Trust and Attention in Opposition

This is a very thoughtful and interesting post by Seth Godin, who is a well-known marketing guru with a wonderful blog.

The two scarce elements of our economy are trust and attention.

Trust is scarce because it's not a simple instinct and it's incredibly fragile, disappearing often in the face of greed, shortcuts or ignorance.

And attention is scarce because it doesn't scale. We can't do more than one thing at a time, and the number of organizations and ideas that are competing for our attention grows daily.

People sometimes get more attention by doing a dance, he says, but violate trust in the process.

..those that pay the price to grab some momentary attention almost always do it at the cost of trust.

Part of it, no doubt, is that some of the main ways to grab attention are sensationalism, gossip, exaggeration, sex, glamor, or celebrity, which have never had wider respect. Linsey Lohan gets plenty of attention, but not much trust.

Much attention is tabloid. Much more is cat videos.

Another issue is attention span. It needs time and effort to build trust, which is usually a shared experience and co-evolution. The Internet, on the other hand, often gravitates towards tl;dr and 140-character tweets. The firehose of information hitting everyone means people take shorter and shorter gulps. Attention can be gained and lost faster than ever before.

The kicker is that the Internet also has a much quicker and more ruthless set of mechanisms to expose lack of trust than ever before as well, from Yelp and Tripadvisor with their customer reviews to the lack of gatekeepers who can direct and tamp down conversations.

We also have an inbuilt skepticism toward things that seem done purely for attention. Perceptions of motive is a major underlying force.

 

 

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.

 

"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.

 

Walking with Cavemen

I watched the BBC-produced series Walking with Cavemen on Netflix last night. It's an interesting recreation of life as it must have been for early precursors of people, in the style of a wildlife documentary.

It starts with Lucy (on the left here), a young Australopithecus Afarensis female in her twenties. She was discovered 3.5 million years later by a French-American expedition in Ethiopia. It moves up through homo ergaster and homo habilis to the Neanderthals, and the eventual appearance of us.

A few things struck me about the series. The reason some varieties of human survived, it says - us - was adaptability. Our lineage was a jack of all trades, rather than being superbly adjusted to just one particular niche.

In the final episode, the series argues that homo sapiens eventually outdid the Neanderthals and other closely related species because of our capacity for imagination. It was a close-run thing, too. The species almost died out 75-100,000 years ago. There were as few homo sapiens in the whole world then as there are orangutangs now. Only the most adaptable of an inherently adaptable lineage made it through that chokepoint.

There is one scene in which two humans bury an ostrich egg filled with water in the ground, on the off chance that they will be passing that way again and need the water. No other living thing has the foresight to imagine and plan.

In a way, that is the origin of our whole idea of wealth as well. It is a side-artifact of our motivation to plan ahead and have choices in the future. It is probably connected to contingent aids to survival.

Of course, squirrels do the same when they store nuts for the winter, and more systematically. But perhaps the difference is that is predictable behavior for predictable outcomes, and pure instinct. For us, it is more a store of adaptability and choice and material survival, because for four million years has been our distinctive specialization.

One other thing becomes very evident. The reason for the evolution of the massive human brain is not so much dealing with the external environment, but the human environment: such as reading people's intentions, motivations, propensity to cooperate and form alliances. We can cooperate, and also drive each other crazy with office politics.

The physical world is much simpler and predictable than the human social world, and needs less brainpower. Bacteria can move towards opportunities. Cats are extremely good at instantaneously calculating where to pounce. Even we are good at solving the quite complex mathematics of the trajectory of a ball thrown high in the air so we can catch it, without being aware of it. It is hardwired into our brains, even if we would struggle with the formal mechanics of ballistic trajectories.

Understanding people is the most difficult task the brain has. And that is why it evolved to be so large, despite the huge demands in terms of energy.

"More Heat than Light": the failure of modern economics

I'm going to turn now to Philip Mirowski's More Heat than Light: Economics as Social Physics, Physics as Nature's Economics, which is a quite devastating critique of mainstream neoclassical economics.

The heart of modern economics, he argues persuasively, was lifted wholesale from physics in the late nineteenth century. The trouble was that the main figures of the marginalist revolution, such as Walras, Jevons and Marshall, didn't quite understand all the math they imported into political economy.

The neoclassical founders almost all came from an engineering or natural science background. But they had a limited grasp of the state of the art of physics even at the time. Above all, says Mirowski, they failed to understand the importance of conservation principles in the math. To accurately measure change, something must stay the same. That means most of the edifice of neoclassical economics is based on stale physics contaminated by basic errors.

 

Substance and fields

What happened was basically this. Natural scientists struggled in the early nineteenth century with ideas of heat and motion, imagining fluids or ethers or substances. By the 1870s, that had given way to a unified view centered on energy, and the conservation of energy as it was transformed from one kind to another. Instead of fluids or other kinds of substance, physicists now thought of fields and forces, and worked out the vector math of kinetic and potential energy.

The heart of neoclassical economics, says Mirowski, is that economists replaced energy with utility in the same equations, and lifted the framework wholesale. The marginalist revoluton paralled the revolution in physics in preceding decades. Classical economists saw Value as a substance, such as the equivalent of wheat for the physiocrats or the labor theory of value for Ricardo and Marx. But for neoclassicals, Value was a field, like electromagnetism in physics. Kinetic energy was essentially spending and income; potential energy was utility.

He quotes several of the major marginalists who explicitly acknowledged that this is how they thought. But later economists mostly forgot these origins. The discipline has never been that historically self-conscious.

