Do the rich capture all the gains from economic growth?

Tuesday, November 13th, 2018

Do the rich capture all the gains from economic growth? Russ Roberts explains why it matters how you measure these things:

But the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. When they find little or no change, they conclude that the average American is making no progress.

But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress. There is immigration. There are large changes in the marriage rate over the period being examined. And there is economic mobility as people move up and down the economic ladder as their luck and opportunities fluctuate.

How important are these effects? One way to find out is to follow the same people over time. When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich.

Studies that use panel data — data that is generated from following the same people over time — consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns.

Some of the most important books Nick Szabo has read

Friday, November 9th, 2018

Nick Szabo shared a list of some of the most important books he’s read on Twitter:

  1. The Selfish Gene, by Richard Dawkins
  2. Metaphors We Live By, by George Lakoff and Mark Johnson
  3. The Wealth of Nations, by Adam Smith
  4. The Fatal Conceit, by F. A. Hayek

Wired to look for chances to earn money

Monday, October 29th, 2018

Americans have a blind spot when it comes to saving:

Americans seem to excel at working. But saving? Not so much. As of last year, the median American household had only $1,100 saved for retirement, according to an analysis from the Federal Reserve Bank of St. Louis.

While many factors likely contribute to the poor U.S. savings rate, a recent Cornell University study published in the journal Nature Communications pointed to another factor that may be at least partially to blame: our brains. More specifically, the researchers found that our brains may be wired to look for chances to earn money — but fail to recognize chances to save, even when they are right in front of us.

The study measured something we can’t usually measure ourselves: how much attention we pay to earning and saving opportunities. First, participants had to identify colors shown quickly on a computer: one “earning” color that let them gain 30 cents, a neutral color that had no monetary effect and one “saving” color that let them avoid losing 30 cents.

When the “earning” color was shown, a staggering 87.5% of participants identified it more quickly and accurately than when the “saving” color was shown. Even in trials that framed “saving” as earnings that would come slightly later, participants were still better at immediate earning.

In the study’s second part, participants had to identify which color appeared first. Three out of four said they saw the “earning” color appear first — when in fact, the “saving” color did. This suggests our “earning” bias may even be strong enough to warp our perception of time.

How precision engineers created the modern world

Wednesday, October 24th, 2018

Simon Winchester’s The Perfectionists explains how precision engineers created the modern world:

The story of precision begins with metal.

And the story begins, according to Winchester, at a specific place and time: North Wales, “on a cool May day in 1776.” The Age of Steam was getting underway. So was the Industrial Revolution — almost but not quite the same thing. In Scotland, James Watt was designing a new engine to pump water by means of the power of steam. In England, John “Iron-Mad” Wilkinson was improving the manufacture of cannons, which were prone to exploding, with notorious consequences for the sailors manning the gun decks of the navy’s ships. Rather than casting cannons as hollow tubes, Wilkinson invented a machine that took solid blocks of iron and bored cylindrical holes into them: straight and precise, one after another, each cannon identical to the last. His boring machine, which he patented, made him a rich man.

Watt, meanwhile, had patented his steam engine, a giant machine, tall as a house, at its heart a four-foot-wide cylinder in which blasts of steam forced a piston up and down. His first engines were hugely powerful and yet frustratingly inefficient. They leaked. Steam gushed everywhere. Winchester, a master of detail, lists the ways the inventor tried to plug the gaps between cylinder and piston: rubber, linseed oil–soaked leather, paste of soaked paper and flour, corkboard shims, and half-dried horse dung — until finally John Wilkinson came along. He wanted a Watt engine to power one of his bellows. He saw the problem and had the solution ready-made. He could bore steam-engine cylinders from solid iron just as he had naval cannons, and on a larger scale. He made a massive boring tool of ultrahard iron and, with huge iron rods and iron sleighs and chains and blocks and “searing heat and grinding din,” achieved a cylinder, four feet in diameter, which as Watt later wrote “does not err the thickness of an old shilling at any part.”

By “an old shilling” he meant a tenth of an inch, which is a reminder that measurement itself — the science and the terminology — was in its infancy. An engineer today would say a tolerance of 0.1 inches.

James Watt’s fame eclipses Iron-Mad Wilkinson’s, but it is Wilkinson’s precision that enabled Watt’s steam engine to power pumps and mills and factories all over England, igniting the Industrial Revolution. As much as the machinery itself, the discovery of tolerance is crucial to this story. The tolerance is the clearance between, in this case, cylinder and piston. It is a specification on which an engineer (and a customer) can rely. It is the foundational concept for the world of increasing precision. When machine parts could be made to a tolerance of one tenth of an inch, soon finer tolerances would be possible: a hundredth of an inch, a thousandth, a ten-thousandth, and less.

Watt’s invention was a machine. Wilkinson’s was a machine tool: a machine for making machines and their parts. More and better machines followed, some so basic that we barely think of them as machines: toilets, locks, pulley blocks for sailing ships, muskets. The history of machinery has been written before, of course, as has the history of industrialization. These can be histories of science or economics. By focusing instead on the arrow of increasing precision, Winchester is, in effect, walking us around a familiar object to expose an unfamiliar perspective.

Can precision really be a creation of the industrial world? The word comes from Latin by way of middle French, but first it meant “cutting off” or “trimming.” The sense of exactitude comes later. It seems incredible that the ancients lacked this concept, so pervasive in modern thinking, but they measured time with sundials and sandglasses, and they counted space with hands and feet, and the “stone” has survived into modern Britain as a measure of weight.

