The Pentagon does not have the budget to create anything as slick and sophisticated as the latest smartphone

Wednesday, March 20th, 2024

Swarm Troopers by David HamblingThe smartphone industry’s research budget was around $150 billion in 2014, David Hambling notes (in Swarm Troopers), dwarfing the Pentagon’s entire R&D spend of around $60 billion:

In aviation, the Pentagon is the biggest player in the game; only a handful of other countries can afford to develop fourth and fifth-generation combat aircraft like the F-22. But when it comes to small electronics, the Pentagon does not have the budget to create anything as slick and sophisticated as the latest smartphone.

The cost of each new generation of military aircraft rises exponentially.

Wednesday, March 13th, 2024

Swarm Troopers by David HamblingIn 1984, Norman Augustine, former Under Secretary of the Army, and CEO of aerospace company Martin Marietta, published a set of “laws” about military procurement, David Hambling explains (in Swarm Troopers):

His most celebrated pearl of wisdom is Augustine’s Law 16, which says that the cost of each new generation of military aircraft rises exponentially.


Although intended facetiously, Augustine’s Law 16 has been remarkably accurate. The North American P-51 Mustang was one of the most important US fighters of WWII. Over fifteen thousand were built, at a cost of around $50,000 each in 1945 dollars ($655,000 in 2014). It was succeeded in the 1950s by the jet-powered F-100 Super Sabre at a cost of $700,000 ($6 million in 2014), ten times as expensive in real terms. The McDonnell-Douglas F-4 Phantom, which first flew in 1960, broke the million-dollar barrier, costing $2.4 million apiece in 1965 ($18 million in 2014), tripling the cost of its predecessor. Even allowing for inflation, the upwards curve is steep.


The USAF’s new F-15 Eagle, also from McDonnell Douglas, was set to replace the F-4. The Eagle was a superb aircraft, but it had reached a new high, costing in excess of $20 million ($45 million in 2014), almost tripling again the cost of its predecessor.


Extensive flying exercises found that the big twin-engine F-15 was only slightly superior to the small, cheap fighters fielded by the Russians in a dogfight. If it came to a war, the small band of F-15s would be overwhelmed by swarms of Russian MiGs. Certainly, the F-15s would be able to knock out plenty of the Russians at long range, but when the survivors closed with them, the contest would be bloody and one-sided.

The Air Force decided to go for a “high-low” mix, supplementing the elite F-15s with a large number of cheaper aircraft known as lightweight fighters. The aircraft selected for the lightweight fighter role was the single-engine F-16 Fighting Falcon, two-thirds the size of the F-15. It was to be the embodiment of a concept by fighter guru John Boyd for an austere aircraft with extreme agility that could beat anything in a dogfight. Being less complex, it would be so cheap it could be acquired in vast numbers. The F-15 with its powerful radar was the champion at long-range combat; the agile F-16 was to be the champion in the “furball” of dogfighting.

During the development process, the purity of the F-16 was slowly corrupted. It became heavier, less agile, and more expensive as more and more capabilities were added.


At $15 million in 1998 dollars ($22 million in 2014), the F-16 was cheaper than the F-15, but more expensive than anything in the previous generation, including the big F-4.


The US Navy went through a parallel experience. They also replaced the F-4 Phantom, and chose the F-14 Tomcat, a $ 38 million (1998 dollars, $ 55 million in 2014) carrier-based fighter. Like the F-15 it had a big radar and impressive long-range capabilities.

Again the F-14 was too pricey to acquire in large quantities, and the Navy took up the idea of bolstering numbers with a smaller, cheaper aircraft. They chose the F-18 Hornet, originally a failed competitor in the Air Force’s lightweight fighter competition. The F-18s costs grew from a planned $5 million to around $29 million (2003 = $37 million in 2014).

One of their friends was firing her weapon, and it suddenly jammed

Friday, March 8th, 2024

Troubled by Rob HendersonRob Henderson fills the first part of Troubled with stories from his childhood in foster care, until he gets adopted by a couple that gets divorced. Then his adopted Mom brings home a “friend” named Shelly, who becomes a second mom. They don’t feel safe, so they decide to learn to shoot:

Shelly and Mom had met up with several of their friends at an outdoor shooting range. They’d gone once before; this was their second time. One of their friends was firing her weapon, and it suddenly jammed. As she tried to figure out what was wrong, she carelessly moved the pistol around. Suddenly, the gun fired. Shelly was standing fifteen feet away, talking to a man and his young son. The bullet went straight into her lower back. Had Shelly not been standing there, the bullet would likely have killed the boy.