There were two main problems with all this, however. First, without a conservation principle, the math didn't work. Conserving energy implied income and utility were a constant - so essentially the same thing. That would mean utility would be superfluous as a separate measure to money, which was not at all desirable. The point was often lost in a technical debate about "integrability". Leading physicists tried to explain the point to economists, who appeared to have been mostly baffled and nonplussed at the argument.

Secondly, physics moved on from its 1870-vintage "proto-energetics" state, as Mirowski termed it. The second law of thermodynamics implied entropy was always increasing, so interactions were not easily reversible. Special relativity, general relativity and quantum theory all upset the mechanical "Laplacian dream" of 1870s physics, bringing frames of reference, probability, indeterminacy and the role of the observer into the picture. Symmetries and conservation principles could be broken. Matter could decay. Particles could pop in and out of existence. In contrast to notions of inherent "scarcity", the whole universe might be a "free lunch", something which came from a temporary variation in nothing.

None of these could easily be incorporated into the neoclassical framework. However, economists insisted all the more stridently that they were pursuing disciplined science, in contrast to sociologists or anthropologists, while actual scientists were increasingly doing something quite different.

As long as the Laplacian Dream was their dream, they clutched neurotically at their portrait of persons as irrotational mental fields suffusing an independent commodity space, as science ebbed ever further away toward a world subject to change, diversity and indeterminacy, and at one with the observer. P275

And the outcome?

In brief, the practical dissolution of the energy concept in advanced twentieth-century physics has painted neoclassical economics into a corner. p388

Mirowski wrote the book in 1989. Of course, the metaphor of utility as (potential) energy looks even more strained today. We now know that the visible universe of 1870s physics is only 4% of the universe. The rest is dark matter and dark energy that we cannot as yet observe and don't understand.

So what? Some mainstream economists concede to his argument about the origin of the neoclassical model, notes Mirowski, but they claim it is not relevant to the subsequent evolution of the discipline.

But it is. They still want the appearance of science, while being stuck with a model which is increasingly divergent from science in reality, he claims. To talk about analogies to entropy, said Samuelson, for example, is always the mark of a crank. But Mirowski points out that Samuelson frequently published articles with tenuous links to physics himself. Indeed, the key to Samuelson's career was maintaining the appearance of scientism.

Economists have produced various ad-hoc conservation principles in the twentieth century, according to Mirowski, "but in the final analysis this is all one big shell game, with the offending conservation principles passed from one assumption to another." p274

 

Production

The metaphor of utility as an energy field is too embedded to be given up by neoclassical economics, he says The trouble is it is also a metaphor of instantaneous exchange, and as such it has proved consistently difficult to reconcile with production, which had been the focus of classical economics. Classical economics thought that value was created in production, circulated in trade, and consumed in consumption. Neoclassical economics was focused on exchange, and found it hard to explain production at all.

That inconsistency explains a proliferation of production functions in postwar economics, and difficulties with temporarily and the existence of firms through time.

Economists have effectively tried to reinvent a substance theory when it comes to production, says Mirowksi. But this is bound to be inconsistent with utility as a potential energy field. So the profession has not been able to settle on a satisfactory answer.

The situation was embarrassing, but no neoclassical was willing to come right out and say that production was superfluous or irrelevant in their scheme of things. (Lionel Robbins came the closest). p272

Scarcity

There are also implications for scarcity. The idea of scarcity as the heart of the economic (and human) condition was largely an artifact of the neoclassical approach, he says.

Prior to that time, scarcity as some sort of primordial state of mankind did not play any signficant role in the value theory of classical political economy. Only with the dominant impression that Nature enforced a general state of dearth, say, rather than the physiocratic notion of Nature's bounty, could it become possible to even think of economic equilbrium as a state of psychological counterpoise, hemmed in by the urgent necessity to clear markets in a state of stringent limitations. p240

This caused obvious problems.

The metaphor of utility as potential energy was predicated upon a Weltanschauung of a closed, bounded system that exemplified the natural state of mankind as enduring ineluctable scarcity. If and when production was to be introduced into this morality play, it had to be done in such a way as to prevent the contravention of the scarcity principle, all the while maintaining the field theory of value. p293

Of course, I think this is fascinating given I think one of our main challenges now is thinking through the implications of abundance.

Keynes, he says. succeeded in introducing a kind of value substance in the guise of "national income". That allowed the idea of an economic process to be reintroduced. There has been an immense effort in recent decades to link macro with rational choice "microfoundations." But this is doomed to failure, says Mirowski.

Keynes generated a theory of an unstable economic process by the instrumentality of his reversion to a substance theory of value, a tactic that allowed the joint conceptualization of production, growth and the passage of time in (relatively) internally consistent manner. In contrast, it is the avowed intention of the microfoundations school to renounce all value substances and to recast all macroeconomic analysis in the format of production and utility fields. It is precisely this choice that prohibits the logical modeling of process in priduction, in growth, and in exchange, as explained earlier in this chapter. The field metaphor cannot represent a circular economy where outputs become inputs and so on, ad infinitum. It cannot specify precisely what it is that grows in an economy. p346

Fields are just not suitable when time is involved.

.. the formalism of the field is useful only in cases where one can safely abstract away all considerations of process and the passage of time. p346

Utility

Mid-twentieth century neoclassical economics would have found an alternative to utility if it could, he says. The mainstream forgot how widespread concern about utility had become in the profession before the second world war. Mirowski quoted Viner as saying economists' understanding of utility was comparable to "the knowledge of heat prior to the discovery of the thermometer." It could not be satisfactorily measured. There had always been concern at how locating value in a purely mental framework came close to idealism or solipsism.