Any assessment of ancient technology has to include, however, a single extraordinary discovery — an archaeological oddball the size of a toaster, named the “Antikythera mechanism,” after the island near Crete where Greek sponge divers recovered it in 1900 from a shipwreck 150 feet deep. Archaeologists were astonished to find, inside a shell of wood and bronze dated to the first or second century BC, a complex clockwork machine comprising at least thirty bronze dials and gears with intricate meshing teeth. In the annals of archaeology, it’s a complete outlier. It displays a mechanical complexity otherwise unknown in the ancient world and not matched again until fourteenth-century Europe. To call it “clockwork” is an anachronism: clocks came much later. Yet the gears seem to have been made — by hand — to a tolerance of a few tenths of a millimeter.

After a century of investigation and speculation, scientists have settled on the view that the Antikythera mechanism was an analog computer, intended to demonstrate astronomical cycles. Dials seem to represent the sun, the moon, and the five planets then known. It might have been able to predict eclipses of the moon. Where planetary motion is concerned, however, it seems to have been highly flawed. The engineering is better than the underlying astronomy. As Winchester notes, the Antikythera mechanism represents a device that is amazingly precise, yet not very accurate.

What makes precision a feature of the modern world is the transition from craftsmanship to mass production. The genius of machine tools — as opposed to mere machines — lies in their repeatability. Artisans of shoes or tables or even clocks can make things exquisite and precise, “but their precision was very much for the few,” Winchester writes. “It was only when precision was created for the many that precision as a concept began to have the profound impact on society as a whole that it does today.” That was John Wilkinson’s achievement in 1776: “the first construction possessed of a degree of real and reproducible mechanical precision — precision that was measurable, recordable, repeatable.”

Perhaps the canonical machine tool — surely the oldest — is the lathe, a turning device for cutting and shaping table legs, gun barrels, and screws. Wooden lathes date back to ancient China and Egypt. However, metal lathes, enormous and powerful, turning out metal machine parts, did not come into their own until the end of the eighteenth century. You can explain that in terms of available energy: water wheels and steam engines. Or you can explain it as Winchester does, in terms of precision. The British inventor Henry Maudslay made the first successful screw-cutting lathe in 1800, and to Winchester the crucial part of his invention is a device known as a slide rest: the device that holds the cutting tools and adjusts their position as delicately as possible, with the help of gears. Maudslay’s lathe, described by one historian as “the mother tool of the industrial age,” achieved a tolerance of one ten-thousandth of an inch. Metal screws and other pieces could be turned out by the hundreds and then the thousands, every one exactly the same.

Because they were replicable, they were interchangeable. Because they were interchangeable, they made possible a world of mass production and the warehousing and distribution of component parts. A French gunsmith, Honoré Blanc, is credited with showing in 1785 that flintlocks for muskets could be made with interchangeable parts. Before an audience, he disassembled twenty-five flintlocks into twenty-five frizzle springs, twenty-five face plates, twenty-five bridles, and twenty-five pans, randomly shuffled the pieces, and then rebuilt “out of this confusion of components” twenty-five new locks. Particularly impressed was the American minister to France, Thomas Jefferson, who posted by packet ship a letter explaining the new method for the benefit of Congress:

It consists in the making every part of them so exactly alike that what belongs to any one, may be used for every other musket in the magazine…. I put several together myself taking pieces at hazard as they came to hand, and they fitted in the most perfect manner. The advantages of this, when arms need repair, are evident.

As it was, when a musket broke down in the field, a soldier needed to find a blacksmith.

Replication and standardization are so hard-wired into our world that we forget how the unstandardized world functioned. A Massachusetts inventor named Thomas Blanchard in 1817 created a lathe that made wooden lasts for shoes. Cobblers still made the shoes, but now the sizes could be systematized. “Prior to that,” says Winchester, “shoes were offered up in barrels, at random. A customer shuffled through the barrel until finding a shoe that fit, more or less comfortably.” Before long, Blanchard’s lathe was making standardized gun stocks at the Springfield Armory and then at its successor, the Harpers Ferry Armory, which began turning out muskets and rifles by the thousands on machines powered by water turbines at the convergence of the Shenandoah and Potomac Rivers. “These were the first truly mechanically produced production-line objects made anywhere,” Winchester writes. “They were machine-made in their entirety, ‘lock, stock, and barrel.’” It is perhaps no surprise that the military played from the first, and continues to play, a leading and deadly part in the development of precision-based technologies and methods.

Why Paul Romer and William Nordhaus won the Nobel Prize in economics

Monday, October 8th, 2018

Tyler Cowen explains why Paul Romer won the Nobel Prize in economics and why William Nordhaus won the Nobel Prize in economics:

These are excellent Nobel Prize selections, Romer for economic growth and Nordhaus for environmental economics. The two picks are brought together by the emphasis on wealth, the true nature of wealth, and how nations and societies fare at the macro level. These are two highly relevant picks. Think of Romer as having outlined the logic behind how ideas leverage productivity into ongoing spurts of growth, as for instance we have seen in Silicon Valley. Think of Nordhaus as explaining how economic growth interacts with the value of the environment.

The Lazy Goldmaker is Azeroth’s most famous financial guru

Thursday, September 13th, 2018

The Lazy Goldmaker is the World of Warcraft’s financial guru:

In August, shortly after the release of World of Warcraft’s seventh expansion, Battle For Azeroth, The Lazy Goldmaker posted one of his meticulous spreadsheets to the WoW economy subreddit. It contains a set of expertly appraised auction house margins for all of Azeroth’s many tradeskills—blacksmithed weapons, stat-buffing cooking recipes, excavated gems.