They were barely able to make ends meet before Shelly was disabled:

At last, Shelly had received a large insurance settlement from the shooting. She and Mom never mentioned the specific amount. I figured it was a few hundred thousand dollars, given what they bought: a new truck for Shelly, a Ford Mustang for Mom, and a motorboat they kept docked at a marina at Shasta Lake. In Red Bluff, having a new boat and a new Ford Mustang was really something.

Mom and Shelly also bought three houses in Red Bluff. One was for us to move into and two were investments to “flip.” They had agreed that the family should move into another home as a way to “start over.” But they strongly disagreed about what to do with the rest of the insurance settlement.


Mom and Shelly expected to make a lot of money by selling the other two homes they’d bought. These houses required some upkeep, and I wanted to help out, so I’d stop by both homes every week to rake the leaves and mow the lawns. Shelly explained that both houses would likely be sold within two or three months at the most, and I didn’t mind doing the extra work for that amount of time.

But three months passed, and there were no buyers.


“I would lie awake in bed at night for months, because I knew this day would come,” Mom said.

We were sitting in the living room of the biggest house I had ever lived in, and I learned that it had been a temporary dream. Eight months had passed, and the two houses Mom and Shelly had intended to flip had still not sold. Shelly and Mom had run out of money. The year 2005 was the right time to invest in houses in California, they said. But not 2006. They explained that all our homes were being foreclosed, and that we had to leave Red Bluff.

Life without a state is dominated by custom

Saturday, March 2nd, 2024

Dune (Movie Tie-In) by Frank HerbertMark Koyama notes that his most downloaded academic paper on SSRN is a yet to be published book chapter on the political economy of Frank Herbert’s Dune:

We should first ask: do fictional universes need a political economy that makes sense? Absolutely not. But to have lasting value, I think it helps that they at least ask important political economy questions.

An episode of the Rest is History, Romans in Space: Star Wars, Dune and Beyond touch on these issues. Holland and Sandbrook note that the original Star Wars trilogy were given a patina of sophistication and historical depth by references to the “old republic” and the “senate”. Star Wars didn’t have a coherent political economy, but these hints gave viewers enough material to reconstruct their own imaginary histories. The problem with the prequel trilogy (the dire Disney remakes have different problems) is that they filled in the backstory and they did so in a particularly flat and inept way.


Paul Atreides is the quintessential “great man”. One of what the 19th century historian Thomas Carlyle called

“…the leaders of men, these great ones; the modellers, patterners, and in a wide sense creators, of whatsoever the general mass of men contrived to do or to attain….”


The intellectual depth of Dune as a novel comes from Herbert asking: what happens to a society that gets its great man or hero? Herbert’s answer is

“No more terrible disaster could befall your people than for them to fall into the hands of a Hero”

This is why David Lynch’s 1984 adaptation fails. In that adaption Paul really is the promised one: his victory makes it rain on Arrakis. There is no sense of the tragedy that inevitably accompanies a fulfilled prophecy.

So why does Paul fail? I would argue that he inevitably fails because he cannot overcome fundamental institutional and geopolitical constraints that he confronts. While this is, of course, the message of Dune Messiah, more can be said about these institutional constraints.

The political economy of the galactic empire is a form of what Douglass North, John Wallis, and Barry Weingast term “limited access orders”. Limited access orders are a form of government that achieve a measure of peace and society order through the creation of economic rents for elites.


Like oil riches, spice produces a resource curse. It leads to the concentration of autocratic power both on the planet and in the galaxy at large. While Harkonnen rule is clearly the most oppressive, the Atreides also rule the planet in an authoritarian manner. The empire Paul conquerers following his victory at the end of the first novel is at least as oppressive and even more violent than the previous Corrino empire.

In Herbert’s novels, history follows cyclical laws which humans can bend but not overcome. The Fremen freedom fights are destined to become invader and oppressors of other planets. Ecological and geographic factors weigh heavily as does Herbert’s Jungian understand of human psychology and myth. Together this saves the novel from being pure escapism.


