Saturday, September 21, 2013

Achieved and ascribed identities

Here's an interesting piece in the Guardian, in the wake of the first recorded bar brawl over Kantian philosophy: two men in Russia got into a pub brawl over Kant, and one shot the other.

Kant cropped up again earlier this week while I was having coffee at my house with David Goodhart, the director of Demos, a thinktank that describes its mission as "to bring politics closer to people". We were recording a programme about community for Radio 4, in the course of which he said something extremely interesting: that the problem with the political class, and the reason they are often so emotionally and politically distant from many ordinary people, especially in settled working-class areas, is that their identities are often achieved, not ascribed.
What he means is that politicians, like many "successful" people, have achieved success by finding a route beyond the limitations of their background. They have come to define themselves not by where they are from, their community, but through what they have achieved in terms of education, qualifications, career and personal aspiration. Community is thus often a nostalgic background hum for many successful people, but not something they are completely embedded within. And if they find a new community, it is one they have chosen, not one ascribed to them by birth.
This, in a sense, is the Kantian ideal. "How recognisable, how familiar to us is the man so beautifully portrayed [by Kant]," wrote Iris Murdoch. "Free, independent, lonely, powerful, rational, responsible, brave, the hero of so many novels and books of moral philosophy.For Kant, the human being is at his or her best when they have successfully self-authored. It's all about self-determination. For such as these, freedom is about breaking free of allegiance, of the restrictions of the local and the particular. In such a world, loyalties are simply a temporary convenience.

Autonomy is not the whole of ethics.


Wednesday, September 11, 2013

People forget how to engage attention

Here's an interesting take in the New Yorker on how and why Facebook makes people unhappy.

What causes us to feel bored and, as a result, unhappy? Attention. When our attention is actively engaged, we aren’t bored; when we fail to engage, boredom sets in. As Eastwood’s work, along with recent research on media multitasking, have illustrated, the greater the number of things we have pulling at our attention, the less we are able to meaningfully engage, and the more discontented we become.

[...] Demands on our attention lead us to use Facebook more passively than actively, and passive experiences, no matter the medium, translate to feelings of disconnection and boredom.

In ongoing research, the psychologist Timothy Wilson has learned, as he put it to me, that college students start going “crazy” after just a few minutes in a room without their phones or a computer. “One would think we could spend the time mentally entertaining ourselves,” he said. “But we can’t. We’ve forgotten how.” Whenever we have downtime, the Internet is an enticing, quick solution that immediately fills the gap. We get bored, look at Facebook or Twitter, and become more bored. Getting rid of Facebook wouldn’t change the fact that our attention is, more and more frequently, forgetting the path to proper, fulfilling engagement. And in that sense, Facebook isn’t the problem. It’s the symptom.

In a broader sense, of course, the Internet offers much more opportunity for active engagement than staring at the television. And I'm not sure the point holds more generally. I'm typing this at my usual coffee shop in New York, a city which is a huge blaring multicolored kaleidoscope of things competing for attention - which is what makes it so stimulating. So why does big city buzz inspire, but online multiple pulls of attention enervate?

It must be something to do with energy and depth and unexpectedness. Any amount of shallow celebrity gossip and trivia must depress people after a while.

It must also have something to do with the right amount of stimulus. I'm reminded of Cziksentmihalyi's idea of flow, that the right amount of challenge, at the edge of our capabilities, puts us into a state where time just seems to pass almost without noticing because you are so absorbed in what you are doing.

Still, it's such a common experience now that people pay more attention to their devices than the person right in front of them that it must point to a deeper problem beyond Facebook.

I asked G about it. She says it's like a hunter-gatherer thing. You see something shiny or interesting, and the instinct is to grab it.


Wednesday, September 4, 2013

"Stop saying robots are killing jobs"

An article in MIT Technology Review disputes that technology is destroying jobs, especially arguments from Brynjolfsson and McAfee which we've seen before.

Brynjolfsson and McAfee’s mistake comes from considering only first order effects of automation where the machine replaces the worker. But when a machine replaces a worker, there is a second order effect: the organization using the machine saves money and that money it flows back into to the economy either through lower prices, higher wages for the remaining workers, or higher profits. In all three cases that money gets spent which stimulates demand that other companies respond to by hiring more workers.

It's the traditional argument that demand simply shifts to new goods and services. But it relies on the traditional assumption that new needs are similar in economic terms to the old ones. In the example above, what of the higher wages for the remaining workers induce them to take more leisure, so total wages remain the same or even fall? That has not happened much to date, but it is a matter of taste rather than economic law.

The fundamental issue is how and when things fall outside the monetary economy, so the flow above springs a leak. I keep arguing that more and more of the things we value as we rise up the hierarchy of needs are harder to package in monetary terms, because they are not excludable nor rival goods. As the underlying nature of the economy changes, our institutions have to adapt too.


Sunday, September 1, 2013

Who will prosper in the New world?

Tyler Cowen asks in the NYT:

Who will do well? THE CONSCIENTIOUS Within five years we will are likely to have the world’s best education, or close to it, online and free. But not everyone will sit down and go through the material without a professor pushing them to do the work. Those who are motivated to use online resources will do much, much better in the generations to come.

Motivation - those who have it, those who can inspire it - is one of the main themes. It's an interesting take. I agree motivation - including incentivizing behavior - is the key issue for the emerging new economy. That's why I've been so interested in some of the classic psychology on motivation, like Maslow.


Monday, August 26, 2013

How technology wrecks the middle class

David Autor,a well-known Labor economist, and David Dorn write in the NYT today.

The good news, however, is that middle-education, middle-wage jobs are not slated to disappear completely. While many middle-skill jobs are susceptible to automation, others demand a mixture of tasks that take advantage of human flexibility. To take one prominent example, medical paraprofessional jobs — radiology technician, phlebotomist, nurse technician — are a rapidly growing category of relatively well-paid, middle-skill occupations. While these paraprofessions do not typically require a four-year college degree, they do demand some postsecondary vocational training.

It's not wholly new - a riff on the hollowing out thesis - but worth a look.

Sunday, August 11, 2013

The "experience economy" comes to the arts

This is an interesting piece in the NYT. The art/ museum world is shifting towards a focus on experiences, it argues.

In this kind of world, the thrill of standing before art — except perhaps for works by boldface-name artists like van Gogh, Vermeer, Monet and Picasso (and leaving aside contemporary artists who draw attention by being outrageously controversial) — seems not quite exciting enough for most people. What’s a museum to do?

Glenn D. Lowry, the director of the Museum of Modern Art, has seen the future. In a speech he gave a while back in Australia, he noted that museums had to make a “shift away from passive experiences to interactive or participatory experiences, from art that is hanging on the wall to art that invites people to become part of it.” And, he said, art museums had to shed the idea of being a repository and become social spaces.

I discussed the book which, according to the NYT article, looks at the commercial aspects of this idea here.

Im fact, I was in the Metropolitan Museum yesterday, and walked around their newly rehung and expanded European paintings section. They now have what appear to be little iPad-like devices in front of some of the paintings, with simple analysis videos which are very effective.

Of course, they've had iPod-like audio devices for years, although I seldom use them. And I love their 82nd and Fifth series of two-minute videos about pieces.

But there must be so much more scope to put particular pieces or objects in context. Perhaps in five years, there will be video of some of the original settings for the Egyptian artifacts right beside them in the museum, for example.

Indeed, there could be a whole separate museum or area which looks for just a few pieces at a time in depth, using audio-visual means to delve deep into context, to enter into the world represented by the piece - the culture, the setting, the artist, ideas about art, how it fitted into the history of the time, audience and reception, technique, how it affected other art or ideas. The Met is dazzling in its breadth, but taking just a few things and looking very closely could be highly rewarding.