[...]

The Goldmaker himself chooses to remain anonymous, but he does disclose that he is 30 years old and Norwegian. It was during the Burning Crusade, more than a decade ago, that he first became interested in the economic side of Blizzard’s immortal MMO, and he’s been operating The Lazy Goldmaker blog—where he posts columns, analysis, and other musings—since 2016, shortly after the launch of the Legion expansion.

[...]

World of Warcraft lets The Goldmaker experiment—he’ll spend hours tinkering with the untapped capital of, say, the profit yields of the new Inscription recipes—and he’ll report back on his blog detailing each of his successes and failures, much to the glee of his international bulwark of disciples. After all, it’s not like he’s risking anything truly disastrous or life-changing. As the Goldmaker reiterates to me, we’re talking about the currency of elves, dwarves, and orcs in a computer game. He can afford to be a little cavalier with his investments, because “it’s just pixels at the end of the day.”

“I’m always looking for markets that players aren’t focusing on,” he says. “Because there are only so many people in the gold-making scene, so there’s always going to be something that players aren’t looking at.”

[...]

You can read the fundamentals of how The Goldmaker breaks down his economic principles in a beginner’s guide he posted to his website this March. “World of Warcraft is a game about constantly improving your character,” he writes, and as a financial opportunist, it’s your job to provide avenues to either help those characters boost their power levels or beautify their models. So, as an upstart auction house shark, you’ll learn to farm efficient materials in Azeroth, target specific high-value recipes that you can turn around quickly, and buy out supplies when they’re abundant and repost them when they’re scarce.

Doomsday prepping for less crazy folk

Friday, August 24th, 2018

Michal Zalewski discusses doomsday prepping for less crazy folk:

The prepper culture begs to be taken with a grain of salt. In a sense, it has all the makings of a doomsday cult: a tribe of unkempt misfits who hoard gold bullion, study herbalism, and preach about the imminent collapse of our society.

Today, we see such worries as absurd. It’s not that life-altering disasters are rare: every year, we hear about millions of people displaced by wildfires, earthquakes, hurricanes, or floods. Heck, not a decade goes by without at least one first-class democracy lapsing into armed conflict or fiscal disarray. But having grown up in a period of unprecedented prosperity and calm, we take our way of life for granted – and find it difficult to believe that an episode of bad weather or a currency crisis could destroy almost everything we worked for to date.

I suspect that we dismiss such hazards not only because they seem surreal, but also because worrying about them makes us feel helpless and lost. What’s more, we follow the same instincts to tune out far more pedestrian and avoidable risks; for example, most of us don’t plan ahead for losing a job, for dealing with a week-long water outage, or for surviving the night if our home goes up in smoke.

For many, the singular strategy for dealing with such dangers is to pray for the government to bail us out. But no matter if our elected officials prefer to school us with passages from Milton Friedman or from Thomas Piketty, the hard truth is that no state can provide a robust safety net for all of life’s likely contingencies; in most places, government-run social programs are severely deficient in funding, in efficiency, and in scope. Large-scale disasters pit us against even worse odds; from New Orleans in 2005 to Fukushima in 2011, there are countless stories of people left behind due to political dysfunction, poorly allocated resources, or lost paperwork.

And so, the purpose of this guide is to combat the mindset of learned helplessness by promoting simple, level-headed, personal preparedness techniques that are easy to implement, don’t cost much, and will probably help you cope with whatever life throws your way.

Has the United States now arrived at the brink of a veritable civil war?

Wednesday, August 15th, 2018

How, when, and why, Victor Davis Hanson asks, has the United States now arrived at the brink of a veritable civil war?

Globalization

Globalization had an unfortunate effect of undermining national unity. It created new iconic billionaires in high tech and finance, and their subsidiaries of coastal elites, while hollowing out the muscular jobs largely in the American interior.

Ideologies and apologies accumulated to justify the new divide. In a reversal of cause and effect, losers, crazies, clingers, American “East Germans,” and deplorables themselves were blamed for driving industries out of their neighborhoods (as if the characters out of Duck Dynasty or Ax Men turned off potential employers). Or, more charitably to the elites, the muscular classes were too racist, xenophobic, or dense to get with the globalist agenda, and deserved the ostracism and isolation they suffered from the new “world is flat” community. London and New York shared far more cultural affinities than did New York and Salt Lake City.

Meanwhile, the naturally progressive, more enlightened, and certainly cooler and hipper transcended their parents’ parochialism and therefore plugged in properly to the global project. And they felt that they were rightly compensated for both their talent and their ideological commitment to building a better post-American, globalized world.

One cultural artifact was that as our techies and financiers became rich, as did those who engaged in electric paper across time and space (lawyers, academics, insurers, investors, bankers, bureaucratic managers), the value of muscularity and the trades was deprecated. That was a strange development. After all, prestige cars, kitchen upgrades, gentrified home remodels, and niche food were never more in demand by the new elite. But who exactly laid the tile, put the engine inside the cars, grew the arugula, or put slate on the new hip roof?

In this same era, a series of global financial shocks, from the dot-com bust to the more radical 2008 near–financial meltdown, reflected a radical ongoing restructuring in American middle-class life, characterized by stagnant net income, family disintegration, and eroding consumer confidence. No longer were youth so ready to marry in their early twenties, buy a home, and raise a family of four or five. Compensatory ideology made the necessary adjustments to explain the economic doldrums and began to characterize what was impossible first as undesirable and later as near toxic. Pajama Boy sipping hot chocolate in his jammies, and the government-subsidized Life of Julia profile, became our new American Gothic.