As I note in my article, we can view the Harkonnens and the Fremen as representing two polar forms of organization. The Harkonnen represent the brutal leviathan state. They are associated with slavery, torture, and oppression. Through history despotisms, such as that of the Harkonnen’s, have been a common though extreme form of government.

In contrast, the Fremen represent a society without a state. Far from being a libertarian utopia, however, life without a state is dominated by custom (“water debt”, “the bond of water” etc.). And Fremen customs are harsh and unforgiving as the desert of Arrakis.

The Atreides, particularly Duke Leto, offer a possible middle ground. I think of this as roughly corresponding to Daron Acemoglu and James Robinson call “the narrow corridor” between rule by society and rule by the state.


In Dune Messiah, however, and in the other sequels, this sense of hope is shattered. The liberation offered by Paul results in a new and insidious theocratic despotism.

This can explain why Dune is so popular whereas the sequels that Herbert wrote have a much smaller and more niche following. The former provides a conventional heoric narrative. In the latter, structural and societal forces dominate, and the consequences of Paul’s heroic quest are transitory or malign.

Their inventors were not scientists

Thursday, November 16th, 2023

Was science really the key to the Industrial Revolution?

Most of the significant inventions of the Industrial Revolution were not undergirded by a deep scientific understanding, and their inventors were not scientists.

The standard chronology ignores many of the important events of the previous 500 years. Widespread trade expanded throughout Europe. Artists began using linear perspective and mathematicians learned to use derivatives. Financiers started joint stock corporations and ships navigated the open seas. Fiscally powerful states were conducting warfare on a global scale.

Time After Time

Friday, November 3rd, 2023

When I recently revisited H.G. Wells’ The Time Machine and the 1960 movie, I noticed that Max also had Time After Time, a 1979 movie I enjoyed watching on TV as a kid, in which Wells builds a working time machine, which his surgeon friend uses to escape to the future, because he is, in fact, Jack the Ripper. It’s an excellent premise for a Hollywood movie, and Malcolm McDowell does an excellent job playing a Victorian proto-nerd, even though he doesn’t look at all like the real Wells — or sound like him:

While preparing to portray Wells, McDowell obtained a copy of a 78 rpm recording of Wells speaking. McDowell was “absolutely horrified” to hear that Wells spoke in a high-pitched, squeaky voice with a pronounced Southeast London accent, which McDowell felt would have resulted in unintentional humor if he tried to mimic it for the film. McDowell abandoned any attempt to recreate Wells’s authentic speaking style and preferred a more “dignified” style.

Wells is expecting to find a socialist Utopia in 1979, but his nemesis shows him the news:

Palestine terrorists carried out their threat and began shooting the first five of 106 Israeli schoolchildren held hostage…

We’ve just received word that Mayor Margolin of Columbus was shot…

Jack also shows him football and a war movie, before commenting that, in this future world, you can just walk into a shop and buy a rifle or revolver — which pulled me right out of the film, because, of course, that was perfectly legal in England in 1893, when they left. Sherlock Holmes routinely shoves a revolver in his pocket, after all. U.K. firearms laws came about in the 20th Century:

The Pistols Act 1903 was the first to place restrictions on the sale of firearms. Titled “An Act to regulate the sale and use of Pistols or other Firearms”, it was short, with just nine sections, and applied solely to pistols. It defined a pistol as a firearm whose barrel did not exceed 9 in (230 mm) in length and made it illegal to sell or rent a pistol to anyone who could not produce a current gun licence or game licence, unless they were exempt from the Gun Licence Act, could prove that they planned to use the pistol on their own property, or had a statement signed by a police officer of inspector rank or above or a Justice of the Peace to the effect that they were about to go abroad for six months or more. The Act was more or less ineffective, as anyone wishing to buy a pistol commercially merely had to purchase a licence on demand over the counter from a Post Office before doing so. In addition, it did not regulate private sales of such firearms.

The legislators laid some emphasis on the dangers of pistols in the hands of children and drunkards and made specific provisions regarding sales to these two groups: persons under 18 could be fined 40 shillings if they bought, hired, or carried a pistol, while anyone who sold a pistol to such a person could be fined £5. Anyone who sold a pistol to someone who was “intoxicated or of unsound mind” was liable to a fine of £25 or 3 months’ imprisonment with hard labour. However, it was not an offence under the Act to give or lend a pistol to anyone belonging to the two groups.