The development of the indifference curve approach and Samuelson's theory of revealed preference were not durable responses, either, and only served to obscure the origin of the utility metaphor. Revealed preference was not empirically tractable, for one thing, and confused preferences and behavior.

In the absence of the metaphor of utility as nineteenth-century potential energy, there is no alternative theory of value, no heuristic guide to research, no principle on which to base mathematical formalism, no causal invariant in the Meyersonian sense, and most threatneing, no basis for the claim that economics has finally become scientific. p368

So what does this lead to? There is, Mirowski says, no scientific method that can guarantee economics' scientific status.

This lesson is the legacy of the decline of positivist philosophies of science in the late twentieth century. Juxtapose this fact with the hypothesis that economic research has always met with the greatest difficulties in establishing the credibiliy of its results and fending off charges of charlatanism and quackery. p357

It is hard to revise the neoclassical framework without undermining it. New approaches do not have that problem. This means, he says, neoclassical economics will be vulnerable to new contenders for the role of social physics.

Theories of Value

And is there an alternative theory of value? Mirowski says there are two main alternatives. One is to deny any separate value, rarely advocated, but as represented by someone called Samuel Bailey (who I have never heard of).

This position argues that no economic phenomenon is conserved through time, and therefore scientific analysis is impossible. Whatever one might think of the truth of this option, it should be clear than the nihilism inherent in the program assures that in this instance there can be no legitimate research program called economics. p400

The other alternative is a "social theory of value", he says, based not on scientific or social metaphors , but in social institutions such as accounting conventions or property rights.

I doubt myself whether this is true. I imagine evolution is the main contender for an alternative scientifc framework, together with the notion of adaptability and "fitness" of some kind or another.

Conclusions

Overall, it is a very bracing read. It seems, at least to me, highly persuasive - but I would want to read some reviews and responses to make sure I am not overlooking flaws in Mirowski's own analysis. .

What it underlines is that utility and scarcity were chosen not so much because of their psychological or social accuracy, but because the math "worked". And if the math worked there was more scientific respectability. I have always had the firm impression that this was the driving force of major parts of the discipline, which is likely the main reason I did not become an academic economist. It did not ring true. It was about the aesthetics of models rather than genuine insight. It was about a particular quasi-religious view of rationality rather than solving problems.

The book is also highly illuminating , not to say shocking, about the origins of utility in modern economics. I've often talked before about how ethical theory went off the rails in the eighteenth and nineteenth centuries, dropping the older tradition of the virtues and the good life for a more utilitarian, neutral and welfarist approach. Mirowski excavates a much deeper layer of intellectual history underlying current economics. It was not a matter of an import from Bentham. It was an import from physics, and just more or less happened to be called utility.

The metaphor of potential energy as a utility field locked economics into an increasingly less productive path for a century - and to a large extent still does. I knew most of the arguments about indifference curves, production functions and revealed preference, of course, but I was much less familiar with the intellectual history of the arguments. It is fascinating. And disturbing.


Perhaps most of all, it shows how value theory is the great unsolved problem at the heart of economics. That is what I have been grasping toward in my own terms on this blog. To understand the future of the economy , we have to be back up into ethics and the question of the good life and human flourishing. That, after all, is the only place a valid notion of value can come from.

 

Companies which lose good ideas

I subscribed a month ago to a wonderful daily e-mail, delanceyplace, which provides excerpts from current non-fiction books, with links to Amazon which benefit a children's literacy project. Today's excerpt is from a book called Advocacy by John A. Daly, with remarkable examples of how people with good ideas could not get them accepted in their original companies. Check it out on the delanceyplace site. An excerpt from the excerpt:

"Business history is dotted with stories of opportunities lost because people within companies were unsuccessful in pitching their ideas. And those neglected opportunities were consequential. Competitors seized market share that could have been kept and increased if the good idea had been adopted. Take the minivan. Who came up with that idea -- Chrysler? No. Ford engineers came up with that idea -- they called it the van-wagon -- but they couldn't convince management that customers would buy it. In fact, one executive who endorsed it, Hal Sperlich, was fired and went on to lead the effort at Chrysler, which then dominated the minivan world for many years. Ford lost out. ...

"Sam Walton, the founder of Walmart, started his career as a franchisee in the Ben Franklin chain of stores. Walton tried to convince the Ben Franklin executives that his model of buying directly from manufacturers and offering deep discounts would lead to incredible opportunities. They didn't listen, Walton implemented the idea himself, and Walmart became an international phenomenon. ...

The same applies to Intel, and many other companies. But the best example is Apple.

"Steve Wozniak, a cofounder of Apple Computers, was working at Hewlett Packard when he and Steve Jobs designed their first personal computer. Wozniak had signed a document at HP saying that whatever he designed as an employee belonged to HP. He said, 'I loved [HP]. That was my company for life. So I approached HP .... Boy, did I make a pitch. I wanted them to do it. I had the Apple I, and I had a description of what the Apple II could do. I spoke of color. I described an $800 machine that ran BASIC (an early computer language), came out of the box fully built and talked to your home TV: And Hewlett-Packard found some reasons it couldn't be a Hewlett-Packard product.'

"Later, when HP began work on a computer, Wozniak approached the project managers and asked to work on it. 'I really wanted to work on computers. And they turned me down for the job. To this day I don't know why. I said, 'I don't have to run anything,' even though I'd done all these things and they knew it. I said, 'I'll do a printer interface. I'll do the lowliest engineering job there is.' I wanted to work on a computer at my company and they turned me down.' Think how different the computer industry would be if Wozniak had successfully pitched his ideas to HP. ...

I read a good book about pitching ideas and overcoming objections a while back, Buy-In: Saving Your Good Idea from Getting Shot Down by John Kotter. I've had good ideas shot down nonetheless. Sometimes no amount of persuasion will work. 