Instead of a room with twenty pieces of art, there could be one piece of art with twenty screens and a soundtrack. That could be inspirational, as well as a matter of participation and experience.

Artists often claim pieces speak for themselves. But they often speak in code, demanding knowledge of why and how the art has come about. More depth of context could challenge people much more to think and feel and respond to something encapsulating a different age and point of view. The key would be to go deep enough to challenge the superficiality or assumptions a viewer brings to the piece.


Wednesday, July 17, 2013

Moving on from Clippy

"Bill Gates says software assistants can save the world," says MIT Technology Review.

Readily accessible floods of data, combined with powerful cloud computing and advances in software, should allow personal assistants to “understand” what humans are doing and actively collaborate or help them out, said Gates. Smart assistant software could even be crucial in addressing some of the world’s most challenging problems, he said, as identified by his philanthropic organization the Gates Foundation.

Gates said, for example, that software able to intelligently interpret the available data about a person and respond could improve education.

The software agents could help make decisions, too.

Gates imagined an assistant helping a Kenyan farmer using the M-Pesa mobile banking system that handles roughly 30 percent of the country’s GDP (see “Shopping via Text Message”). “When I sell my crop after the harvest, it advises me to save some of my money and even makes that deposit,” said Gates, who praised the data M-Pesa has made available for such projects

Clippy, the notorious Microsoft paperclip "helper", had perhaps just been premature, he said.

Clearly, there's something to this argument. But for now, I find the services available surprisingly primitive. Nobody has yet developed an effective assistant to help prioritize an email inbox, for example (at least commercially). Junk filters and prioritizing some senders is about all email programs do. Compare this to the confident hopes about artificial intelligence and expert systems in the 1980s. Far from super intelligent computers taking over the world, they can barely sort important work time-sensitive email from routine information emails.

And for all the discussion of predicting wants and needs, I still find one of the most common examples, Netflix suggestions, amazingly primitive sometimes. It has not yet figured out there is a man and a woman in our house and they often like different movies.

The difficulty has always been computers have difficulty with context and meaning. Brute force and massive amounts of data, such as Google Machine translation, is starting to change that. However , it looks like we're just going to see specific small-scale helpers for the time being.

That could still have an impact in education or office productivity. But expectations have also fallen.



Tuesday, July 16, 2013

"For the Last Time, Robots Do NOT Cause Unemployment"

Here's a pushback at RealClearMarkets against recent worries about technology and the job market.

Parts of the nation's commentariat have been seized, in recent months, with a nasty bout of technophobia. Technophobia is a psychological condition, but infectious. Hardly a week goes by without a new outbreak documented in another blog post or business column. To judge from the symptomatic hand-wringing the epidemic is spreading, we are on the verge of mass unemployment as work becomes increasingly automated.

As I've often said, it is clearly true that there has always been an increase in aggregate demand for labor in the past. But to argue that will continue indefinitely carries an assumption the nature of needs and wants is static. Economics is not that good at understanding changing needs and preferences. Instead, they are treated as exogenous. And that is a foolish assumption.

In fact, it's not at root an economic problem. It's an ethical and instiutuonal problem. There needs to be deeper change and adaptation in economic institutions. That more attention to issues of the "good life " given basic economic survival is no longer the prime problem facing humanity. The labor market achieved huge prominence in the industrial revolution period, dominating life in a way which would have been inscrutable to medieval peasants on the land, or aristocratic Romans. It may be less prominent in the future.

Friday, June 14, 2013

"Sympathy for the Luddites"

Paul Krugman says technological disruption is real, and argues redistribution is the only way to deal with it.

And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we’re told we need, only to learn that the economy no longer wants those skills?

Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).

So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.

It's interesting evidence mainstream economics is starting to get worried about this issue. He's not providing a "but these fears have always been misplaced in the past" usual take.

The trouble is redistribution without some sense of who deserves what isn't going to fly. This is the left's problem: people don't believe equality is the same as justice (or "fairness".) We can't solve this without having some sense of what we value, or what the good life is. And liberal neutrality on that question, and its focus on material resources and income above all, makes that impossible.

Krugman's solution also assumes there will be supernormal profits, but technology may compete and innovate those away, too. In a perfect market profit is zero, after all, and tehnology is removing barriers to entry and market segmentation.





Sunday, June 9, 2013

Siren Servers

The stories about NSA surveillance of email and phone metadata are one more boost to skepticism about the new digital economy.

Here's a separate article in the NYT about digital concentration of influence and wealth.

DISSECT almost any ascendant center of power, and you’ll find a giant computer at the core. In the past, power and influence were gained by controlling something that people needed, like oil or transportation routes. Now to be powerful can mean having the most effective computer on a network. In most cases, this means the biggest and most connected computer, though very occasionally a well-operated small computer can play the game, as is the case with WikiLeaks. Those cases are so rare, however, that we shouldn’t fall into the illusion of thinking of computers as great equalizers, like guns in the Wild West.

The new class of ultra-influential computers come in many guises. Some run financial schemes, like high-frequency trading, and others run insurance companies. Some run elections, and others run giant online stores. Some run social network or search services, while others run national intelligence services. The differences are only skin deep. I call this kind of operation a “Siren Server.”

The irony is the original image of the personal computer was of liberation, such as Apple's famous Superbowl ad in 1984. The Silicon Valley political vision of the world - a kind of libertarian paradise - is encountering increasing resistance and skepticism.

So the author of the NYT article suggests we should move towards micropayments for our personal information, to reduce the advantage of the "siren servers."

Of course, the counterargument is today's titans - Google, Facebook, Amazon, Apple - are likely to be tomorrow's Dell, Compaq, MySpace, or AOL, let alone earlier titans such as Bethlehem Steel or Pennsylvania Railroad. I doubt there are natural monopolies or network effects sufficiently powerful to entrench the current digital elite for long.

Algorithms can be replicated. That kind of information wants to be free, too. And if people find their personal data is being over-exploited, they will find alternative ways to communicate.

There can often be something of an arms race with technology. Take airline fares, for example. Large centralized computing power originally enabled the airlines to segment their customers in the 1970s and 1980s, and extract the maximum amount people would pay for a certain route. But the consumer caught up. Technology also brought transparency before long, including sites like Expedia or Kayak. Large centralized computers still price airline fares, but the airlines barely stay out of bankruptcy most of the time, and their only way to get pricing power is to cut capacity. Their industry became commoditized.

People have also feared the use of technology for surveillance for decades, but it usually enables transparency and less power for gatekeepers too.

The whole economy is changing in deeper ways, and that is irreversible. But I doubt that technology will enable any enduring center of power.






Sunday, May 19, 2013

The Prevalence of Loneliness

This, from an article in the New Republic, is an indicator that things are not going well in society. How truly amazing and sad.

... even among the not-so-old, loneliness is pervasive. In a survey published by the AARP in 2010, slightly more than one out of three adults 45 and over reported being chronically lonely (meaning they’ve been lonely for a long time). A decade earlier, only one out of five said that. With baby-boomers reaching retirement age at a rate of 10,000 a day, the number of lonely Americans will surely spike.

I've talked before how we overlook the importance of connection and the experience of the texture of daily lived life, as if we need a "gross national loneliness" to set against GDP.


Thursday, May 16, 2013

Work is a human right

A great essay by Walter Russell Mead, here. I disagree with his confidence about personal services sometimes, but this is good stuff, worth reading in full.

There is a horrible snobbery lurking beneath the idea that most people will not be able to find meaningful work when the age of scarcity ends. Once the working classes aren’t needed to dig coal anymore, in this view, there is nothing to be done for the mass of mankind than to sit them in front of the TV on a comfy couch with a big bag of chips. They are good for nothing else.