Oddly, when they travel to the future, they don’t end up in 1979 London, but 1979 San Francisco, and, despite the premise that Wells expects Utopopia and finds something quite different, the 1979 San Francisco they show is clean and beautiful, at least until Wells goes into a hospital emergency department to check on Jack, who had been hit by a car. This is not the San Francisco of Dirty Harry — or of today.

I also found it odd that Wells goes to exchange his 15 pounds sixpence for $25.50 and only seems mildly surprised that the exchange rate was nowhere near the five-to-one ratio that held for a century, outside of major wars, and he never comments on prices being 100 times what he might expect, especially since he lived in an era with no inflation.

As long as something else is taking off when another technology peaks, that’s tolerable

Friday, October 27th, 2023

Productivity growth is some combination of literal technology and social technology, Byrne Hobart says:

The former is pretty easy to understand: physical technologies from wheels and pulleys to RFID and EUV allow us to get more results from a given amount of effort. Social technologies cover a wide range of other behaviors that can affect economic outcomes, from high-level ones like trustworthiness and punctuality to more granular ideas like accrual accounting, performance-based compensation, post-mortem memos, and the like.[1] Other elements include general attitudes: at the level of companies and countries, having people in charge who think that the institution they’re responsible for will last a long time, but could fail if they make a mistake, will tend to produce better results than the vague hope of retiring before things go off the rails. The concept of productivity growth itself is an instance of productivity growth: just by having a new mental model, you can slice up your statistics on economic growth to figure out how much of it to attribute to the gradual accumulation of buildings, equipment, roads, ships, etc., to general population growth, and to the sometimes-mysterious extra factor that makes the sum of these equal more than their parts.


In the very long run, employment rates have been surprisingly stable everywhere we’re able to measure them—it’s surprising and counterintuitive that over the last two centuries of extreme technological, institutional, and cultural change, roughly 90-95% of people who want a job can find one most of the time. In many countries automation has increased formal employment when the alternatives were either agricultural work, working in the informal sector, or rent-seeking. And in a sense that’s even true of rich countries’ industrialization; the US was much more corrupt historically, and certainly the late 19th century and early 20th centuries had some egregious abuses of government power for private gain, but after a while it started to get obvious to most people that there was simply more money in positive-sum activities than in negative-sum ones—and that tolerating the negative-sum behaviors was a drag on overall growth.

That actually extended to politics, too; the relationship between labor and capital is an easier one to navigate when the question is “how fast do each of us get rich?” rather than “how can I protect my piece of the shrinking pie?”

The story of economic growth is usually a story of overlapping S-curves in adoption, and the first derivative of that S-curve, which measures the new deployment of a technology, tends to peak and decline. As long as something else is taking off when another technology peaks, that’s tolerable; it doesn’t avoid recessions, but a recession also forces people to leave declining sectors and join growing ones instead.

From a monetary perspective, World War I never really ended

Thursday, October 26th, 2023

From a monetary perspective, World War I never really ended once it began in 1914, Lyn Alden notes:

In prior wars throughout history, wars had to be funded with savings or taxes or very slow debasement of coinage. Physical coinage held by citizens could usually only be debased by their government gradually rather than diluted instantaneously, because a government couldn’t just magically change the properties of the coins that were held by households; it could only debase them over time by taxing purer coins, issuing various decrees to try to pull some of those purer coins in, and spending debased coins back out into the economy (and convincing initial recipients to accept them at the same prior value, despite the lesser precious metal content, which would only work for a time and might not even be noticed at first). However, with the widespread holding of centrally issued banknotes and bank deposits that were redeemable for specific amounts of gold, governments could change the redemptive value with the stroke of a pen or eliminate redemption all together.

This gave governments the power to instantaneously devalue a substantial part of their citizens’ savings, literally overnight, and funnel that purchasing power toward war or other government expenditures whenever they determine that the situation calls for it.

Borrowers are “locked-in” by the golden handcuffs of their cheap mortgages

Wednesday, October 25th, 2023

Construction and sales of new homes have soared, even as sales of existing homes have entered a deep freeze:

Between mid-2022 and earlier this year, existing home sales fell from an annualized rate of almost 7 million sales per month to just 4 million, a record pace of contraction and an overall drop in magnitude only slightly shy of the 2008 financial crisis. There are currently only about 600,000 homes on the market, compared to 1.5 million before the pandemic. Prices remain close to record highs, but given such thin liquidity, are virtually meaningless.

