like, say, the supply and demand curves) are the mainstay of economics.

But you can’t do much in the way of real-world applications with a one-period model. You have to find some way of taking into account the fact that people base their actions not just on what’s happening now, but also what they expect to happen in the near future. To take a concrete example, consider the price of a share of Amalgamated Widgets, an imaginary company which fortunately happens to have just filed its accounts for the last twelve months and to have earnings per share of exactly one dollar. How much would you pay for a share of AW?

Obviously, that’s going to depend on your expectation of what it’s going to do in the future. In fact, Paul Samuelson demonstrated that, under innocent-looking assumptions, your valuation of AW is equal to your expectation of its cash earnings for every period from now to the end of time, with each future period discounted at the appropriate rate of interest. This ought to be true whether you’re planning to hold onto the stock forever or to flip it in the next five minutes, because the price you can sell it for in five minutes’ time depends on what someone *else* think’s it’s worth, and so on and so on. Since *someone*’s going to be holding the stock forever, *everyone* involved with its price, even the shortest-term trader, has to be concerned with long term earnings. Samuelson referred to this as the “Law of Iterated Expectations”; my expectation of your expectation of what AW is worth, is the same as my expectation of what AW is worth, which is the same as the properly discounted value of what I expect AW to earn. No matter how many times we “iterate” the expectations by adding more and more middlemen, it all comes down to this.

So what would my expectations be, then? Well, the simplest way to model them is to assume that I have myopic expectations; I assume that all future periods will be exactly the same as this one. Then, next period, when I turn out to be wrong, I update my assumption that everything will be the same as the new period.

The myopic expectations model (known in forecasting circles as “the naive forecast”) is such a traqnsparent and stupid way of thinking about the future that it’s embarrassing how difficult it is to come up with a method that works better in practice. Lots and lots of professional models, the kind of services that you pay thousands of dollars for, underperform either the pure myopic model, or the myopic model with respect to growth rates. Which is a comfort of sorts to academic economists, who would otherwise probably be moved to tears and suicide by the differential between professorial salaries and the kind of sums that a charmer with a bow tie can pull down in the prediction industry.

Somewhat more sophisticated, we have the “adaptive expectations” model, whereby I have some idea of what would be a normal earnings number for AW, and I update that in a sort of Bayesian fashion with every earnings announcement. Adaptive expectations never really took off in finance theory, but they were very big as the engine of a lot of Keynesian macro models in the early 1970s, shortly before the “revolution” which brought us …

Rational expectations! Beloved of a million and one young and ambitious graduate students with spots, straggly beards and a head for calculus, and loudly derided by a million and two youngish journalists with tweed jackets, hazy left wing politics and a two hundred word screed to write before lunchtime. The rational expectations model and its close cousin, the “efficient markets theory” are actually based on a perfectly sensible intuition; that the mistakes people make are likely to cancel each other out, so when you’re talking about a large population, you should assume that they do cancel each other out. The trouble comes when actually existing rational expectations guys forget the derivation of the theory and start applying “efficient markets” concepts to real life problems as if it was a conclusive argument that the market is always right.

Of course, the big problem with rational expectations models is that when the rubber met the road, in empirical testing, they performed disastrously (by which I mean, really really disastrously). They started off with a few successes; Patrick Minford’s model at the University of Liverpool seemed to be predicting the early 1980s recession pretty well. But after a few years, it was noticed that Minford’s model predicted recessions more or less all the time, and thus occasionally did very well in the same way in which a stopped clock is occasionally right. This was the problem with rational-expectations models from a mathematical point of view; they tend to have “positive feedback” characteristics which make them sink into certain preferred solutions, leading to forecasting performance which, in the words of Steve Nickell, “was enough to make you weep if you cared about that sort of thing”. How bad was it, Virginia? I’ll tell you how bad. Robert Lucas, who won a Nobel Prize himself for inventing rational expectations models, has more or less given up on them. Yup, these models were bad enough to make an economist admit he was wrong. (We should note at this point that it is my personal view that “rational expectations” as a principle of economic modelling was never really given a fair go. The limitations in the mathematical form of the models actually used were so severe that they would have cocked up in exactly this way more or less whatever the economic intution they were modelling. But here we are departing from the broad historical sweep).

So then, we reach Kahneman and Tversky (in case you’re interested, Tversky unfortunately died, and hence isn’t eligible for the Nobel which is not awarded posthumously1). While the empirical battle over rational expectations was dragging out to a bloody end, they came in with a theoretical contribution to the debate. This basically involved taking some of the results from experimental psychology about how people formed expectations and made decisions (fixation on key levels, loss aversion, concerns for distributive equity, etc), and used them as the basis for making a case that people did, in fact, make systematic errors of judgement, and it was not safe to make the assumption that errors would cancel each other out. Rational expectations in macro was dead, and the “behavioural finance” crowd have been chipping away at efficient markets ever since.