High Tech

The mass production of cheap consumer goods, most assembled abroad, redefined wealth or, rather, disguised poverty. Suddenly the lower middle classes and the poor had in their palms the telecommunications power of the Pentagon of the 1970s, the computing force of IBM in the 1980s, and the entertainment diversity of the rich of the 1990s. They could purchase big screens for a fraction of what their grandparents paid for black-and-white televisions and with a computer be entertained just as well cocooning in their basement as by going out to a concert, movie, or football game.

The Campus

Higher education surely helped split the country in two. In the 1980s, the universities embraced two antithetical agendas, both costly and reliant on borrowed money. On the one hand, campuses competed for scarcer students by styling themselves as Club Med–type resorts with costly upscale dorms, tony student-union centers, lavish gyms, and an array of in loco parentis social services. The net effect was to make colleges responsible not so much for education, but more for shielding now-fragile youth from the supposed reactionary forces that would buffet them after graduation.

An entire generation of students left college with record debt, mostly ignorant of the skills necessary to read, write, and argue effectively, lacking a general body of shared knowledge — and angry. They were often arrogant in their determination to actualize the ideologies of their professors in the real world. A generation ignorant, arrogant, and poor is a prescription for social volatility.

Illegal Immigration

Immigration was recalibrated hand-in-glove by progressives who wanted a new demographic to vote for leftist politicians and by Chamber of Commerce conservatives who wished an unlimited pool of cheap unskilled labor. The result was waves of illegal, non-diverse immigrants who arrived at precisely the moment when the old melting pot was under cultural assault.

The Obama Project

We forget especially the role of Barack Obama. He ran as a Biden Democrat renouncing gay marriage, saying, “I believe marriage is between a man and a woman. I am not in favor of gay marriage.” Then he “evolved” on the question and created a climate in which to agree with this position could get one fired. He promised to close the border and reduce illegal immigration: “We will try to do more to speed the deportation of illegal aliens who are arrested for crimes, to better identify illegal aliens in the workplace. We are a nation of immigrants. But we are also a nation of laws.” Then he institutionalized the idea that to agree with that now-abandoned agenda was a career-ender.

Read the whole thing. (I edited down each point.)

Organisation is suppression

Sunday, August 12th, 2018

Nick Land argues that organisation is suppression in a 1997 Wired UK interview:

According to Dr. Nick Land, lecturer in Continental Philosophy at the University of Warwick (a title that he hates), pretty much everything the Western tradition has come up with in the way of thinking about itself and the world around it is not only wrong but bad. Using the work of French writers Gilles Deleuze and Felix Guattari as a jumping off point, Land substitutes a vision of a world of flux forever constructing and reconstructing itself via the operations of countless “machinic processes” for the models supplied by the linear, rationalist thought of the classical, modernist and postmodernist traditions. He draws parallels between the processes of late twentieth century capitalism, fascism, and schizophrenia, and strongly resists attempts to categorise his work, ridiculing the notion that there is even such a thing as “philosophy”. He has no time for the academic consensus that you have to produce a turgid tome every two years to prove that you are “serious”. At present, his favoured medium is multimedia performance, and he works closely with arts collective Orphan Drift.

James Flint: Why is it that much of the content on the Internet, this supposedly amazingly democratic, anarchic forum, is becoming dull and corporate and organised?

Nick Land: Your question suggests that there’s some pre-existing social pool of liberatory, revolutionary, emancipatory creative potential that could be expected to spontaneously express itself as soon as it had an opportunity to do so. But there is no such intrinsic power of innovation latent in the human organism that’s just waiting to bounce out onto the web. So the question really is what are the assemblages that are emerging? And correspondingly to what extent are distributed systems becoming operative as such?

JF: So how do systems which are initially freeform and distributed give way to centralised power structures?

NL: You have to understand that organisation involves subordinating low level units to some higher level functional program. In the most extreme cases, like in biological organisms, every cell is defunctionalised, turned off, except for that one specialised function that it is allocated by the organic totality. And hence the preponderant part of its potential is deactivated in the interests of some higher level unity. That’s why the more organised things get, the less interesting their behaviour becomes — “interesting” simply meaning here how freely they explore a range of possible behaviours, or how “nomadic” they are.

JF: I take it from that that you are not as keen on the idea of “self organsiation” as some thinkers.

NL: Organisation is suppression. It’s more accurate to say that systems which avoid self-organisation whilst maintaining trajectories of productive innovation end up parasitically inhabited by organisms of all kinds, whether those organism are biological organisms, corporations or state systems. The history of life on this planet right through to Microsoft is of the successive suppression of distributed, innovated systems.

JF: Can you give me an example?

NL: Well, first of all one has autocatalytic chemical systems that are subject to code control by RNA. When RNA begins to complicate enough to start exhibiting various kinds of lateral interference and experimental deviations, it becomes overcoded by DNA. The absolute crucial event in the whole history of the planet is the point at which the earth’s bacterial life system — which is very loosely code controlled, comparatively — is subjected to exterminatory gassing by oxygen-emitting, massively highly structured securo-maniac metazoan organisms. Many of the bacteria disappear except insofar as they are captured as productive subcomponents of highly organised, nucleated, concentrational systems which are now what dominate all life on the planet and have done for five hundred million years.

JF: So how would you interpret the classical picture of evolution as a tree-like structure?