The freeze in transactions is a function of interest rates.

Homeowners borrowed and repriced about $3trn worth of mortgage debt (half of the entire outstanding amount) in 2002-22—either through purchases or refinancings—at emergency-level low interest rates. Today, one third of mortgage debt carries an interest rate below 3%.

Contrast that with the going rate on a 30-year fixed rate mortgage: at the time of writing, above 7%. Since existing homeowners can’t ‘port’ their mortgage to a new home, or sell it to the would-be buyers of their home (except in rare circumstances), moving houses entails losing a cheap mortgage and resetting at a much higher rate. Borrowers are “locked-in” by the golden handcuffs of their cheap mortgages.

This dynamic has always existed in the US housing market, but—given the swing from rock bottom rates to the highest borrowing costs in a generation, and in such a short amount of time—this mortgage lock-in effect has never been so strong.

A mortgage originated at a lower rate than prevailing rates is worth less than par—this is an unrealized loss to the lender and an unrealized gain to the borrower. Unsurprisingly, pandemic-era borrowers are unwilling to lose their collective $700 billion worth of these gains.


Mortgage lock-in prevents home prices from adjusting to the shock of higher financing costs. This is, in particular, a burden for the ~2 million Americans who are first time home buyers every year. Millennials are the biggest cohort of buyers these days, and in 2022, 70% of them were first time buyers.

The sprawling edifice of American intervention in the mortgage market—from the Federal Housing Administration (FHA), to the government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae, to Federal Home Loan Banks (FHLBs)—are premised on the goal of making home ownership more widely available. But amidst rising rates, mortgage lock-in is an impediment to achieving that goal.

If the stickiness of the asset is a problem for prospective first time buyers, the inflexibility of the liability is a problem for existing owners. Aside from locking owners into their current homes, the rigidity of mortgages in the face of rising interest rates means that an increasing number of borrowers are ‘underwater’ or very close to it—they hold a mortgage that is close to, or exceeds, the value of their equity in their home.


Mortgage lock-in also has less obvious but more harmful, widespread, and long-lived effects. Not least: it exacerbates declining levels of geographic mobility. Americans are staying in their homes longer. They are evincing a declining willingness to move neighborhoods, cities, or states in order to find work that better matches their skills. By giving Americans a powerful incentive not to move, mortgage lock-in contributes to a handful of modern-day macroeconomic problems, including anemic productivity growth and neo-feudal levels of income inequality.


Mortgage lock-in doesn’t exist in Denmark because borrowers can buy back their loans at market prices in the secondary market.


In the US, banks originate mortgages but then sell them onwards to GSEs for bundling into mortgage backed securities. But Danish mortgage finance operates on the ‘balance principle’: bank lending is funded by the issuance of bonds which precisely match the cash flows of the underlying mortgages. Danish banks retain ownership of mortgages, including their credit risk. These remain on their balance sheets within ring-fenced ‘cover pools’.

Securitization of these assets is not via mortgage backed securities but instead via ‘covered bonds’. Cash flows pass directly from borrowers to covered bond investors, with the mortgage bank acting as servicer.

Covered bond investors are highly secured: they have exclusive recourse to the segregated cover pool of assets on the issuing bank’s balance sheet, and (nonexclusive) recourse to the overall assets of the issuer.

Danish mortgage banks are specialized institutions that only issue and distribute mortgages without maturity transformation (a form of narrow banking). They are barred by law from taking deposits.

The balance principle and generally tight regulation ensure a very stable market—since its creation in 1797, the Danish covered bond market has not experienced a single default in a bond series.

The allowance for repurchases below par is facilitated by the fact that Danish mortgage-backed bonds are pure pass-through securities: each specific mortgage can be traced directly to a bond that is traded in the secondary market. This means that when a mortgagor wants to terminate the loan, it is possible to identify the bond it was financed through and buy back an equivalent portion at the prevailing market price.