This is a premise which any serious theist or humanist must reject. If we believe that every human being has a unique real worth, we must also believe that every human being has a contribution to make. Keynes rather snidely remarks that few people have the talent to live creative lives; writing about the difficulty many will have adjusting to lives without toil he warns of the intense boredom that most will suffer. “Yet it will only be for those who have to do with the singing that life will be tolerable and how few of us can sing!”

Actually, a good many more of us can sing than Keynes thought; it’s just that life in the coal mines and the factories means that many people haven’t had the same chances to develop their talents that a son of privilege like Keynes did.


Sunday, May 5, 2013

Morality unhinged from Wisdom

Walter Russell Mead writes about the situation in Syria, as Samantha Power, who urged humanitarian interventions, leaves the Obama Administration:

As a general rule, sad to say, the good guys and the smart guys often play on different teams. For too many foreign policy humanitarians, it is more important to have good intentions than to understand the crooked and wicked ways of the world you want to change. This instinct for the ideal over the real was a hallmark of humanitarian policy failures all during the 20th century and on the evidence to date the deadly mixture of political amateurism with ambitious humanitarian international agendas has persisted into the 21st. America’s university campuses are packed with people who believe that the flaws in our foreign policy are failures of morality rather than failures of forethought and execution, but morality unhinged from wisdom is one of the most destructive forces known to man.


Monday, April 29, 2013

The end of entitlement

Robert Samuelson writes that the public is going through a downshift in expectations that is having deeper political consequences.

Weighed down by these contradictions, entitlement has been slowly crumbling for decades. The Great Recession merely applied the decisive blow. We're not entitled to many things: not to a dynamic economy; not to secure jobs; not to homeownership; not to ever-more protective government; not to fixed tax burdens; not to a college education. Sooner or later, the programs called "entitlements," including Social Security, will be trimmed because they're expensive and some recipients are less deserving than others.

The collision between present realities and past expectations helps explain the public's extraordinary moodiness. The pandering to the middle class by both parties (and much of the media) represents one crude attempt to muffle the disappointment, a false reassurance that the pleasing past can be reclaimed. It can't.

I don't think this is true. We still have the paradox that we have more productive capacity and underlying abundance than ever before. The problem is we have less and less clarity on how to distribute it, or what we value, or what incentives are or ought to be.

What it does mean is we need a deeper rethink of economic institutions to cope with a world in which many of the things we value most are not easily traded. Government cannot deliver what people want if we have no shared vision of what people ought to want, in their own different ways. Instead, our general discourse on rights and universal rules tends to evade the question.

"..some recipients are less deserving than others" says Samuelson. That is the heart of the problem. It is a matter of ethics, not economics. The left wants universal (unearned) rights. The right wants a changing mix of pure market allocation and tradition.

Sunday, April 14, 2013

People are just not that motivated by money alone

Here's an interesting blog post on the Harvard Business Review site on how money and motivation are related: they're not.

The results indicate that the association between salary and job satisfaction is very weak. The reported correlation (r = .14) indicates that there is less than 2% overlap between pay and job satisfaction levels. Furthermore, the correlation between pay and pay satisfaction was only marginally higher (r = .22 or 4.8% overlap), indicating that people's satisfaction with their salary is mostly independent of their actual salary.

In addition, a cross-cultural comparison revealed that the relationship of pay with both job and pay satisfaction is pretty much the same everywhere (for example, there are no significant differences between the U.S., India, Australia, Britain, and Taiwan).

It puts a little more solid evidence around the argument that is made in books like Daniel Pink's Drive: The Surprising Truth About What Motivates Us.


Tuesday, March 5, 2013

Wittgenstein against scientism

This is a very good article in the NYT about Wittgenstein. It is not surprising he is not popular in current philosophy departments, the author, a Professor at NYU says, as Wittgenstein is so skeptical of standard philosophy. The article summarizes Witgenstein's position:

Philosophical problems typically arise from the clash between the inevitably idiosyncratic features of special-purpose concepts —true, good, object, person, now, necessary — and the scientistically driven insistence upon uniformity. Moreover, the various kinds of theoretical move designed to resolve such conflicts (forms of skepticism, revisionism, mysterianism and conservative systematization) are not only irrational, but unmotivated.The paradoxes to which they respond should instead be resolved merely by coming to appreciate the mistakes of perverse overgeneralization from which they arose. And the fundamental source of this irrationality is scientism.

The dream of social physics dies hard. Economics, even more than philosophy, has suffered from an overtemptation towards generalized parsimonious models.

As Wittgenstein put it in the “The Blue Book”:

"Our craving for generality has [as one] source … our preoccupation with the method of science. I mean the method of reducing the explanation of natural phenomena to the smallest possible number of primitive natural laws; and, in mathematics, of unifying the treatment of different topics by using a generalization. Philosophers constantly see the method of science before their eyes, and are irresistibly tempted to ask and answer in the way science does. This tendency is the real source of metaphysics, and leads the philosopher into complete darkness. I want to say here that it can never be our job to reduce anything to anything, or to explain anything. Philosophy really is “purely descriptive."

And so therefore the purpose of philosophy is not explanation but therapeutic.

traditional philosophy is necessarily pervaded with oversimplification; analogies are unreasonably inflated; exceptions to simple regularities are wrongly dismissed.

— Therefore — the fourth claim — a decent approach to the subject must avoid theory-construction and instead be merely “therapeutic,” confined to exposing the irrational assumptions on which theory-oriented investigations are based and the irrational conclusions to which they lead.

Tuesday, February 26, 2013

Labor and Social Links

I've been working intensively on another project in the last few weeks, so blogging has been lighter here. There's a build-up of things I want to blog about and say.

I just wanted to note this column by Ross Douhat in the NYT about the decline of work, however. The transformation of work is a major theme on this blog.

If the utopia of a world without work is being achieved, Douhat says, it isn't because the upper classes can afford it and it will gradually spread down to laborers and high school dropouts. It's happening from the bottom up.

Yet the decline of work isn’t actually some wild Marxist scenario. It’s a basic reality of 21st-century American life, one that predates the financial crash and promises to continue apace even as normal economic growth returns. This decline isn’t unemployment in the usual sense, where people look for work and can’t find it. It’s a kind of post-employment, in which people drop out of the work force and find ways to live, more or less permanently, without a steady job. So instead of spreading from the top down, leisure time — wanted or unwanted — is expanding from the bottom up. Long hours are increasingly the province of the rich.

The problem with this, he says, isn't so much income or survival. People are not starving. It's lack of social integration. It's part of the wider trend of the decline of community and social links.

One could make the case that the right to not have a boss is actually the hardest won of modern freedoms: should it really trouble us if more people in a rich society end up exercising it?

The answer is yes — but mostly because the decline of work carries social costs as well as an economic price tag. Even a grinding job tends to be an important source of social capital, providing everyday structure for people who live alone, a place to meet friends and kindle romances for people who lack other forms of community, a path away from crime and prison for young men, an example to children and a source of self-respect for parents.

It's a problem of flourishing.

In a sense, the old utopians were prescient: we’ve gained a world where steady work is less necessary to human survival than ever before.

But human flourishing is another matter. And it’s our fulfillment, rather than the satisfaction of our appetites, that’s threatened by the slow decline of work.

This is an interesting take. And of course I agree that the prime question is how our institutions contribute to human flourishing, so he is going in the right direction.

But he doesn't go far enough, perhaps. There is a difference between the labor market, which is going to keep getting more productive, and a sense of vocation.

What is clearly at issue is motivation and purpose, and how you retain and encourage and cultivate them when the economy is changing. Our civil discourse has become very bad at providing that, as I've often argued , such as here.


Sunday, February 10, 2013

An Apple Watch?

This is quite a visionary and original speculation what might be the next device for Apple: a watch. I've seen excerpts over the past week, but it's worth reading the entire thing, not just for gadget gee-whiz but a sustained piece of practical imagination. The author worked for fourteen years at Apple and developed some of their original design guidelines.