So, certainly a hurray from me as a heterodox economist. Rational expectations was a bad theory, and it is good that it no longer rules the roost, and Kahneman certainly did his bit. But only two cheers, because in my view, economics is never really going to get to grips with time and uncertainty as long as it is stuck in a paradigm under which the response to the failure of the last approach is to start tinkering with the way in which we model expectations.

To start with, consider the mathematical structure of the models we’ve been talking about (if you aren’t familiar with the mathematical structure, just adopt a thoughtful facial expression). Although the concept of future time is present through the expectations operator, they’re actually static models. “Taking expectations” is not really a way of modelling the future; it’s a way of avoiding modelling the future by flattening it down into the present, only treating it at all through its effect on today’s expectations. Kahneman’s work doesn’t actually change this fundamental characteristic; behavioral models of expectations are still, structurally, one-period models being forced to do the work of genuine dynamic modelling.

The real work that needs to be done is in attacking the fundamental assumptions of “expectations” modelling in economics. I mentioned above that Samuelson’s assumptions underlying the Law of Iterated Expectations were “innocent-looking”, which they are, but they’re actually extremely restrictive. Importantly (and this is a topic I’ve harped on about before), they’re only valid for expectations of *ergodic* processes.

What the hell is an “ergodic process” when it’s at home?

Ergodicity is a statistical property. A data generating process is “ergodic” if the data that it generates is “well-behaved” in the sense that you can take a sample of it and that sample will be in some way representative of the whole. Imagine a random number generator, spewing out numbers, and yourself sitting in front of it, writing the numbers down. After 1000 numbers, you calculate the mean of the observations. If the random number generator is driven by an ergodic process, you now have a decent estimate of what the mean will be after 10,000 observations. With ergodic stochastic processes, collecting more data gets you a better and better estimate of what the underlying parameters of the process are, as the “noise” cancels itself out in some statistically well-defined way.

But imagine if you were in front of the machine, and you kept on collecting more and more data, but the average after 1000 numbers was completely different from the average after 10,000, which was nothing like the average after 100,000 and so on. Imagine further that it *never* settled down, no matter how much data you collected. That would be a strongly nonergodic process; over time periods of around a week to a month, lots of weather data appears to be nonergodic, which is why medium term weather forecasting is so difficult. It’s clear here that to talk about “expectations” of the future states of a nonergodic system are meaningless; people might have opinions about the future, but there aren’t the solid linkages between these views and the actual data which one would need to call them “expectations”. Certainly, there isn’t enough to support the trick used by economists in using the expectations operator to make dynamic processes static so that they can be modelled tractably.

So what? Well, so this:

Most processes which are characterised by positive feedback are nonergodic

Most economic processes of interest are subject to significant, destabilising positive feedback

It’s a real problem, and in my opinion, Paul Davidson ought to be looking at something like a Nobel Prize for being one of the few economists to take it seriously. (He won’t get it, of course, because this is way out of the mainstream of academic economics, where it is still considered the mark of a clever young man to say that “chaos theory never amounted to much”). Kahneman’s work is important, but in order to be a constructive contribution to some future correct theory of economics, it needs to be thought of as a description of human decision making and behaviour forming, not as a way of rescuing the broken models of expectations economics. So a hearty “Hip hip” from me, but I’ll be keeping the champagne on ice for the meantime …

1In fact, you can be awarded the Nobel Prize posthumously if you pop your clogs between the time it is announced and the actual awards ceremony.


October 16, 2002

Scenes from the decline and fall of this weblog …

Yep, now I’m reduced to throwing hit ‘n’ run insults at short exceprts out of context from newspaper columns. Might as well go for the gusto by using the most hackneyed device on the web and awarding a “King Stupid” award to Thomas Friedman of the New York Times for this gem

How is it that Egypt imprisons the leading democracy advocate in the Arab world, after a phony trial, and not a single student group in America calls for divestiture from Egypt? (I’m not calling for it, but the silence is telling.) How is it that Syria occupies Lebanon for 25 years, chokes the life out of its democracy, and not a single student group calls for divestiture from Syria? How is it that Saudi Arabia denies its women the most basic human rights, and bans any other religion from being practiced publicly on its soil, and not a single student group calls for divestiture from Saudi Arabia?

I would guess that the reason that there is no campaign for divestiture from Syria is that it doesn’t have a stock exchange.

There are a few Syrian companies quoted on the bourse in Doha, but they’re not exactly mainstream investments. The Egyptian stock exchange is absolutely tiny; I seem to remember that Fleming-CIIC Securities (part of the JP Morgan Chase group) is the only international broker operating there (edit: Google says I’m wrong and that HSBC and ABN Amro have a presence. But google also tells me that the market capitalisation of Egypt is only $30bn), and although the Saudi stock market is capitalised at around $40bn, investment into it by foreigners is tightly regulated; basically, the only way you can buy into it is through a country fund managed by a Saudi bank and listed in London. Unlike Israel, which boasts a number of companies with New York listings and two S&P500 constituents, investment in the three countries mentioned is pretty hard-core emerging markets stuff, not really the widows-and-orphans territory of your typical university endowment.