A weaker money won out in terms of adoption over a harder money

Tuesday, October 24th, 2023

From papyrus-based bills of exchange to double-entry booking and paper banknotes, Lyn Alden explains, the main purpose of banking was to enable transactions to move more quickly and frequently than the transportation and verification of physical gold would allow:

Banking also allowed for the usage of more extensive credit systems, by allowing a third party (a money changer or a bank) to serve as a trusted intermediary between two non-trusting entities (buyers and sellers, or creditors and debtors).

In other words, banking allowed for transactions (commerce) and settlements (money) to be separated. Transactions for individual goods and services could occur more frequently, existing for a period of time in a state of credit, until they were settled with precious metals in less frequent occurrences and in larger amounts. However, while this process of batching multiple transactions into fewer and larger settlements increased transaction efficiency and reduced the risk of theft, it couldn’t overcome a fundamental constraint: the speed of information.

For thousands of years, transactions and settlements had the same maximum speed limit: the speed of foot, horses, and ships.


However, with the invention of the telegraph, and then the telephone, the speed of transactions increased to nearly the speed of light. The first working telegraph was invented in the 1830s. Engineers then spent much of the 1840s and 1850s figuring out how to run cables over long distances, including under large bodies of water, during which time they were able to connect the various financial centers of Europe together, including London and Paris. After some failed attempts, the first long-lasting transatlantic telegraph cables were put in place in the 1860s, and the global banking system quickly became more interconnected in the decades that followed.


All around the world, people and institutions increasingly relied on interconnected bank accounts rather than coinage. And with currency units abstracted from the underlying metal, it turned currency units into an inherently political topic between creditor groups and debtor groups.


The more and more efficient the global banking system became at netting and clearing imbalances, the less and less it needed metal as a proportion of transactional volumes and saving volumes during the normal course of operation. And consumers happily went along with it as well, due to the greater ease that it provided them with. And yet this increasing efficiency is precisely what allowed it to become so unbacked and unstable at its foundation. The disinclination of most people to want to withdraw and secure the cumbersome physical metals allowed for the extreme proliferation of gold claims relative to the amount of actual gold.

By the early 20th century, thanks to this extreme degree of monetary abstraction and the associated ease of claim creation for World War I approximately four decades after Jevons’ book, the global gold standard collapsed and never recovered. In the decades after that, governments eventually dropped gold and silver backing from their financial systems entirely, and that’s how we eventually got to this world of 160 different inflationary fiat currencies — each with a local monopoly in their respective jurisdiction.


This is the only time in history where, on a global scale, a weaker money won out in terms of adoption over a harder money. And it occurred because telecommunication systems introduced speed as a new variable into the competition.

There is no direct, urgent reason to do the best possible job

Sunday, October 15th, 2023

The actual way delegation works, Byrne Hobart suggests, is to resist the entropic force that makes some problem look like a rounding error:

This shows up everywhere: Salesforce won’t miss its numbers this quarter because one particular salesperson is a little slow. McDonald’s won’t need to write down the value of its intangible assets because one bathroom isn’t cleaned thoroughly. Very few companies have died entirely because of excessive travel expenses (though it’s often an early sign of other failures to control spending).

Anyone making decisions at this level can be fairly confident that there is no direct, urgent reason to do the best possible job. And yet, if you indicate to a Salesforce salesperson, however subtly, that you might someday be a source of annual recurring revenue, you will hear from them a lot. And if you visit a McDonald’s it will generally have pristine, gleaming bathroom facilities (at least if you adjust for the foot traffic a typical location gets).

Delegation is, essentially, a relentless quest to make the individual decisions that are a rounding error for the company feel like weighty and important matters for whoever makes them. That can’t be done entirely by fiat; there’s some flexibility required because circumstances often change in a way that a) does change the optimal behavior for a given employee, but b) doesn’t reach the level of importance that would require attention from the CEO or board of directors.

What makes these organizations work is that they’re consistently breaking high-level incentives down into granular ones that actually affect people’s behavior without locking them into some approach that doesn’t make sense. It’s not a good idea for a company with a sales team of thousands to set a quota for firmwide cold calls, for example; the level at which that kind of quota should be set is the level at which someone can see whether their team is getting better results from cold calls, cold emails, events, requests for referrals, or any of the other tools in the salesperson’s kit. So the devolution is that highly specific key performance indicators matter at the lowest level, and as they percolate up they get more general and abstract, until they roll up to numbers that make sense across almost every industry: revenue, some indication of margins, some measure of return on investment, and some proxy for making sure the business actually generates cash in a timely fashion.