The reason capitalism works better as a system is not because it's efficient or elegant - I was talking about this concerning General Electric the other day - but because in the medium term, in aggregate, fewer good ideas are shot down. So it is more adaptable and innovative.


 

 

Food breakthrough?

This is pretty interesting. A new company is successfully growing food using just sea water and Australian scrubland.

Indeed, the work that Sundrop Farms, as they call themselves, are doing in South Australia, and just starting up in Qatar, is beyond the experimental stage. They appear to have pulled off the ultimate something-from-nothing agricultural feat – using the sun to desalinate seawater for irrigation and to heat and cool greenhouses as required, and thence cheaply grow high-quality, pesticide-free vegetables year-round in commercial quantities.

So far, the company has grown tomatoes, peppers and cucumbers by the tonne, but the same, proven technology is now almost ready to be extended to magic out, as if from thin air, unlimited quantities of many more crops – and even protein foods such as fish and chicken – but still using no fresh water and close to zero fossil fuels. Salty seawater, it hardly needs explaining, is free in every way and abundant – rather too abundant these days, as our ice caps melt away.

It could dramatically change world water usage.

It's an inspiring project, more important, it could be argued, than anything else going on in the world. Agriculture uses 60-80% of the planet's scarce fresh water, so food production that uses none at all is nothing short of miraculous.

I can't help wondering if there is a catch, or long-term problem that isn't evident yet. But a combination of hydroponic techniques and more efficient solar power may be durably effective.

It's bearing out some of the ideas and arguments and new technologies we discussed here.

 

The Internet of Things

GE is building up a huge new research center in the East Bay, near Silicon Valley, says this NYT article, because the same thing that powers sharing trivia on Facebook could also share much more significant data in the real economy. The industrial Internet is being born.

.. G.E.’s effort, analysts say, shows that Internet-era technology is ready to sweep through the industrial economy much as the consumer Internet has transformed media, communications and advertising over the last decade.

The key is adding sensors to machines, to help make them more intelligent.

Today, G.E. is putting sensors on everything, be it a gas turbine or a hospital bed. The mission of the engineers in San Ramon is to design the software for gathering data, and the clever algorithms for sifting through it for cost savings and productivity gains. Across the industries it covers, G.E. estimates such efficiency opportunities at as much as $150 billion.

I think this is very interesting, but the question is whether it will prove to be about transformation and new business models, not simply efficiency. There is a certain amount of big data "me-too-ism" about it.

I was watching an interview between Jeff Bezos and Charlie Rose the other day. Bezos said they never liked to enter a market just because they could. There isn't much money to be made doing the same thing as everyone else, entering a market late a in "me-too" way.

GE may be very good at efficiency, but I wonder if they can innovate as well. We've seen before that the rise of the modern world cannot be explained by greater efficiency, but by doing things in new ways. And I say that as a GE shareholder. Their share price is still near half what it was before the crisis.

They have such vast scale that more efficiency means millions of dollars for even tiny gains, and that could ripple across the economy in power and transportation sectors. But we need new possibilities as well.


 

Futility and stock-picking

Active managers have had another bad year, says CNBC. Traditional stock-picking and bottom-up analysis doesn't work any more.

 

Just as in 2011, only about 1 in 5 active managers are beating their benchmarks in a year marked by the same type of headline volatility caused by events in Europe and fiscal concerns closer to home.

While the advantage of passive over active is nothing new, the near-record level of futility is, and the cracks are beginning to show.

[...]

"The market is being driven by macro factors," Flam said. "So most professional advisors have a background in evaluating companies, industries, economies. It's not in politics, and politics is what dominating the markets over the last couple of years."

Political factors are about decisions and perception, not ratios.

Aristotle: Virtue and Happiness

I'm going to conclude a series of posts about Aristotle's The Politics , which start here.


He warns again against simply doling out surplus, as in a welfare state - which apparently happened at the time, and notoriously so later in antiquity in the form of Roman bread and circuses.

On the other hand if revenues are available, one should not do what popular leaders today do - make a free distribution of the surplus. (When people get it, they want the same again: this sort of assistance to the poor is like the proverbial jug with a hole in it.) .. Every effort therefore must be made to perpetuate prosperity. And since that is to the advantage of the rich as well as the poor, all that accrues from the revenues should be collected into a single fund and distributed in block grants to those in need, if possible in lump sums large enough for the acquisition of a small piece of land, but if not, enough to start a business, or work in agriculture. p375

Independence is preferable to simply handing out revenues, he thinks. It is a timeless thought. Often we think we are the first generation to confront a problem, or we are wonderfully modern and sophisticated. But it is just as often because we don't know how often it has been confronted in the past. We forget lessons which were already manifest in 350 B.C.

 

A constitution needs a view of the most desirable life

However, he comes back to his main point. We have to know what the good life is to design political institutions to achieve it.

If we wish to investigate the best constitution appropriately, we must first decide what is the most desirable life; for if we do not know that, then the best constitution is also bound to elude us. p391

He believes that virtue is the precursor to prosperity and happiness.

Thus people suppose that it is sufficient to have a certain amount of virtue; but they set no limit to the pursuit of wealth, power , prosperty, reputation and the like. {But} it is not by means of external goods that men acquire and keep the virtues, but the other way around; and to live happily, whether men suppose it to consist in enjoyment or in virtue or in both, does in fact accrue more to those who are outstandingly well-equipped in character and intellect, and only moderately so in the possesion of externally-acquired goods. p392

Of course, one of the more difficult issues in life is that sometimes character and virtue are not rewarded, of course. Time and chance happen to everyone. But it is still probable that as a rule people who are prudent and temperate and courageous and honest will do better. Parents generally teach their children to be honest rather than lie, after all. And living happily has only a tenuous connection with wealth and material goods beyond a certain threshold, as we know from the Easterlin paradox.