Tuesday, January 29, 2013

The pessimism of blue elites

Here's a magnificent essay by Walter Russel Mead on us continuing theme of the decline of the "blue" economic mode and changes in the economy.

There is deep pessimism among "blue elites".

The blue vision of the future, as I wrote in my last essay, is a bleak one in many respects. If the establishment liberals of our time are right in their future vision, most of the population will be economically surplus; globalization and automation will empower a creative class on Wall Street and in Hollywood and Silicon Valley. Most of the rest of the country will be stuck in low productivity, low wage jobs as manufacturing fades and is replaced by … nothing, unless you count government benefits and food stamps. The blues think that a redistributive and regulatory state (naturally enough administered by wise and well intentioned people such as themselves) can pump enough money from the growing parts of the economy onto the plebs and the proles in the post-industrial doldrums, providing at least a degree of middle class life to the sidelined majority.

But the transition can still lead to something better, as happened when employment in agriculture collapsed. Education levels had to rise.

The task facing America today looks something like the task we faced after the Civil War. How do we manage the transition from a well-established political and social system to something more productive? Both then and now, many of the negative features of the transformation appeared first, while the benefits came slowly. The population boom and the agricultural transition drove millions into cities looking for work when there wasn’t yet enough factory employment.

It is the great question of the age. But as I keep arguing, it is as much an ethical question - what do we value? What do we reward! What is the good life? - as economic.


Thursday, January 24, 2013

Underperforming hedge funds (again)

More bad news for hedge fund returns, according to this NYT piece. A standard 60% equity/40% bond portfolio returned 90% over the last decade, compared with 17% after fees for a common hedge fund index.

The author finds some people just seem to want to pay higher fees for lack of transparency and hints about secret rocket science under the hood. People - and also pension funds. Two-thirds of the industry is now institutional money. But how long can that go on, if performance is so bad on average?


Sunday, January 20, 2013

The "Semantic Web" is next

This is an interesting piece on where Google Search is going in the future.

Until now, Google has been an unprecedented signposter of knowledge. It has not "known" the answer to anything itself but it has had an awfully clever way of directing you to exactly the place you can find out. In some senses, that attribute is in the process of changing. This year, Google will roll out what it calls its Knowledge Graph, the closest any system has yet come to creating what Tim Berners-Lee, originator of the web itself, called "the semantic web", the version that had understanding as well as data, that could itself provide answers, not links


Wednesday, January 16, 2013

What should we be worried about?

Edge Magazine's Annual Question looks pretty interesting, although I've only read a couple of the 151 responses from leading thinkers yet.

We worry because we are built to anticipate the future. Nothing can stop us from worrying, but science can teach us how to worry better, and when to stop worrying.


Tell us something that worries you (for scientific reasons), but doesn't seem to be on the popular radar yet—and why it should be. Or tell us something that you have stopped worrying about, even if others do, and why it should be taken off the radar.



More Robot news

Still more incremental improvements on the automation front, according to an article in MIT Technology Review.

That is why Budnick is now considering adding a new member to his team: a robot called Baxter. Baxter was conceived by Rodney Brooks, the Australian roboticist and artificial-intelligence expert who left MIT to build a $22,000 humanoid robot that can easily be programmed to do simple jobs that have never been automated before (see “This Robot Could Transform Manufacturing” and “Rebooting Manufacturing”).

The company hasn't sold any robots as yet but it is getting intense interest from American manufurers.

The ultimate goal is for robots like Baxter to take over more complex tasks, such as fitting together parts on an electronics assembly line. “A couple more ticks of Moore’s Law and you’ve got automation that works more cheaply than Chinese labor does,” Andrew McAfee, an MIT researcher, predicted last year at a conference in Tucson, Arizona, where Baxter was discussed.

We've seen other predictions of the impact on cheap Chinese labor before. Manufacturing will go the way of agriculture, with perhaps only 2-3% of the population working in the sector at very skilled jobs.


Tuesday, January 15, 2013

"History suggests the entitlement era is winding down"

Michael Barone says major changes in American life have often happened at 76-year intervals. The entitlement state may be come to an end, as one of those 76-year intervals is almost up.

The original arrangements in each 76-year period became unworkable and unraveled toward its end. Eighteenth-century Americans rejected the colonial status quo and launched a revolution and established a constitutional republic.

Nineteenth-century Americans went to war over expansion of slavery. Early 20th-century Americans grappled with the collapse of the private sector economy in the Depression of the 1930s.

We are seeing something like this again today. The welfare state arrangements that once seemed solid are on the path to unsustainability.

Of course, 76 year intervals are just a rhetorical hook. The broader point is that underlying social attitudes and institutions need to adjust and shift at least every three generations or so, as the world changes.


Abundance and Self-Realization

I'm looking at Robert Fogel's The Fourth Great Awakening and the Future of Egalitarianism, starting here.

Distribution of income matters less than distributiion of "spiritual resources", he says. That means there is a tendency in the "Fourth Awakening" to refocus on the individual again, rather than material conditions in society as a whole.

I have often talked about abundance on this blog, such as here and here. Fogel also emphasizes the saturation of material goods.

Our society is so well saturated with consumer durables, in fact, that even the poorest fifth of households are well-endowed with them. Consequently, the era of the household accumulation of consumer durables, which sparked the growth of many manufacturing industries in the many decades following World War II, is largely over in the United States. p189

So where are things going? Meaning becomes more important as survival challenges recede.

Today, people are increasingly concerned with what life is all about. That was not an issue for the ordinary individual in 1880, when nearly the whole day was devoted to earning the food, clothing and shelter needed to sustain life. A half century from now, perhaps even sooner, when increases in productivity make it possible to provide goods in abundance with half today's labor, the issue of life's meaning, and other matters of self-realization, will take up the bulk of discretionary time. p 191-192

Health and leisure time will be the focus of the future economy, although, he says, it is difficult to foresee the details.

The point is that leisure-time activities (including lifelong learning) - volwork - and health care are the growth industries of the late twentieth century and the early twenty-firsty. They will spark economic expansion during our age, just as agriculture did in the eighteenth century and the early nineteenth and as manufacturing, transportation and utilities didin the late nineteenth century and much of the twentieth. The growing demand for health-care services is due primarily, not to a distortion of the price system, but to the increasing effectiveness of medical intervention. p201

What does self-realization mean? Interestingly, Maslow is not mentioned at all, nor are the older classical ideas about virtue in any detail. Instead, Fogel develops his own list.

To those philosophers who have developed the concept, self-realization means the fullest development of the virtuous aspects of one's nature. ..Of all the maldistributed spiritual resources, sense of purpose may be the most important. p205

Others include "a vision of opportunity", "a sense of the mainstream of work and life" which means a sense of where opportunities are and how to pursue them. There must be "a sense of community", an "ability to engage with diverse groups", which entails an "ethic of benevolence". As self-realization is often achieved through an occupation, a "work ethic" and "sense of discipline" are required, as well focus and a "capacity to resist the lure of hedonism". There needs to be a "capacity for self-education", a "thirst for knowledge". an "appreciation of quality", and some "self-esteem." p205-206

To this updated list of virtues he adds a sense of balance or, as Aristotle would put it, the golden mean.

Each of the fifteen spiritual resources just outlined must be possessed in moderation. There is an optimal amount of each spiritual resource, which will vary from one individual to another. Too much of a sense of purpose turns dedication into ruthlessness. Too little sense of purpose may cause one to be uncompetitive in a given pursuit. p207

It isn't quite a virtue ethics, perhaps, as it is more a list of desirable psychological attributes, being well-adjusted rather than arete or excellence. But it comes close. It is not utilitarian, nor based on more simplistic ideas about happiness. It is certainly reconcilable with older virtues such as courage or temperance or practical wisdom. It is also reconcilable with other ideas we have looked at, such as the evolution of the economy from manufacturing to services to experiences to, finally, transformation of individuals, or the requirements for individual flourishing.