This is most visible in franchise companies. From an investor’s perspective, a franchise business looks very low-risk: it’s capturing a fairly fixed piece of the upside from a brand, without all the messy operational intensity of buying or building a location, staffing it, and operating it. But from an operating perspective, it’s a nightmare. Every time Starbucks opens a new location, it’s betting a brand worth tens of billions of dollars on one store, and, really, on every worker in that store. Any bad decision at the lowest level can threaten the brand equity of the entire business.

This may be why franchise-based models eventually slow down. After a while, the accumulated value of the business is so high, and the marginal benefit of one location so relatively low, that it doesn’t make sense to risk so much brand equity on one more spot. Meanwhile, the existing store base is, presumably, continuing to compound the value of the brand, so a store-growth model slowly shifts to a same-store-sales based one.

The implementation of this is, in practice, signing a monstrously detailed franchise agreement, with the agreement devoting lots of space (starting on page 57 in this case) to enumerating all of the additional training sessions that will be required to cover material not mentioned in the agreement itself.

Any big company is, in historical terms, a miracle of human coordination. It’s astounding that on any given day, 2.3 million Walmart associates spend their workday more or less the way Walmart CEO Doug McMillon wants them to. That’s more direct influence on human behavior than historical heads of state could command. And entropy constantly pushes against this coordination working. The profits a company produces, and the share price that represents the expected future sum of those profits, is the source of organizational negentropy that justifies the otherwise herculean task of keeping everyone on task.

Gaza has no resources that make it worth living there

Thursday, October 12th, 2023

Back in 1980, Arnold Kling and his then-new wife spent some time in Israel near Gaza:

“You’re about to see the saddest sight of your entire life,” our host told us. My wife and I, recently married, were riding in a tractor that was pulling the accumulated week’s trash from our small farming village to a dumping area in the sand just outside the boundary of the village. The cart we were pulling was about 15 feet by 15 feet, piled high with what today would be composted by environmentally conscious elites: moldy bread, rotten fruit, scraps of vegetables.

As we approached the dumping area, we found ourselves surrounded by Arab residents of Gaza. They came running, competing to be the first to have access to what we were dumping. They were dressed in rags, which were torn, patched and ill-fitting. It was indeed the saddest sight I have ever seen.

Gaza has no resources that make it worth living there. It is hard to get historical demographic figures for the Gaza Strip, but it seems that at the end of World War I the area had fewer than 20,000 residents. It . As of 1948, according to Michael Oren, the population was just 80,000. He says that nearly 2 million people live there today.


Arab refugees, there and elsewhere, were kept in a state of dependence. No one ever made an attempt to create an actual economy in Gaza, with people working and producing. It was all handouts, and even those were inadequate.

The Israelis conquered Gaza in 1967. They, too, made no effort to develop it. They approved a handful of Jewish settlements there. From a strategic perspective, the strip is a buffer zone between Israel and the Sinai Peninsula. Israel captured the Sinai in 1967 and gave it back to Egypt under the Begin-Sadat peace agreement brokered by President Carter in 1979.

His theory was that the body-snatching was happening through their phones

Friday, September 15th, 2023

All the sudden disruptions of long-running economic trends in America led people to wonder,What the heck happened in 1971? Now Erik Hoel looks at all the sudden disruptions of long-running social trends in America and wonders, What the heck happened in 2012?

Of course, we should expect it to be harder to measure cultural tipping-point years rather than economic ones, since what makes for healthy psychologies and cultures is often immeasurable. Still, if you look at charts about people’s psychology, or culture in general, like how people use language, you often consistently see a major shift around 2012 or shortly thereafter.

This isn’t just due to the definition of the word “depression” broadening. Teenagers legitimately try to commit suicide far more now, taking off right around 2012.

These changes haven’t affected just teenagers, although they are the most intense there, as if the youth, those most exposed and dependent on the current culture, those with nothing else to lean back on (no memories of the 90s to bask in) are operating like canaries in a coal mine—it is their little lungs which go first.


And yes, psychological changes are nebulous, but there are obvious downstream real-world ramifications. For 13-year-olds across America, both reading and mathematics peaked in 2012 and then rapidly began to decline.