So Aristotle may overstate the point when he says

Let this then be agreed upon at the start: to each man there comes just so much happiness as he has of virtue and of practical wisdom, and performs actions dependent thereon. p392

But we would like it to be true. And in the long run, on average, it probably is true - and, like Pascal's bet, it is probably better to act as if we believe it is true.

 

Defining the Good Life

So what's the good life, or the best life? Not asceticism or denial or honor/shame or material success.

For the present, let this be our fundamental basis: the life which is best for men, both separately, as individuals, and in the mass, as states, is the life which has virtue sufficiently supported by material resources to facilitate participation in the actions that virtue calls for. p393

Although this is open to all, some avenues attract the most ambitious.

Both in earlier and in modern times men most ambitious for virtue seem generally to have preferred these two kinds of life, the statesman's or the philosopher's. p395

We have to have some purpose, or target.

The well-being of all men depends on two things; one is the right choice of target, of the end to which actions should tend, the other lies in finding the actions that lead to that end. p427

Aristotle is very teleological, of course. I often complain about liberal neutrality. But there is a liberal teleological tradition as well, and a leftist one stemming from Marx and Hegel. The problem is the good life they aim at is a vague abstract equality without much substance.

I would add another element. We need a choice of target, if nothing else because the economy and society naturally evolve regardless of whether we choose to perceive it. We can and ought to at least choose the fitness and selection criteria for the kind of change we experience.

So was it worth looking in such detail at a classic work, from a world in which a trireme or a horsecart was high technology? Yes. While looking up the Easterlin reference above, I came across this previous quote from Deirdre McCloskey in this blog post:

The great economist Simon Kuznets, notes his student Richard Easterlin, believed that "the `givens' of economics- technology, tastes, and institutions- are the key actors in historical change, and hence most economic theory has, at best, only limited relevance to understanding long-term change.

The technology has changed since Aristotle's day, of course. But tastes and institutions are still the key actors which we need to understand in a much less superficial way than our own parochial view allows.

And that is why stepping far outside our own parochial view , right back to first principles at the origin of many of our conceptions about ethics and politics, can give us a fresh perspective on our current challenges.

Investing in local neighborhoods

This is a fascinating piece in Atlantic Cities:

The Millers have invested the last two years and nearly a million dollars in trying to answer this question: Why can’t small-time investors put their money in their own communities? Then, finally, in August, they successfully took a single property on H Street public

 

Aristotle and the beginning of the Western tradition

With the election still reverberating in the air, it's a good time to get some longer perspective. I read Aristotle's The Politics (Classics) a few weeks so, but haven't talked about it yet. It is going to take at least a week to go through all the ramifications of this book.

Why read something two thousand years old?

Let me explain first of all how I was led to this. I started off this blog asking what had gone wrong with the economy. The answer, as I've gradually come to think, is we have a set of institutions and practices which are designed for scarcity, the oldest problem of mankind. But the basic things of life are now superabundant, at least in the West. We have more material stuff than we know what to do with. Our problem is not starvation, but obesity.

So we have solved the "economic problem", as Keynes called it. As we become more and more efficient and productive, the amount of labor devoted to the exchange economy - services as well as manufacturing - is plunging, just as agriculural employment did before in the nineteenth century. The economy is sputtering as a result.

Mainstream economists are confident that demand will simply shift to newer goods and services. But the nature of our wants and preferences are changing. Most mainstream economists are oblivious to this, because they take tastes and preferences as exogenous. The discipline ignores changing preferences by definition. It is a profound blind spot.

Many of the other things we want in life are changing, as we ascend what Maslow called the hierarchy of needs. The issue is that the things we increasingly want more of are not easily packaged and sold as excluable, non-rivalrous goods and services. They are not as suited to be as easily sold in the market, or delivered by the welfare state. It is difficult to establish clear property rights. (Ask the music or newspaper industries). Alternatively, as technology advances, the marginal cost of so many new goods and services is so low that (as in Facebook, or Google, or Flickr, or other paragons of the new economy) it is easier to give them away to the consumer.

Most of the value in the economy is now intangible, but we have been slow to catch up with the consequences. Mainstream economists are wrong to assume that new jobs will always be created to replace old ones, even though that has been true for the last two centuries.

I have become frustrated with our general lack of answers for what we do with the economy once many of the things we want are not material or easily tradable - such as connection, enjoyment, security, love and relationships, meaning and purpose. These are the things we turn to once we have enough shelter and food and security.

In other words, we need to take a much deeper look at what makes people flourish; not just what simply ensures survival, because flourishing has to be the objective of the economy from now on. And that means it is sensible to take a step back and look at long-run answers to this question, and older conceptions of human nature.

This is all the more important because most of our political theory has ignored this question for two hundred years, as the idea of ends or the "good life" have been sidelined. Liberal political theory - and I mean here liberal in the broad sense, which covers most of the current political spectrum - has as a matter of conscious intention no sense of what flourishing means or what our ends should be. Instead, it asks how people can minimally coexist together in a largely neutral state. In other words, it focuses almost entirely on the referee rather than asking what game we are playing, and what our goals are.

So, among other things, I was riveted by this book : After Virtue, by Alisdair McIntyre. He argues our ethical theory has become incoherent because we lost the much older tradition in the West, dating back to Aristotle, which is based on the virtues. That tradition places much more emphasis on character and judgement than impartiality, and it seeks the "golden mean" and ways to avoid excess rather than universal rules.