What it does not do (and no book can do everything) is explain what happens to labor markets and economic incentives when material needs are saturated. How might a post-scarcity economy work? How will people make a living?

In all, it is quite a radical book for an academic economist. It is also politically quite eclectic - egalitarian, but taking religion seriously; interested in the condition of the poor but skeptical of government intervention. It asks the right questions, even if the answers are not wholly developed.

The basic conclusion is income is no longer a suitable end-point for policy discussions. Nor are national income statistics. Like the rich sons of Athens two thousand years ago, the nature of the good life is the main question that confronts us once material needs are saturated. Even some Nobel Prizewinners in Economics can see that.




Monday, January 14, 2013

Waves of ethical and religious change

I'm looking at Robert Fogel's The Fourth Great Awakening and the Future of Egalitarianism, starting here.

So Fogel argues the main challenge is no longer material inequality, but spiritual inequality. He adds a theory of cyclical evolution of ethics in responses to changes in technology and the economy. This is quite intriguing.

While economic growth since 1700 has been relatively steady and technological change has accelerated, there has been a recurring lag between the vast technological transformations and the human adjustment to those transformations. It is this lag which has produced the crises that periodically usher in profound reconsiderations of ethical values, that produce new agendas for ethical and social reform, and that give rise to political movements that champion the new agendas. p8-9.

People must evolve new ethical perspectives to cope with technological transformations. Exactly, and it seems obvious when put like that. He does not appear to adopt a vulgar Marxist-type approach, however, where ethics and culture are simply superstructure above the real economic base. People adapt their ideas ro suit circumstances when external events force them to reevaluate their perspectives and needs. And those ideas in turn create political and legislative programs.

Interestingly, he argues that this revaluation shows up in religious movements first, long before electoral politics, which, because of its compromise and balancing tends to lag behind. For example,

The greatest of all reform movements in American history, the abolition of slavery, was for decades almost exclusively a religious movement until a number of religiously inspired Northern politicians developed brilliant tactics and strategies necessary to create a winning antislavery coalition. P7

So he has a theory of how and why ethical transformations occur, which is fascinating. Why should religious movements be more responsive? Because in the frenetic competition of American religious denominations, indepedent congregations are likely to evolve responses to new ethical needs far quicker than political parties. The Awakenings are more political than relgiious, but they show up more quickly in relgious reaciton to new technology and new circumstances.

The religious response has been more rapid because of the high degree of independence of specific evangelical congregations from hierarchical control and from the restraints imposed on political parties, which must often trim their policies to maintain coalitions. P9


Great Awakenings

Evangelical religion reacts more quickly than more hierarchical and less populist churches. It means there have been a series of "Great Awakenings" in American religious life, which spilled over into politics after a generation or two.

These Great Awakenings are reform movements with an ethical/programmatic phase followed by a legislative/political phase, both of which arise out of the lag between technological change and institutional adjustment. Each Awakening lasts about one hundred years, including a declining phase in which exponents of one great awakening clash with those of the next. The First Great Awakening began in the 1730s and ripened into the American Revolution against the British Crown. The Second Great Awakening began about 1800 and produced the crusade against slavery that eventuated in the Civil War. The Third Great Awakening arose at the end of the nineteenth century and led to the rise of the welfare state and policies to promote diversity. The Fourth Great Awakening, which began about 1960, has recently entered its political phase and is focused on spiritual reform. p9-10

Importantly, the Awakenings mostly came from the margins of society.

The Great Awakenings have not usually originated from the top; generally, they have welled up from below and have often been given voice by ministers and novice leaders on the fringes of the establishment. p42

The First Great Awakening eroded older Puritan beliefs and emphasized individial rights. The Second Great Awakening emphasized equality of opportunity, and moved even away from Calvinist ideas of predestination towards a sense , influenced by Methodist theology, that people could work towards their own salvation.


Individual sin versus Social Corruption

The third Great Awakening arose in large part because of the challenge of industrial development and the growth of huge enterprises. That produced a move away from emphasis on individual sin and corruption to social reform, as well as economic and social egalitarianism. Equality of condition mattered more than equality of opportunity.

The Third Awakening rejected the idea that poverty was the wages of sin, and came to terms with Darwinism and science. The innate depravity of man was abandoned in favor of a conception the innocent young corrupted by society.

Modernists in the mainstream denominations evolved into the Social Gospel movement.

Its leading figures argued that, if America was to realize itself, it would have to change not only its creed, its theory of man's relationship to God, but also its ethics. It would have to make poverty not a personal failure, but a failure of society, and evil would have to be seen, not as a personal sin, but as a sin of society...The victory of the modernists and the Social Gospellers laid the basis for the welfare state, providing both the ideological foundation and the political drive for the labor reforms of the 1930s, 1940s and 1950s, for the civil rights reforms of the 1950s and 1960s, and for the new feminist programs of the late 1960s and early 1970s. p24-5

The first three awakenings are part of mainstream historical scholarship, but Fogel is more isolated is seeing a fourth awakening, including the rise of the religious right in recent decades. Logically, however, major shifts in technology and transformation of the economy would entail some sort of Fourth Awakening in due course, however. And it is undeniable, as he points out, that the mainstream Protestant denominations have shriveled, and evangelicals have risen to over a third of the electorate.

Meanwhile, the Third Awakening forces have been secularized.

As modernist theory grew stronger, the supernatural aspects of religion diminished among those creating the New Theology, and conversions ceased to be central to their missionary work. Social reform increasingly replaced personal reform as the center of the struggle to perfect American society... The essence of religion became the elimination of poverty and inequality. p121

The rise of the professional classes has been one of the main economic transformations, and they tend to be secularized, along with a liberal mainstream media. The universities were originally founded largely to train one profession - the ministry. But the growth of new professions and vast increase in demand for skilled graduates transformed them. Academic disciplines which generally had their modern origin in 19th century theological disputes (such as economics, as founded in the American Economic Association) tended to forget the history of their disciplines.

It would be easy to quibble with this scheme of revivals and awakenings, and some would be uncomfortable putting religious feeling so close to the heart of economic and political life. Nonetheless, it is a viable and interesting theory of how and why changes in ethical perspective come about, and I had not read about these movements in any detail before. It is a story of how deep changes in the assumptions about human nature and possibility ramified through theological debate and into practical political outcomes over a period of generations.

The story is now more secularized, as ethical debate now takes place on a much wider sphere than it did one hundred years ago. But it is equally clear that purely secular perspectives can overlook much of the deeper changes going on in the world, which include the massive growth of evangelical religion in Asia, Africa and Latin America. Something is going on out there even if it is not evident in the New York Times or the New York Review of Books view of the world. The world is less secular on the whole than we think.

Inequality of Income

Moreover, many of Fogel's do not rely on his Awakening scheme for their force. He is skeptical of the Third-Awakening focus on income distribution, and he has good technical reasons for saying so. For one thing, that approach underestimates the massive improvement in nutrition, healthcare and life expectancy since the nineteenth century, as well as more leisure, both of which accrued more to the poor than the well-off.

The theory projected by the Social Gospelers, and embraced by modernism generally, held that cultural crises could be resolved by raising incomes. That theory has been given a long trial and has turned out to be incorrect. Despite the sharp rise in incomes, especially at the low end of the income distribution, the moral crisis of the cities remains unresolved. Although income transfers have gone far beyond the mild redistributions advocated by Bascom, Ely and Commons, such problem as drug addiction, alcoholism , births to unmarried teenage girls, rape, the battery of women and children, broken familitgies, violent teenage death , and crime are generally more severe than they were a century ago. p172

Income redistribution is at the core of the current political debate. But it is also increasingly irrelevant. We will conclude looking at the book tomorrow.