NL: The bacterial net is successively suppressed by levels of organisation, tiers of control that have a tree-like structure. But that tree-like structure is not at all inherent, it’s actually produced by organisation. It’s incredibly similar to the relation between corporations and markets, in the sense that markets are potentially open ended, distributed transaction systems which are subjected to regularisation, hierarchical structuralisation, specialisation and concentration by the corporate structures that superimpose themselves upon them.

JF: Might the widespread use of computers and the net challenge these structures?

NL: The thing about the potentialities of massively distributed computation capacity is that they disperse productive potential. And there’s a certain sense in which the personal computer introduces a fundamental break in the traditional structure of investment by being simultaneously a piece of consumer electronics and a piece of productive apparatus. But although this is the case, the old structures are being artificially maintained.

JF: How?

NL: Buying a personal computer is treated as productive investment if it is done by a corporate entity and as a piece of personal consumption if it is done by dis-integrated [sic] consumers. And presumably this kind of trompe d’oeil is getting results, because the intersection between software, broadcast media and telecommunications is at the moment in an absolute orgiastic state of capital concentration. And clearly the key actors in this sector think that their strategies are based upon some viable avenue of continued advantage — a continuation of the modernist situation of economies of scale, if you like. Their picture is clearly not one of disintegration into small scale horizontal agents.

JF: But can’t the net itself help us overcome these illusions, through increasingly universal access to knowledge and communication?

NL: Certainly the great potential in the technical infrastructure of the net is the telecoms base rather than the broadcasting base. This is not a very original thought, but nevertheless it seems of crucial importance. Capitalist and state organisations have an absolutely immense investment in disabling the telecoms dynamics of the forthcoming digital media system. But that doesn’t mean that much has yet been done that is particularly exciting with this telecoms infrastructure. The more of it the better, the more that you have a multi-switched high bandwidth communications oriented digital system rather than a one to many broadcast oriented, media-production-media-consumption oriented system, the more chance there is of actually eliciting innovative behaviour out of innovative systems. But I’d be very cynical with regard to the extent to which we have seen any of that yet.

Extraordinarily pessimistic, and yet still extraordinarily motivational

Saturday, August 11th, 2018

Peter Thiel speaks to Die Weltwoche, in English — after beginning the conversation in German with an American accent:

At the moment, Silicon Valley still looks all-powerful.

The big question is: Will the future of the computer age be decentralized or centralized? Back in the 60s, you had this Star Trek idea of an IBM computer running a planet for thousands of years, where people were happy but unfree. Today, again we are thinking that it is going to be centralized: Big companies, big governments, surveillance states like China. When we started Paypal in 1999, it was exactly the opposite: This vision of a libertarian, anarchistic internet. History tells me that the pendulum has swung back and forth. So, today I would bet on decentralization and on more privacy. I don’t think we are at the end of history and it’s just going to end in the world surveillance state.

What has become the problem with Silicon Valley?

One of the paradoxes of Silicon Valley is that this internet technology revolution is supposed to get rid of the tyranny of place and geography. And yet, it was all happening in one place. There is, however, always a tipping point with network effects. At the beginning, they are very positive, but at some point they can become negative. In economic terms, they become negative when the costs get too high. If you have to pay 2000 dollars a month for a one-bedroom apartment in San Francisco, maybe that is a sign of the boom. But when it is 4000 dollars a month – with a city government where the police don’t work, the roads don’t work, the schools don’t work – 4000 dollars is just a very high tax, in effect. There is also a cultural component: At one point, the wisdom of crowds tips into the madness of crowds – and you end up with a sort of conformity, lemming-like behavior. It actually becomes a somewhat less creative place.

You label yourself a “contrarian”. How did you become one? How does one become a contrarian?

It is a label that has been given to me, not one that I give normally to myself. I don’t think a contrarian per se is the right thing to be. A pure contrarian just attaches a minus sign to whatever the crowd thinks. I don’t think it should be as simple as that. What I think is important for people is to try to think very hard for oneself. But yes, I do deeply mistrust all these kinds of almost hypnotic mass and crowd phenomena and I think they happen to a disturbing degree.

Why do they happen in a supposedly enlightened society?

The advanced technological civilization of the early 21st century is a complicated world where it is not possible for anybody to think through everything for themselves. You cannot be a polymath in quite the way people were in the 18th century enlightenments. You cannot be like Goethe. So there is some need to listen to experts, to defer to other people. And then, there is always the danger of that going too far and people not thinking critically. This happens in spades in Silicon Valley. There is certainly something about it that made it very prone to the dotcom bubble in the nineties or to the cleantech bubble in the last decade.

Tell us about how your support for Donald Trump for president of the United States was received in the Silicon Valley.

That was quite striking. My support for Donald Trump was, on some level, the least contrarian thing I have ever done. If it is half the country, it cannot be that contrarian. And yet, in the Silicon Valley context it has felt extraordinarily contrarian. It is not that politics is the most important thing. I think there are many things that are much more important than politics: Science is more important, technology is more important, philosophy, religion… We normally think that political correctness is literally about politics. But politics is sort of a natural place to start. If you cannot even have differences of opinion in politics, that’s a sign that things are very unhealthy.

What was unique about the Trump campaign?

Republican candidates have always been way too glibly optimistic about everything. I’ve thought for many years that it was critical for the Republicans to somehow run a more pessimistic candidate just because that was a more honest description of what was going on. It is very hard to know how to do that because if you are too pessimistic, you demotivate people: If everything is just going down the drain, no point even voting for me. Somehow, the genius of Trump was that it was extraordinarily pessimistic, and yet still extraordinarily motivational. The slogan “Make America Great Again”, the most pessimistic slogan of any presidential candidate in a hundred years: The country used to be great, it is no longer great. That is a shocking, shocking statement!