I read Aristolte's Nicomachean Ethics. There has also been a revival of interest in virtue ethics in contemporary philosophical circles. It has even reached some brave mavericks in the economics profession, such as Deirdre McCloskey's magnificent books.

I think many of our most intractable current political disputes arise because we argue over distribution without any reference to the virtues or actual flourishing. The left thinks equal distribution is enough. The right tends to want some standards of behavior or work ethic, but finds it hard to articulate this in liberal or libertarian terms. So it falls back on "the market". Our basic economic and political issue is what "fairness" means.

The Politics

This is why I wanted to read Aristotle's other major book, The Politics. Right at the dawn of the western tradition, he discusses what a society focused on virtue and flourishing and the Good Life ought to look like in practice. Part of the fascination is he is, of course, one of the foundational thinkers of the West, one of the most brilliant thinkers who ever lived. As an educator, he profoundly influenced the next two thousand years of history, including the Islamic world via Avicenna and the medieval Chirstian world via Aquinas. In practical terms, he tutored the most brilliantly successful conqueror in history, Alexander the Great, as well, so he is not simply an ivory-tower theoretical hermot. He taught in post-democratic Athens, but was eventually forced to flee by the mob who were hostile to Macedonian non-citizens like himself.

So we have a pragmatic voice of wisdom from a world which had grappled with many of our issues of freedom, leisure and democracy, but which is absolutely disintersted about our own political divisions. Aristotle lived two millenia before America was even discovered.

We will start off with what he says about household management, oikonomia - the origins of our word for economics.

 

Acceleration and flexibility in the economy

This is a fascinating story in the NYT about Zara, the huge Spanish clothes retailer, which says a lot about business and consumption. Zara has vastly accelerated the cycle of fashion. They monitor what customers are buying, and also saying to sales clerks. So if one item is selling, they can have more of them and more similar designs manufactured, shipped and on the shelves within three weeks.

Merchandise moves incredibly quickly, even by fast-fashion standards. All those thousands of Inditex stores receive deliveries of new clothes twice a week.

In this way, says Masoud Golsorkhi, the editor of Tank, a London magazine about culture and fashion, Inditex has completely changed consumer behavior.

“When you went to Gucci or Chanel in October, you knew the chances were good that clothes would still be there in February,” he says. “With Zara, you know that if you don’t buy it, right then and there, within 11 days the entire stock will change. You buy it now or never. And because the prices are so low, you buy it now.”

And fashion trends are now worldwide and instantaneous.

I remarked that it must be interesting to see what is fashionable in Turkey but not in New York and vice versa. I imagined that different nationalities still had different tastes, at least in terms of fashion. But I was wrong.

“Actually, the customer is more or less the same in New York and Istanbul,” she said. “There are differences, like Brazilian girls like more brilliant colors, whereas in Paris they use more black. But in general when you find a fashion trend, it’s global.”

It is similar to the evolutionary paradigm I have talked about before, in fact, from the very beginning of the blog. They try lots of small experiments, shipping just three or four skirts or jackets to a store. When they find something working, they immediately replicate and build on it. And they adapt extremely fast.

I wonder how fast the economy can really spin, though. Fashion has always been a special case. Change for the sake of change, for display and identity, might apply to clothes or phones. It seems to apply less to things like cars than before, though. The economy is increaingly intangible altogether.

And some things get increasingly commodified and generic at the same time as other things become the object of relentless change. Commodification is just a heartbeat or a moment away.

 

Demography and the election

I'm still working through some of the implications of the election, although cautious about drawing conclusions too fast. Perhaps the most widespread immediate explanation is that Republicans can't win now because of changing demographics, especially more Latinos.

It's not actually clear that this explains this election, at any rate. According to RealClearPolitics, the absolute numbers of minority votes is likely to have hardly risen at all once postal ballots are counted and final results are in. The big difference this time is five million fewer white voters turned up at the polls. Obama did not suffer as much disaffection from disappointed liberal constituencies like students, but many whites seemed disaffected with Romney but unwilling to vote for Obama. I think this is not yet proven yet , but the data bears watching. And in any case, I think immigration reform is exaggerated as a means to Latino votes. Poorer working-class Latinos are likely to vote Democratic for a generation or two, no matter what Republicans do.

Megan McCardle doubts talk of the emerging democratic majority is justified, partly because we've been hearing it since the 1990s and it has not stopped GOP blowouts like 2010, and partly because the Democratic coalition itself is likely to fracture. Most Latinos are white, and could behave like the many Irish and Italian Catholics who fled the party since Reagan. There could also be massive conflicts between unions and other parts of the Democratic coalition.

Don't take this for a "Hey, GOP, everything's fine! Don't you go changing!" I've been saying for years that the GOP has run tax cuts out as a campaign plank--indeed, they're now over the cliff and about to plunge while Roadrunner chortles. .. . And they've now nominated two candidates who have put forward almost nothing that couldn't be found in Reagan's 1980 platform. The party desperately needs some new ideas to sell to the American public.

But I am highly skeptical that last night means they've gone into some sort of permanent decline. It was a close election in which Obama lost states that he carried in 2012. The Democratic bench is very weak--the current leading candidates to succeed Obama, Hillary Clinton and Joe Biden, will be 69 and 74 in 2016. And Obama is going to have to preside over some very, very tough choices. We can't borrow a trillion dollars a year for another four years. Nor can we get all the money from Republican constituencies; they just don't have enough of the stuff. Whoever's ox Obama chooses to gore will probably be a considerably less enthusiastic coalition member come 2016.