Sunday, January 13, 2013

Happiness versus Meaning

Here's an interesting article in the Atlantic. New research confirms what Victor Frankl famously wrote about following his experience in Nazi concentration camps: a sense of purpose is deeply necessary to people, even more so than immediate happiness.

Research has shown that having purpose and meaning in life increases overall well-being and life satisfaction, improves mental and physical health, enhances resiliency, enhances self-esteem, and decreases the chances of depression. On top of that, the single-minded pursuit of happiness is ironically leaving people less happy, according to recent research. "It is the very pursuit of happiness," Frankl knew, "that thwarts happiness."

This is why some researchers are cautioning against the pursuit of mere happiness. In a new study, which will be published this year in a forthcoming issue of the Journal of Positive Psychology, psychological scientists asked nearly 400 Americans aged 18 to 78 whether they thought their lives were meaningful and/or happy. Examining their self-reported attitudes toward meaning, happiness, and many other variables -- like stress levels, spending patterns, and having children -- over a month-long period, the researchers found that a meaningful life and happy life overlap in certain ways, but are ultimately very different. Leading a happy life, the psychologists found, is associated with being a "taker" while leading a meaningful life corresponds with being a "giver."

"Happiness without meaning characterizes a relatively shallow, self-absorbed or even selfish life, in which things go well, needs and desire are easily satisfied, and difficult or taxing entanglements are avoided," the authors write.

How do the happy life and the meaningful life differ? Happiness, they found, is about feeling good. Specifically, the researchers found that people who are happy tend to think that life is easy, they are in good physical health, and they are able to buy the things that they need and want. While not having enough money decreases how happy and meaningful you consider your life to be, it has a much greater impact on happiness. The happy life is also defined by a lack of stress or worry.

Most importantly from a social perspective, the pursuit of happiness is associated with selfish behavior -- being, as mentioned, a "taker" rather than a "giver."

People want to contribute to something.

Baumeister and his colleagues would agree that the pursuit of meaning is what makes human beings uniquely human. By putting aside our selfish interests to serve someone or something larger than ourselves -- by devoting our lives to "giving" rather than "taking" -- we are not only expressing our fundamental humanity, but are also acknowledging that that there is more to the good life than the pursuit of simple happiness.

It's worth reading the whole article.


The Fourth Great Awakening

I read Robert Fogel's The Fourth Great Awakening and the Future of Egalitarianism over the holidays, and it is a very interesting book. Fogel is a Nobel Laureate in Economics (1993) , mostly for his earlier quantitative economic history and study of the historical economics of slavery in the US. Perhaps he felt liberated to write a much more original book, published in 2000. Yet it is based on deep knowledge of US history.

He focuses on the impact of the waves of religious revival in the US on broader growth and public policy. The main challenge for egalitarianism now is not material redistribution, he says, but the maldistribution of "spiritual resources."

The agenda for egalitarian policies that has dominated reform movements for most of the past entry - what I call the modernist egalitarian agenda - was based on material redistribution. The critical aspect of the postmodern egalitarian agenda is not the distribution of money income, or food, or shelter, or consumer durables. Although there are still glaring inadequacies in the distribution of material commodities that must be addressed, the most intractable maldistributions in rich countries such as the United States are in the realm of spiritual or immaterial assets. These are the critical assets in the struggle for self-realization. p2

Traditional measures of income inequality are inadequate. They ignore consumption of leisure and improved health, for example.

They focus on a variable - money income - that currently accounts for less than half of real consumption and that in a generation may account for less than a quarter of real consumption. Such measures shed little light on the most intractable forms of poverty (those related to the unequal distribution of spiritual resources). Nor do they bear on the capacity of individuals to overcome the social estrangement that undermines their quality of life. p3

So a politics based on income transfers is exhausted. That naturally leads to consideration of the good life.

A good place to begin a consideration of the content of a postmodern egalitarian agenda is with Socrates' question, What is the good life? That was a crucial question not only for the sons of rich Athenians but for the sons of the landed rich throughout history. Freed of the need to work to satisfy their material needs, they sought self-realization in public service, military adventures, philanthropy, the arts, theology, ethics and moral philosophy. p2

Naturally, I felt a huge sense of recognition and agreement at this point, as I believe that without some sense of the good life public action is empty. Fogel adds another twist. State action cannot redistribute such spiritual resources.

Realization of the potential of an individual is not something that can be legislated by the state, nor can it be provided to the weak by the strong. It is something which must develop within each individual on the basis of a succession of choices.

The quest for spiritual equity thus turns not so much on money as access to spiritual assets, most if which are transferred and developed privately rather than through the market. Moreover, some of the most critical spiritual assets, such as a sense of purpose, self-esteem, a sense of discipline, a vision of opportunity, and a thirst for knowledge, are transferred at very young ages. P4.

This is very much in tune with what I have been arguing on this blog. The main challenges we face are more ethical than economic now, about how people can be helped realize the good life and what kinds of behavior should be rewarded. It is surprising to see such a clear statement in this vein from an academic economist - although economic historians consistently seem more heterodox and interesting than mainstream model-builders.

We will look at more tomorrow, especially his emphasis on how ethical concerns develop over time.




Friday, January 11, 2013

More signs of a renaissance in psychology

This is an interesting column from David Brooks in the NYT, mostly because he sees many of the main challenges in public policy as a matter of better psychology.

What about the big problems? How do we get people to restrain government commitments now so that debt down the road won’t be so ruinous? How do we calculate the multiplier effects of tax cuts or spending increases among different subgroups of the population, or under different emotional conditions? How do we rig the context of budget negotiations so participants can actually come to a deal? How are people in different cultures likely to react to drone strikes? How do we structure sanctions against Iran to cause the greatest psychic humiliation?

These are the big questions, and most of our policies rely on crude folk psychology from a few politicians. But there’s hope. As Brian Wansink notes in Eldar Shafir’s volume, the 20th century saw great gains in sanitation and public health. The 21st century could be a great period for behavior change.

No mention of economics at all. Of course, economics has some things to say about credibility and commitment, such as the Kydland/Presscott time inconsistency literature. But the rational actor approach appears to be yielding diminishing returns. The focus of the social sciences can shift over time. I've been seeing more and more interesting things in psychology recently.


Sunday, January 6, 2013

The Golden Age and the stale 1980s debates

Here's a take on Keynes' long view from an Australian economics professor. (H/t AI Daily).

Malthusian ideas of scarcity began to be contested in the late 19th century.

The idea that a combination of technological progress and political reform could produce a genuine utopia became an appealing alternative to the ‘pie in the sky’ of an afterlife. Edward Bellamy’s Looking Backward (1888), a critique of 19th century capitalism written from the imagined perspective of the year 2000, was the archetypal example of this literature.

Few utopians had a serious theory of growth, he says, but Keynes was more realistic in expecting incremental improvements in living standards over many decades.

The trouble is Keynes' vision has not been realized.

So on a first reading, ‘Economic Possibilities for our Grandchildren’ seemed prophetic. Yet, 40 or so years later, I am a grandparent myself, the year 2030 is rapidly approaching, and Keynes’s vision seems further from reality than ever. At least in the English-speaking world, the seemingly inevitable progress towards shorter working hours has halted. For many workers it has gone into reverse.

The culprit, he thinks, is market liberalism. He says

If work was distributed more equally, both between households and over time, we could all be better off. But it seems impossible to achieve this without a substantial reduction in the centrality of market work to the achievement of a good life, and without a substantial reduction in the total hours of work.

The first step would be to go back to the social democratic agenda associated with postwar Keynesianism. Although that agenda has largely been on hold during the decades of market-liberal dominance, the key institutions of the welfare state have remained both popular and resilient, as shown by the wave of popular resistance to cuts imposed in the name of austerity.