Around 2012, birth rates fell off. They were low anyways, which should be expected after the Great Recession, but it is precisely around 2012 where they should have started climbing back up and instead they fell off a cliff.


It’s simply impossible to dance around it: what would now be called “wokeness” came onto the main stage of culture in 2012, and this in turn began to trigger anti-wokeness (e.g., while Jordan Peterson wouldn’t become famous until 2016, 2013 was when he created his YouTube channel and began uploading). This action/reaction dynamic explains the timing differences for when each political side felt the psychological effects.


At a personal level, I remember someone in graduate school, which I entered in 2010, confessing to me after a few beers that the rise in politicalization among our peers around 2012-2013 (as my fellow grad students either suddenly bought into wokeness and started using its reasoning and language or staked out controversial or secretively resistant anti-woke positions) reminded him of “the invasion of the body-snatchers.” His theory was that the body-snatching was happening through their phones.


In fact, in terms of market saturation, the transition from 2012 to 2013 is the exact year the majority of the US switched to finally owning a smartphone.

Which would certainly explain the massive spike in pedestrian fatalities from cars following a low in 2010.

Marxism remains dangerous nonsense

Tuesday, September 12th, 2023

Tyler Cowan asks, What is valid in Marxism?

1. Capitalist systems, especially before reaching contemporary times, can produce less autonomy than small scale production. Standards of living do rise from industrialization. But I look at many of my rural Mexican friends. They could earn somewhat higher wages in factories, but they prefer to paint ceramics at home. It is more fun and they control their time to a large degree. At some point industrialization can undercut the cultures and networks of suppliers that makes such a choice possible. Marx directs our attention to a certain indivisibility of systems.

2. Marxism promotes an alternative idea of freedom, namely freedom from the market. Anyone who has chosen life as a tenured university professor should not claim that such an idea is complete nonsense. Smith thought in terms of marginal tradeoffs. Marx, above all, focused on inframarginal and systematic effects.

3. The benefits of industrialization take a long time to kick in. Reforming postcommunist economies took fifteen years or more. Poland did most things right and people there are still unhappy. So how long should it take to reform feudalism or other preindustrial structures? Forty years? I take seriously the idea that the industrial revolution did not make people better off right away, so did Marx.

4. Being happy at work is one of the most important things in life. Marx saw the importance of this more clearly than did many of the classical economists. And he saw the importance of inframarginal systemic factors.

5. A growing division of labor can make some people unhappier at their jobs.

To sum up, we all know that capitalism brings a “creative destruction,” to use the phrase of Schumpeter. This is all for the better, but Marx saw how strong both the positive and negative sides of this process would be. And he knew that the relevant problems went deeper than just looking at whether people make rational tradeoffs at the margin. That being said, he overestimated the negative side of the market and underestimated how well capitalism could solve its problems concerning the distribution of income.

Of course marxism, as a political program, remains dangerous nonsense. Marx’s blind spots were enormous, and I still cannot understand how generations of the intelligentsia were taken in by the whole thing.

Growth has to come from within

Thursday, August 3rd, 2023

One of the interesting lines of evidence about the importance of human capital in wealth disparities, Emil O. W. Kirkegaard notes, comes from examples of how groups can recover from setback:

The most obvious example are the losers of World War 2, that is, Japan, Germany, and Italy. Japan and Germany suffered extreme damage to their infrastructure in the later stages of the war but were quickly able to recover.


Some of this research has been done using slaveholders in the former Confederacy, who lost the US civil war (1861-65). These were wealthy people who owned slaves, but lost this wealth. If they were wealthy because of human capital reasons, we would expect them to regain some fraction of this, and their children to markedly catch-up towards their long-term trend.


For people who had a lot of wealth from slave owning in 1960, their wealth was still reduced in 1870. However, their sons had actually caught back up by 1900. Likewise with the grandsons.


In his book The Son Also Rises economic historian Greg Clark tracked elite surnames to gauge social mobility across many countries. One of these was China, where the situation was dire.


However, when looking up modern data for the elite surnames, these are still over-represented among the current elite, despite the efforts of the communists to eradicate their advantages.


Here some will object that the recovery of the former Axis powers was due to US subsidies (Marshall plan in Europe). The problem with this idea is that wealthy countries have also tried doing the same kind of growth program in other regions of the world, and they have never worked very well.


Growth has to come from within.