This is probably true.

You could have argued the traditional Yankee Calvinists were supplanted in Massachusetts in the nineteenth century, and much of the American Protestant mainstream by Catholic and Jewish immigration in the early twentieth century. All are now lumped together as "white" by the liberal press. This has been going on a long time, and assimmilation tends to grind away the differences over time. The Democratic Party tends to cater to the less assimilated, but that is historically a moving target.

There is a much more worrying possibility, though, as well. John O'Sullivan writes in National Review:

But it would be false comfort (and the kind of irresponsible optimism I detest) not to mention a darker possibility. That possibility is that whites will develop a defensive minority consciousness in response both to their statistically weaker position.

That has happened before where majorities have become minorities, and it is a “rational” response (so to speak) to this change in their condition. When their collective power was numerically unassailable, they felt able to extend generous concessions to other groups. When they feel threatened, they defend every item of privilege and resent every loss. [..]

The late Sam Huntington warned in his fine book Who Are We? that a racial concept of American identity might gain ground in the circumstances of America’s whites losing their majority status. I didn’t buy this explanation at the time. I still think it is somewhere down in the low teens of possibility. And the spread of intermarriage is one hopeful defense against it. But it cannot be dismissed entirely and thus deserves a mention alongside the sunnier prospects.

America works as a multiethnic society precisely because in principle we believe that ethnicity is less important than what unites us. E pluribus unum. An alignment along largely ethnic lines would be potentially disastrous. Look at Yugoslavia or Nigeria or Northern Ireland or the collapse of the Austro-Hungarian empire or the current Middle East , such as Syria, for where that leads. Diversity can quickly turn into conflict in the wrong circumstances.

The melting pot made ethnicity less important in the past. A racial spoils system could enflame differences if the stakes - i.e. the whole future of the country - are as high as the liberal press claims.

I said before the election the left often prefers the romantic dream that turns to darkness. History offers many examples of instances where changing demographics produces resistance and conflict, not a liberal paradise. Liberals would be much better off emphasizing differences of ideas as the basis for political coalitions, not ethnicity or race. And everyone would be better off thinking about what is good for the country as a whole, not particular sectional interests.

 

 

Economic forecasts

We're looking at Nate Silver's The Signal and the Noise: Why So Many Predictions Fail-but Some Don't, starting here.

One other area which has experienced consistent failure is economic forecasting. I cite what Silver says here with a certain amount of glee. Of course, I know this as background information, but to see the hard facts marshalled together is striking. Take a survey economic forecasts in 2008, for instance.

As I mentioned, the economists in this survey thought that GDP would end up at about 2.4 percent in 2008, slightly below its long-term trend. This was a very bad forecast: GDP actually shrank by 3.3 percent once the financial crisis hit. What may be worse is that the economists were extremely confident in their bad prediction. They assigned only a 3 percent chance to the economy’s shrinking by any margin over the whole of 2008.15 And they gave it only about a 1-in-500 chance of shrinking by at least 2 percent, as it did.

Nor was this a once-off occurrence because of a freak once-in-a-lifetime crisis.

In fact, the actual value for GDP fell outside the economists’ prediction interval six times in eighteen years, or fully one-third of the time. Another study,18 which ran these numbers back to the beginnings of the Survey of Professional Forecasters in 1968, found even worse results: the actual figure for GDP fell outside the prediction interval almost half the time. There is almost no chance that the economists have simply been unlucky; they fundamentally overstate the reliability of their predictions.

Aggregate forecasts tend to be more reliable than individual forecasts, however. This has been bad news for in-house corporate economists, who were mostly eliminated in the 1990s. Bluechip or Consensus Forecasts are better.

My research into the Survey of Professional Forecasters suggests that these aggregate forecasts are about 20 percent more accurate than the typical individual’s forecast at predicting GDP, 10 percent better at predicting unemployment, and 30 percent better at predicting inflation. This property—group forecasts beat individual ones—has been found to be true in almost every field in which it has been studied.

Perhaps the new availability of computers made forecasters particularly overconfident in the 1960s and 1970s, he says - the age of the massive economic forecasting model. But ultimately you have to have some theoretical understanding or you will sink into mere data mining, he says.

The idea that a statistical model would be able to “solve” the problem of economic forecasting was somewhat in vogue during the 1970s and 1980s when computers came into wider use. But as was the case in other fields, like earthquake forecasting during that time period, improved technology did not cover for the lack of theoretical understanding about the economy; it only gave economists faster and more elaborate ways to mistake noise for a signal. Promising-seeming models failed badly at some point or another and were consigned to the dustbin.

Economics has inherent limitations on theory, however. One of the decisive intellectual impacts on me in college was learning about the Lucas Critique, which says people's behavior may change when policy changes, so you cannot rely on large-scale econometric relationships. I lost interest in econometrics and forecasting.

The economics profession has mostly responded to this problem by searching for policy-invariant microfoundations. It tries to model individial choice, far below the level of economic aggregates. In practice, this mostly entrenches naive rational-choice mathematical optimization even further.

A better answer to this is deeper knowledge of history. At least some people in the central banks note that we are fortunate that Ben Bernanke was an acknowledged expert in the history of the Great Depression, rather than, say, real business cycle models.

 

Signal, Noise and Prediction

I'm now going to turn to Nate Silver's new book, The Signal and the Noise: Why So Many Predictions Fail-but Some Don't. Silver is the well-known political forecaster who parlayed his blog FiveThirtyEight into a prominent spot in the New York Times.