Key elements of the social democratic agenda include a guaranteed minimum income, more generous parental leave, and expanded provision of health, education and other social services.

This is the problem. He sees it as a reason to go back to 1980s-style welfare liberalism and expand already bloated public services. It is fighting out the debates of the late twentieth century over and over. It makes it far more difficult to achieve any genuine change if it becomes associated with outdated liberal leftism.

However, he does come close to a good point.

It seems clear enough that technological progress can generate the necessary productivity gains, so what is needed most is a change in attitudes to work that would make a guaranteed minimum income socially sustainable. The first is that the production of market goods and services needs to become pleasant enough that those doing it don’t mind supporting others who choose not to. The second is that the option of receiving a guaranteed minimum income does not become a trap, leading into the kind of idleness that produces despair.

The key is to make some form of minimum income "socially sustainable" without causing resentment. That is where the left's ideas of equal distribution block anyway forward. Without some convergence on ideas about the good life, most people will not want to subsidize other's "rights". Liberal ethics undermines liberal economics.


Wednesday, January 2, 2013

From Mercantile Exchange to Railroads

We're looking at Double Entry: How the Merchants of Venice Created Modern Financeby Jane Gleeson-White, starting here.

So double-entry book-keeping served as a foundation stone of capitalist rationality and, on an individual level, business success. Luca Pacioli's advice would echo through generations of clerks laboriously maintaining ledgers.

In Pacioli’s view, three things are needed by ‘anyone who wishes to carry on business carefully. The most important of these is cash or any equivalent, according to that saying, Without this, business can hardly be carried on.’ The second thing necessary in business ‘is to be a good bookkeeper and ready mathematician’. The third ‘and last thing is to arrange all the transactions in such a systematic way that one may understand each one of them at a glance, ie, by the debit and credit method’. Not much has changed today.

Production and Decisions

Capitalism developed and changed in the eighteenth and nineteenth centuries, however. Book-keeping evolved into accounting. The medieval core of double entry proved durable for these new, much larger enterprises.

This vast new range of double-entry applications reflects the extraordinary expansion of business from the late eighteenth century to the close of the nineteenth, a period which saw the rise of the joint stock company (a business organisation which was funded by selling shares to investors who became partners in the venture), and marks the formative era of accountancy. During these decades, accountants transformed a mere system of recording exchanges into a method of managing and controlling business. The first signs that double entry would be equal to the task of monitoring and directing this new industrial world of factories, wage labour and large-scale capital investment were found in the north of England, in the pottery works of Her Majesty’s potter, Josiah Wedgwood (1730–95)—a factory called Etruria, named, by chance, after the ancient Italian region home to Pacioli’s Sansepolcro.

Wedgwood ran a large business that often did not make much money, for inscrutable reasons. So he decided to investigate.

During this period of scrutiny, Wedgwood made an important discovery—the distinction between fixed and variable costs—and he immediately understood the implications of their difference for the management of his business.

A new form of production - large factories - led to the beginnings of cost and management accounting. This was part of a much broader evolution from a system centered on mercantile exchange to one also suited for production and accountability.

The shift in outlook required to move Pacioli’s bookkeeping system beyond its mercantile origins in an exchange economy (where it recorded the exchange of goods, owing and being owed, paying and collecting debts) to manufacturing, where the emphasis is on the production of goods (the conversion of materials and labour into products) was huge.

The growth of railroads in the mid-nineteenth century brought a whole new set of issues. They required outside investment, which both meant more audit control to prevent fraud, and clearer distinctions between income and capital, so investors could be paid dividends out of actual income.

Not only did a new form of production—factories—challenge and alter double-entry bookkeeping from the 1770s, but the financing and managing of the vast investments required to build railways during the same period of industrial expansion brought new issues of accounting and accountability.

The key accounting issue in a corporation is the amount of profit available for dividends—which means that a corporation must properly distinguish between capital and income, because profits derive from income, not from capital. This new laser-like focus on profits and dividends brought two new accounting questions to centre stage: How to calculate income or profit? And how to value assets? These questions were rarely asked before 1850 but by the end of the century they had become the major preoccupations of practising accountants.


Tuesday, January 1, 2013

Double Entry and the Modern World

I read Double Entry: How the Merchants of Venice Created Modern Financeby Jane Gleeson-White last week, largely motivated by wanting to know some of the deeper reasons behind the surface apparatus of Quickbooks, which for various reasons I have to figure out soon.

It sounds like a dry subject. But the book is historically colorful, thought-provoking and well-written. Accounting numbers rule much of our lives and way of seeing the world. But they have a history and limits and flaws.

Measurement and capitalism

She tells the story of how Italian monk and mathematician Luca Pacioli in 1494 first wrote down the methods Venetian merchants had used to keep accounts, possibly for several centuries before that. The invention of double-entry clarified notions of cost and profit. According to some historians perhaps it led to capitalism itself.

In six pages Sombart set out his belief that the emergence of capitalism and the appearance of double-entry bookkeeping in the thirteenth century are causally related. He wrote: ‘It is simply impossible to imagine capitalism without double-entry bookkeeping; they are like form and content.’

Weber’s definition of a ‘capitalistic enterprise’ is derived from the concepts of double-entry bookkeeping: ‘a rational capitalistic establishment is one with capital accounting’. Like Sombart, Weber argues that double entry is significant because it makes possible an abstract measure of income and expenses—and therefore enables the calculation of profit, the key component of capitalistic business practice. Weber also believed that the formal rationality of double entry made the world a cold and disenchanted place—and, ominously, predicted that double entry would continue its rule ‘perhaps until the last ton of fossilized coal is burnt’.

The new double-entry methods caused a deeper change in perception:

He calls Pacioli’s treatise on double-entry bookkeeping ‘a major innovation in economic history’. First, because double entry provided the means of discarding all information extraneous to decision-making, leaving behind only numbers. And second, because it translated these numbers into a common measuring tool called ‘profit’, which allowed a relatively precise evaluation of actions. Double entry thus transformed business books from mere memory aids into records which allow the calculation of profit—and which can therefore be used to measure the success of each individual transaction and of a business generally.

But this did not come without a price.

We are now so familiar with this once innovative (and largely arbitrary) cost-benefit way of thinking that we take it for granted and cannot imagine it otherwise. And yet, as we shall see, this profit-driven way of thinking encouraged by double entry is not only driving managers to drink, academics to pull their hair out, politicians to short-term opportunism and most human beings to suffer in some way, but it is also destroying the world beneath our feet.

She argues that accounting is poorly suited to count environmental damage, for example. This is a problem when accounting has become central to the practice of policy and government.

National statistics

One of the main extensions of accounting is modern national income accounting. It is so familiar (at least if you have studied economics) that we forget how relatively recent it is. Keynes and Kuznets largely invented it, and both were skeptical about its use.

As a thinker of great depth and complexity who saw economics above all as a moral practice, Keynes was suspicious of statistics and considered these quantitative measures of the national economy as exceptional, emergency measures demanded by the times. In the budget speech which presented these accounts for the first time, the British Chancellor expressed the same view, stressing that the publication of official estimates of national income and expenditure should not be regarded as setting a precedent.

That did not stop a massive increase in the use of techniques which had proved useful during the war.

In 1952, very few statisticians were familiar with the theory and practice of national accounting. This would soon change irrevocably. The work done by Stone, Kuznets and others became the foundation of international accounting, and their national income statistics used to measure economic growth would soon become the key indicator of national success and government performance.

But even the main originator of much national income accounting was skeptical of its application.