Another issue that is debated very controversially is Trump’s trade policy. People are shocked by his imposition of tariffs.

At the center of this is the question with China. The US exports something like 100 bn a year to China, we import 475 bn. What’s extraordinary, is that if we had a globalizing world, we would actually expect the reverse to hold: you would expect the US to have trade surpluses with China and current account surpluses because we would expect that there is a higher return in China because it is a faster growing country than the US. This is what it looked, let’s say, in 1900, when Great Britain had a trade surplus of 2 percent and a current account surplus of 4 percent of GDP. And the extra capital was invested in Argentinean railroads or Russian bonds.

The fact that the US does not have a surplus, that actually it has a massive deficit, tells you that something is completely wrong with the standard globalization picture that we have. It is sort of like: Chinese peasants are saving money and it is flowing uphill into low-return investments in the US and bonds in Europe with negative interest rates. There is something completely crazy about that dynamic.

What’s your view on Switzerland?

Switzerland is an extraordinarily well functioning country. I don’t like the neighborhood it is in, but it is really remarkable. If you compare Switzerland with Austria or Scandinavia, human capital is equally good but the per capita income in Switzerland is 50 to 100 percent higher. It does tell you that there is something that people are doing that is dramatically better. The question is whether its cities are big enough. If you are a talented young person: Do you move to Geneva or do you move to London? It was good if Switzerland had a somewhat better answer to that sort of question. But as I stated at the beginning, I think the technology will be more decentralized and so I think what has been a limitation for Switzerland will be much less going forward.

Are you jealous that you didn’t invent Bitcoin?

It is hard to be jealous of something that you weren’t remotely capable of doing. I have to acknowledge I would never come up with anything like that. So I can’t even be jealous. I was very interested in all these virtual currencies in the late 90s. We started Paypal thinking about that, but at the end it was a payment system for existing fiat money. Somehow, that experience weirdly primed me to underestimate Bitcoin early on. It was on the radar in 2011 and there were people telling me I should buy it, and we didn’t really get involved until 2014. When you have experiences and you learn things, it is often very dangerous and my experience in the late 90s was that cryptocurrencies didn’t work. And it was largely correct, but you always have to be open to think about it.

(Those are just some of the questions and answers.)

What would the decline of America look like?

Tuesday, July 31st, 2018

So, Tyler Cowen asks, what would the decline of America look like?

In recent years, the underlying rate of productivity growth often has been about 1 percent, and rates of economic growth are not even half of what they used to be. Meanwhile, America will have to increase taxes or reduce spending by about $2,200 per taxpayer per year to keep the national debt-to-GDP ratio from rising ever higher, and that figure predates the Trump tax cuts. To fund that shortfall, the U.S. will cut back on infrastructure maintenance. At least one-third of this country will end up looking like — forgive the colloquial phrase — “a dump.” The racial wealth gap will not be narrowed.

Aging and entitlements will force the president, whether Democratic or Republican, to look for a mix of spending cuts and tax increases. The spending cuts will diminish the range of the military, and the tax hikes will ensure that economic growth doesn’t pick up. The integrity of Medicare and Social Security will be (mostly) protected, but the U.S. will lose the ability to project power around the globe.

Over a period of less than five years, China will retake Taiwan and also bring much of East and Southeast Asia into a much tighter sphere of influence. Turkey and Saudi Arabia will build nuclear weapons and become dominant players in their regions. Russia will continue to nibble at the borders of neighboring states, including Latvia and Estonia, and NATO will lose its credibility, except for a few bilateral relationships, such as with the U.K. Parts of Eastern Europe will return to fascism. NAFTA will exist on paper, but it will be under perpetual renegotiation and hemispheric relations will fray.

One area of major technological advance will be drugs, and I don’t mean beneficial pharmaceuticals. The opioid crisis eventually will subside, but new waves of ever more powerful addictive substances will arise. Easy home lab production will make interdiction at the border fruitless. More than 80,000 Americans already die from alcohol every year, and more than 60,000 from drug overdoses. Total losses from addiction will rise.

Other technologies will indeed provide a bounty, but not all of it will be positive. Artificial intelligence and facial and gait surveillance will lead to unprecedented invasions of privacy, causing another 1 or 2 percent of Americans to decide to “live off the grid.” The impact of assassin drones will be curbed — by filling the skies with police drones. Public crimes will plummet, but public spaces in major cities will have a depressing sameness, due to the near-total absence of spontaneous behavior. Advances in recording technologies will make most conversations in public, and many in private, remarkably bland.

Driverless cars will be “the next big thing,” but they’ll make roads more crowded. The elderly will insist on their driverless car rights, and defeat economists’ proposals for new congestion charges. Americans will spend another hour a day in their cars, although texting and watching TV, rather than driving.

The very worst fears about climate change won’t come true. But a nagging succession of storms, plus required adjustments along the coasts to accommodate a rise in sea level, will eat up about 0.5 percent worth of economic growth. So when America does occasionally approach 3 percent growth, in terms of living standards it may feel more like 2 percent.

One of his “petty gripes” looks familiar:

Due to the limited selection on Netflix streaming, fewer and fewer people will watch the great movies of the past, thereby neutering the durability of the 20th century’s greatest art form. And live performances of classical music — another of the West’s most significant and beautiful achievements — will cease to be regular in all but a few major U.S. cities.