I didn't expect much when I bought it. I thought it would be one of those "my quantitative model explains the universe" books (and investment funds) which are so tiresome and common. The world, and especially the markets, are filled with quants who think all you need is Mathematica and some back issues of Econometrica to explain everything. They are usually overconfident, expert on code rather than decisions,and tend to blow up spectacularly like LTCM given time.

Nothing could be further from the truth in this case. The book massively exceeded expectations and turns out to be a thoughtful, mature and reflective. It is consistent with much of my experience and thinking, but I still learned a lot of things I didn't know. It's also fluent and well-written. I'd recommend it without hesitation, and I'll look at it in some detail.

The crux of the book, from someone known for his number-crunching models, is that there is no such thing as objective data-driven models, at least in human affairs.

The numbers have no way of speaking for themselves. We speak for them. We imbue them with meaning. Like Caesar, we may construe them in self-serving ways that are detached from their objective reality. Data-driven predictions can succeed—and they can fail. It is when we deny our role in the process that the odds of failure rise. Before we demand more of our data, we need to demand more of ourselves.

The more information we have, the more we tend to screen out that which does not match our preconceptions. More information most often makes us narrower rather than wiser.

Alvin Toffler, writing in the book Future Shock in 1970, predicted some of the consequences of what he called “information overload.” He thought our defense mechanism would be to simplify the world in ways that confirmed our biases, even as the world itself was growing more diverse and more complex.

Information is no longer scarce, but much of it is not very useful.

Our biological instincts are not always very well adapted to the information-rich modern world. Unless we work actively to become aware of the biases we introduce, the returns to additional information may be minimal—or diminishing.

This does not mean we should just give up, or adopt lazy relativism. Instead, everything is approximate.

Some of you may be uncomfortable with a premise that I have been hinting at and will now state explicitly: we can never make perfectly objective predictions. They will always be tainted by our subjective point of view. But this book is emphatically against the nihilistic viewpoint that there is no objective truth. It asserts, rather, that a belief in the objective truth—and a commitment to pursuing it—is the first prerequisite of making better predictions. The forecaster’s next commitment is to realize that she perceives it imperfectly.

So what are the causes of failure to predict outcomes?

The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. We ignore the risks that are hardest to measure, even when they pose the greatest threats to our well-being. We make approximations and assumptions about the world that are much cruder than we realize. We abhor uncertainty, even when it is an irreducible part of the problem we are trying to solve.

Indeed, experts have a particular tendency to ignore threats to their expertise. The rating agencies, for example, did not think through the possibility that default risk of various CDOs and CDO tranches might not be independent and uncorrelated.

The possibility of a housing bubble, and that it might burst, thus represented a threat to the ratings agencies’ gravy train. Human beings have an extraordinary capacity to ignore risks that threaten their livelihood, as though this will make them go away.

Our expectations about the future are riddled with blind spots, as anyone who has ever really thought about the policy process or had to predict events for a living - and been held accountable for it - knows.

We'll look at some other aspects of the book in more detail.

 

Is US Economic Growth Over?

Here is something I'll have to look at (from an NYT article):

The American economy is running on empty. That's the hypothesis put forward by Robert J. Gordon, an economist at Northwestern University. Let's assume for a moment that he's right. The political consequences would be enormous.

In his widely discussed National Bureau of Economic Research paper, "Is U.S. Economic Growth Over?" Gordon predicts a dark future of "epochal decline in growth from the U.S. record of the last 150 years." The greatest innovations, Gordon argues, are behind us, with little prospect for transformative change along the lines of the three previous industrial revolutions:

It is pretty gloomy.

Over most of human history, in Gordon's view, the world had minimal economic growth, if it had any at all - and "there is no guarantee that growth will continue indefinitely." Gordon's paper suggests instead that "the rapid progress made over the past 250 years could well turn out to be a unique episode in human history."

 

An open access version of The Gordon article is here, although I haven't read it yet. It sound similar to Tyler Cowen's arguments.

 

Intellectual Property..and Theft

The NYT has a very interesting series on the impact of intellectual property disputes. The cost of litigation is becoming astronomical:

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

IP law is a mess, and it is holding back innovation - especially by small companies who cannot afford battalions of lawyers and lobbyists. I was talking about patent trolls here.

Copyright ls is just as much of a mess - for example, Google and publishers continue to fight over orphan copyright works, although they have apparently just settled terms for other uses.

There's a common theme here. Our basic intutions about property and property rights don't work very well for many kinds of intangible property. And much of the value in the economy is now intangible. Instead of owning defined parcels of land, this is more like an evolving ecosystem, like a coral reef, where interactions and recycling and reuse can be highly complex and interdependent.

At very least, patent and copyright terms ought to be getting shorter as change accelerated, not longer.

It isn't clear we do need such an elaborate patent system to incentivize innovation. MIT and public universities and NASA and the national labs and DARPA and the National Institutes of Health are churning out new innovations all the time, and that is just in the US. The fundamental long-teamwork is much more likely to be done this way.

In fact, the worst way through most of history to generate innovation has been to let huge corporations and organizations get monopolies, often at the expense of startups, disrupters and the less connected.

Much of the value in the Economy is increasingly nonrival and largely nonexcludable. An economy based on ideas and innovation has to work differently to one based on manufacturing trucks or toasters or life insurance. That's a fact. We have to get used to it.

 

 

Baumol's disease, now in a book

Here is a review of something I must read: William Baumol on healthcare costs. "Baumol's cost disease" is one of the primary challenges for productivity. It says industries which require large amounts of expensive labor (like education and healthcare) get steadily more expensive - and often migrate to the public sector. And of course rising healthcare costs is one of the primary problems of society, and the largest driver of fiscal costs. So this is likely a wonky but essential read which I will come back to.