In fact, on the basis of the above research, I would hazard a guess (and perhaps award a small prize to anyone who can gainsay me with proof), that the major American university endowments have no investments at all in Egypt, Syria or Saudi Arabia, making it rather fucking pointless to campaign for them to “divest”.

It is considered traditional at this point to fulminate about the kind of individual who makes this sort of pig-ignorant blanket assertion without bothering to spend five minutes on google to check the facts, but I’m scared of the blowback from that one.

edit Apparently I thought this post was so great that I posted it eight times. I don’t know how that happened, but I think normality has now been restored.


October 15, 2002

Why are Americans so fat?

A fairly provocative question, prompted by this having a go at the citizens of that great nation for piling on the pounds, and suggesting that the government tax them for their sin. A quick glance at the title of this weblog reveals that I am hardly a disinterested party to this issue, but there you go. I considered having a go at the latest fad diet (which, pop culture types will be interested to know, was last popular in 1973-4, around the time of the last serious bear market; deep speaks to deep here, as they say, and you don’t have to be a hardcore evolutionary psychologist to note a connection between financial wealth and the emotional relationship with food). But beer is apparently a carbohydrate, so fuck that.

Anyway, the question of why Americans are so fat is one which everyone and his fat wife have had a go at answering. And, surprisingly enough, everyone has come up with the same answer, viz:

Americans are so fat because of some moral failing particular to Americans today, and they would not be so fat if more people agreed with my political views.

I’m paraphrasing, obviously. But it would certainly be bad news for people like these if peddlers of political platitudes had to sign up to the same code of rigorous scientific analysis that these people are meant to follow in making claims about losing weight. In fact, it’s pretty easy to understand why Americans are getting fatter, if you just take account of a few unarguable facts about work, leisure and productivity. You can even do it all without leaving the marginalist paradigm, so those people who are put off by heterodox economics can keep reading.

First of all, let’s think about the activity of eating. First, we can note that it is mainly a leisure-time activity, and it’s an action of consumption rather than production in economic terms. Very few people get paid for eating, and eating food is a processing which has only one output, which nobody is in the business of selling except that conceptual artist whose name I forget. So, let’s draw up a list of substitutes for eating food; other activities which people carry out for pleasure. We have things like:

  • Conversation
  • Reading
  • Sunbathing
  • Sexual intercourse
  • Listening to music
  • etc.

Basically, various other physical and intellectual pleasures. Now, let’s look at a couple of other stylised facts.

Consider this as a stylised fact. for instance; the average leisure time of the average American has not increased at all over the last hundred years. Arguably, it’s shrunk. Now that might have happened for any of a million reasons, but let’s for the moment treat it simply as a social fact. Time, as the newspapers tell us, is a scarce resource.

But, it’s a scarce resource which is in fixed supply. Although the onward rush of technology has made us unimaginably richer in material terms over the last hundred years, we are still only supplied with twenty-four hours in a day, only about eight of which we can really count as being available for use in leisure activities. If you ever think that there’s something funny about those chained-GDP examples which puport to prove that the bottom 1% of current workers enjoy a better standard of living than the millionaires of 1780, then this is part of the reason why; if it had occurred to him to do so, David Ricardo could have buggered off and spent the day playing golf whenever the whim took him, and you can’t.

Now, let’s look at the substitutes for eating listed above. Straight off, we notice that most of them are highly demanding in time, and that the input of time is more or less invariant in order to get a unit of pleasure out of them. A favourite example of Brad DeLong’s of how technology has improved our life is that these days, the poorest of persons in America can easily listen to the world’s greatest virtuoso playing the violin at the touch of a button. Which is true; but another interesting way to look at it is that it takes us exactly as long to listen to a symphony as it took Emperor Franz Joseph, and there’s nothing at all that technology can do to help us with that. Our acts of sexual intercourse take as long as they did for Napoleon (I have no figures on this), it takes as long to have a conversation as it took Doctor Johnson, and the last improvement in our ability to read books (Dr Bruno Furst’s Speed-Reading System) was about fifty years ago.

But … one area where things have improved mightily over the last hundred years is our ability to eat food. Food takes roughly the same time to eat however yummy it is, and the industrialisation of agriculture, whatever it’s done to the environment, has certainly massively increased the amount of food-related pleasure which the average man can extract out of a minute. And given this massive increase in the pleasure productivity of food-eating, is it any wonder that the American population has responded by choosing to spend less time in the comparatively less efficient pursuits of having sex and reading, and more time on stuffing their faces? It’s the simple result of a rational optimisation calculation; to become uglier, stupider and fatter is simply where the comparitive advantage has shifted to.

So, courage, my American friends. If you can fill the unforgiving minute, with sixty seconds worth of sugar and lard …