It starts with Fibonacci

Monday, July 30th, 2018

If you ever go to a Robeco presentation, Eric Falkenstein says, be sure to hit them up for their Concise Financial History of Europe:

It starts with Fibonacci introducing the Arabic number system in 1202, but interestingly the Florentine bankers prevented anything but Roman numerals as of 1299, and the Medici’s didn’t adopt Arabic numerals until 1500.

The Florentine bankers Bardi, Peruzzi, and Acciaiuoli, who prospered from 1300 to 1340, left a lot of documentation about their business. The Medicis then dominated from 1397–1494, followed by the Fuggers, and then the Rothschilds from 1800-1900. Interestingly, the Rothschild patriarch created the perfect family business, putting his five sons in key cities throughout Europe, allowing them to arbitrage the different exchange rates common to markets that are not fully integrated. Last year Bitcoin often traded at prices 5% higher in Korea, but it is difficult to move money in and out of Korea. The only way to arb this requires a non-formal relationship with someone in Korea, like a brother. You then buy in the US while your brother sells there, settling when you meet for a holiday.

Jan notes the rise of finance from Northern Italy, to Bruges, then Antwerp (1500-1550), and then Amsterdam. As the Dutch East India company was the first traded stock (1602) and prospered throughout the 17th century, Amsterdam was well situated. Amsterdam also reduced the uncertainty caused by the many coins and their various levels of debasement by requiring every transaction above 600 guilders to go through the Bank of Amsterdam, which kept a 100% reserve ratio and cleaned up the system by melting down ‘bad’ coins.

The English are fond of deprecating the Dutch — Dutch Uncle, courage, date — but they really owe the Dutch quite a bit. The financial center of Amsterdam literally moved to London around 1680, as when Dutch stadtholder William of Orange took over England via the Glorious Revolution in 1688, it gave them not only a Bill of Rights that limited monarchical power, it also created the Bank of England, tradable bonds, and an active London stock market. The start of the Industrial Revolution is often dated around 1750 centered in London, and surely it would have taken a lot longer without those innovations.

There was a simple way to get around the Catholic prohibition on interest. The 14th-century Florentine bankers simply used different FX rates on contracts. As FX rates could fluctuate the bill was not considered a loan and so not usury. Explicit loans were also available, but they would have been more like ‘payday’ lending today, a business dominated by two outsider groups: Jews who could charge interest to non-Jews, and pawnbrokers nicknamed Lombards, whose name underlies the ‘Lombard Streets’ found in many financial districts.

Poor spending habits explain the persistence of the wealth gap

Sunday, July 22nd, 2018

There is arguably no racial disparity more striking than the wealth gap, Coleman Hughes argues:

While the median white household earns just 65 percent more income than its black counterpart, its net worth is fully ten times as high. And, unlike income, which individuals earn in their own lifetimes, wealth accrues over generations, and whites are more than three times as likely as blacks to inherit money from their families. In the public debate on racial inequality, the wealth gap is among the sharpest arrows in the progressive quiver.

[...]

Although it is true that the median income of white men more than tripled between 1939 and 1960 (rising from 1,112 dollars to 5,137 dollars), the median income of black men more than quintupled (rising from 460 dollars to 3,075 dollars).9 Black women, too, saw their incomes grow at a faster rate than white women over the same timespan.10 Baradaran makes the same mistake in her description of life for blacks in the 1940s and 50s: “poverty led to institutional breakdown, which led to more poverty.”11 But between 1940 and 1960 the black poverty rate fell from 87 percent to 47 percent, before any significant civil rights gains were made.12

[...]

If wealth differences were largely explained by America’s history of favoring certain groups over others, then it would be hard to explain why Asian-Americans, who were never favored, are on track to become wealthier than whites.

Nor can historical racism explain wealth disparities between groups of the same race. A 2015 survey of wealth in Boston found that the median black household had only 8 dollars of wealth. Newsweek reported this fact under the heading “Racism in Boston.” But the 8 dollar figure only pertained to black Bostonians of American ancestry; black Bostonians of Caribbean ancestry had 12,000 dollars of wealth, despite having identical rates of college graduation, only slightly higher incomes, and being equally black in the same city.

Similar disparities emerge when people are grouped by religion. A 2003 study found that Jewish households had a 7-to-1 wealth advantage over Conservative Protestant households, despite the fact that Protestants have been favored over Jews for most of American history. Because facts like these discredit the assumption that government favoritism drives wealth accrual, they don’t make it into the progressive narrative. When all the facts are included, the story changes: wealth is not handed from the top down. It is produced by a bottom-up process involving millions of individuals bringing their skills, habits, and knowledge — attributes which vary from group to group — to bear on valuable tasks.

[...]

No element of culture harms black wealth accrual more directly than spending patterns. Nielsen, one of the world’s leading market research firms, keeps extensive data on American consumer behavior, broken down demographically. A 2017 Nielsen report found that, compared to white women, black women were 14 percent more likely to own a luxury vehicle, 16 percent more likely to purchase costume jewelry, and 9 percent more likely to purchase fine jewelry. A similar Nielsen report from 2013 found that, while only 62 percent of all Americans owned a smartphone, 71 percent of blacks owned one. Moreover, all of these spending differences were unconditional on wealth and income.