But the accuracy and usefulness of national income measures have been questioned from the beginning, by Keynes and others, including Simon Kuznets himself. For example, Kuznets believed the national accounts should include the value of unpaid housework, despite the fact that including this vast contribution to the national economy would present statisticians with the difficult task of making monetary estimates of this valuable work. The US Commerce Department refused to calculate these estimates—and as a result Kuznets broke his association with the department in the late 1940s. Kuznets was also concerned about the effects on people’s lives of the modern economic growth that these statistics encourage as an end in itself.

GNP continues to be questioned as an adequate measure, most significantly recently in the Stiglitz-Sen-Fitoussi study.

Perpetual scandal

The numbers can often conceal as much as they convey, and we can mistake a false impression of precision for truth. The numbers sometimes are outright lies, for one thing. Accounting is also inseparable from scandals, she says, and always has been. People have not lost confidence in accounting despite failure to detect fraud or indications of problems on a litany of cases from Enron to Worldcom to RBS.

However, not only has no such fall ensued but it turns out that these accounting scandals are a regular feature in the landscape of accounting. They are as old as the profession itself, dating back to the earliest days of the formalised use of collective capital: the corporation. Corporations and accounting scandals go together like Gordon Gekko and greed. The nineteenth and early twentieth centuries are rife with corporate collapses of the magnitude of Enron’s and comparable in their elements. And they all stem from significant accounting misstatements orchestrated by influential senior managers. Equally, the responses of lawmakers and watchdogs have been the same over the past one hundred years: tinker around the edges of the law, found new watchdogs, proclaim a new era of greater scrutiny and let accountants and auditors out to play with the managers of vast sums of other people’s money.

We'll look at more tomorrow.


"Sure, Big Data Is Great. But So Is Intuition"

An NYT article is skeptical of inflated claims for Big Data:

The quest to draw useful insights from business measurements is nothing new. Big Data is a descendant of Frederick Winslow Taylor’s “scientific management” of more than a century ago. Taylor’s instrument of measurement was the stopwatch, timing and monitoring a worker’s every movement. Taylor and his acolytes used these time-and-motion studies to redesign work for maximum efficiency. The excesses of this approach would become satirical grist for Charlie Chaplin’s “Modern Times.” The enthusiasm for quantitative methods has waxed and waned ever since.

Big Data proponents point to the Internet for examples of triumphant data businesses, notably Google. But many of the Big Data techniques of math modeling, predictive algorithms and artificial intelligence software were first widely applied on Wall Street.

At the M.I.T. conference, a panel was asked to cite examples of big failures in Big Data. No one could really think of any. Soon after, though, Roberto Rigobon could barely contain himself as he took to the stage. Mr. Rigobon, a professor at M.I.T.’s Sloan School of Management, said that the financial crisis certainly humbled the data hounds. “Hedge funds failed all over the world,” he said.

The problem is that a math model, like a metaphor, is a simplification. This type of modeling came out of the sciences, where the behavior of particles in a fluid, for example, is predictable according to the laws of physics.

In so many Big Data applications, a math model attaches a crisp number to human behavior, interests and preferences. The peril of that approach, as in finance, was the subject of a recent book by Emanuel Derman, a former quant at Goldman Sachs and now a professor at Columbia University. Its title is “Models. Behaving. Badly.”

It really is a matter of proper scope, and consciousness of limits. Big Data is wonderful for finding the Higgs Boson among billions of particle paths, or tracking potential credit card fraud. It is not so good at many other tasks where the data is absent or incomplete or misleading. In those cases, it is little different from ancient farmers looking at the sky and seeing mythical animal patterns.

The Importance of Stocks and Depreciaton


We're looking at Double Entry: How the Merchants of Venice Created Modern Finance by Jane Gleeson-White, starting here. Book-keeping evolved into accounting as outside investors needed assurance that dividends were paid out of actual income, not capital.

Railways and factories also wore out, however, which led to another important concept: capital stock and depreciation.

The advent of the corporation raised several other key accounting issues; for example, how to calculate the declining values—due to wear and tear—of large investments in machinery, rails, rolling stock (or railway vehicles), and so on. This problem gave rise to the concept of depreciation.

It took a long time for accountants to come to terms with depreciation and properly accounting for assets. And this is still a problem, she says, when it comes to the environment since many assets are free.

This is because until recently economists have assumed that natural resources are so plentiful that any loss of them is insignificant, not worth counting. They assumed that natural resources like water, soil, forests and air were free gifts of nature.

But just as the nineteenth-century railway entrepreneurs had to learn that human-made capital—rails and machinery—wears out and must be depreciated, so some economists are beginning to understand that nature’s capital is also subject to wear and tear and depletion. Cambridge University’s Professor Sir Partha Dasgupta is one economist who is critical of the GNP and its use to judge the progress or otherwise of nations. He argues, ‘as so many economists have already done, that GNP’s main weakness lies in the fact that it is insensitive to the depreciation of capital assets’. And from an environmental point of view, this is critical.

The Modern Economy is about Stocks

This is no doubt true. But she perhaps over-emphasises environmental gaps to the exclusion of other social assets like trust or quality of life.

The larger point is we are often too focused on flows rather than stocks, including the depreciation of assets (stocks meaning an amount, like a stock of wheat, rather than an equity share like the stock exchange.) This is a basic economic distinction we often forget. As Dasgupta says, we need to be sensitive to the depreciation of capital assets.

We are much better at being conscious of flows of income rather than the valuable stock of assets which produces that income. Yet many of the great economic challenges of our era have more to do with stocks than flows of income. Many or our capital assets, such as the knowledge required to build an Intel processor or the song "Hey Jude" do not depreciate in the traditional way. They may have to be re-learned or passed on, but they do not wear out.

So what happens when the stock of our valuable assets, properly defined, gets disproportionately much larger than money income flows? In many ways, our prime objective should be to increase the stock of assets. Income and distribution are secondary factors , especially of many of the benefits flowing from those assets are free. Some of our political thought gripes towards this, especially those who think capitalism should be left unfettered to create wealth which government can then redistribute. But that often confuses income with value.

We will come back to this point another time.

Finally, Gleeson-White emphasizes again how the numbers may often conceal deeper uncertainties.

Even accounting’s most fundamental concepts and practices, such as income measurement and asset valuation, are based on uncertainties. Accountants still cannot agree on how to define income, the measurement of which remains one of the intractable problems in financial accounting theory and practice. The valuation of assets only becomes more complex and more fiercely debated as modern global corporate structures and financial instruments become increasingly labyrinthine, and income measurement, the key to determining profits and therefore dividends, is inextricably linked to this contentious, chimerical practice of asset valuation. Nor is the crucial measurement of costs an objective process: costs are also highly contestable figures and may result as much from the collusion or rivalries of firms as from any other actuality. Accrual (or corporate) accounting—the need to allocate revenues and expenses between accounting periods and to value assets and liabilities at the end of an accounting period—raises problems which have never been solved and are probably incapable of solution. Numbers can be negotiated to make management look good. In effect, ‘accounts are used to justify decisions and to excuse mistakes’.

She concludes

In an era of international capital, when our wealth is more than ever tied up in its fortunes, and at a time when corporations, governments and financial institutions are demonstrating their fallibility on a global scale, it is essential that we are aware of the somewhat arbitrary laws of account that govern them—especially because it is in the labyrinthine workings of our accounting systems that value itself is assigned. It seems that if we want to bring our infinitely voracious consumerism into line with the resources of our finite planet, we must consider giving our planet a value that the market can recognise and account for, assign a monetary value to the oceans, air, forests, rivers, wildernesses. • Delete this highlight

(My bold). In the end, we come back to the problem of economic value. There have been many major shifts in perception of costs and decisions and stocks and accountability and depreciation. Together, they make up the modern economy.

It is time for another major shift, to cope with intangibles and abundance and our reliance on those abundant stocks. Value should not be defined by arbitrary default.