To what extent do poor spending habits explain the persistence of the wealth gap? Economists at the University of Chicago and the University of Pennsylvania asked this question after analyzing 16 years of nationally representative data from the Consumer Expenditure Survey. Consistent with the Nielsen data, they found that blacks with comparable incomes to whites spent 17 percent less on education, and 32 percent more (an extra $2300 per year in 2005 dollars) on ‘visible goods’ — defined as cars, jewelry, and clothes. What’s more, “after controlling for visible spending,” they concluded that the “wealth gap between Blacks and Whites, conditional on permanent income, declines by 50 percent.” To be clear, that 50 percent figure doesn’t pertain to the total wealth gap, but to the proportion of the gap that remains after income is taken into account — which was 40 percent. The upshot: the fact that blacks spent more on cars, jewelry, and clothes explained fully 20 percent of the total racial wealth gap.

To make matters worse, spending patterns are just one part of a larger set of financial skills on which blacks lag behind. Researchers at the Federal Reserve Bank of St. Louis followed over 40,000 families from 1989 to 2013, tracking their wealth accumulation and financial decisions. They developed a financial health scale, ranging from 0 to 5, that measured the degree to which families made “routine financial health choices that contribute to wealth accumulation” — e.g., saving any amount of money, paying credit card bills on time, having a low debt-to-income ratio, etc. At 3.12, Asian families scored the highest, followed by whites at 3.11, Hispanics at 2.71, and blacks at 2.63.

Next, they asked if education accounted for the differences in financial habits by limiting the comparison to middle-aged families with advanced degrees. Surprisingly, they found that the racial gap in financial health-scores didn’t shrink; it widened. Highly-educated Asian families scored 3.49, comparable whites scored 3.38, comparable Hispanics scored 2.94, and comparable blacks remained far behind at 2.66. Thus, the study authors concluded, neither “periodic shortages of time or money” nor “lower educational attainment” were the driving forces behind the differences in financial decision-making.

Mercantilism was never about economics

Monday, July 9th, 2018

Mercantilism was never about economics, Ben Landau-Taylor explains:

I believe mercantilist policies were the central government’s solution to the problem of taxation. While modern governments can impose taxes almost arbitrarily, early modern governments could not. Royalty made money from the farmland they owned, but as the economic center of gravity moved from the farms to the towns, this became less important, and they needed more money. The royalty lacked the local knowledge and “boots on the ground” to collect taxes outside of their demesne, and so had to act through the local power holders. In the manors, this meant acting through the nobility. (That’s a complicated topic beyond the scope of this piece, so I’ll just gesture at the British Parliament and the civil wars that accompanied its origins as an example of the power struggles this provoked.) In the towns, this meant acting through the guilds.

It wasn’t practical to simply extort money from the guilds, so they ended up in a more symbiotic relationship with the state. Essentially, the deal was that that the state would use force to shut down the guild’s competition, and in return the guild would pay taxes and help administrate their collection. In other words, the state would sell a monopoly to the guild. The guild would then submit to the collection of tariffs, or to paying duties on their merchandise, or some other tax on their transactions. (Notably, I know of no cases in this period where income or wealth were taxed directly. States couldn’t get away with that until later.) Jean-Baptiste Colbert pursued this policy more brazenly and systematically than anyone else I’ve looked at.

Through this lens, the mercantilist policies make more sense. The focus on money was because the purpose was to collect money, and so the central government wanted to bring more money into the country and track it as precisely as possible. The hodgepodge of regulations follows no systematic rule of economics, but does follow the pattern of a symbiotic trade between the state and the guilds. For example, a punitive tariff on imported wine will raise some money for the state, and more importantly, it is a favor to the domestic winemaker’s guild (which pays taxes, unlike foreign winemakers). Granting a monopoly to a favored shipping company makes no sense as an economic policy, but does make sense as a taxation policy.

Of course, whenever the state is pursuing a course of action, there will arise a demand for intellectual arguments that the state policies serve the common good, and thinkers will arise to fill this demand. Such thinkers made arguments for mercantilist policies, and some then generalized these arguments and made further recommendations. However, I have seen no evidence that these thinkers were influential or their recommendations adopted, and suspect that they had negligible effects.

Nevertheless, these intellectuals made a convenient foil for Adam Smith and his peers. By casting them as his foes, Smith was able to demolish them and demonstrate his superiority, thereby associating his own program with progress and rationalism, and leaving his opponents no intellectual ground to retreat to. (Smith was a capable persuader with sophisticated models of his audience, although many of his peers were not.) I think the real story is that Smith’s program was possible because his true foes, the guild merchants, were no longer necessary to the state due to the institutionalization of taxation infrastructure and/or the nascent factory system. However, because every historian of economics has read Smith, his account is widely known; and because his narrative of progress and rationalism matches modern sensibilities, his account is widely accepted.

These smug pilots have lost touch with regular passengers like us

Wednesday, June 20th, 2018

What’s the best thing to do on an airplane? Twitter fight, Nassim Nicholas Taleb says:

I tried to get in a fight with an Indian fellow who’s repeating that story that we’re refusing expertise at all. Remember that cartoon? They’re imitating that cartoon in The New Yorker that shows people with the sign that they don’t need the expertise of the pilot.

“These smug pilots have lost touch with regular passengers like us. Who thinks I should fly the plane?”

“These smug pilots have lost touch with regular passengers like us. Who thinks I should fly the plane?”

You cannot compare a macroeconomist to a pilot. There are two classes of experts. Belly dancers are experts at belly dancing. The people who steal radios from cars are experts at stealing radios from cars. Dentists are experts at dentistry. I’m not sure macroeconomists know anything about anything.

Because there’s no feedback, so we don’t know. Maybe they know. Policymakers or people in the State Department, I’m not sure they know anything because there’s no feedback. We definitely know that a carpenter is an expert at carpentry, you see?