Category Archives: Economics

The Origin of Wealth – Eric Beinhocker

“An African elephant is a strategy for making thermodynamic profits and reproducing in the environment of the African bush, and a Coronatae jellyfish is a strategy for making thermodynamic profits and reproducing in the environment of the deep ocean.”

Perhaps my favourite experiment discussed by Beinhocker is actually a computer simulation, run by Epstein and Axtell, named Sugarscape. In essence, they program an enormous chessboard, with piles of sugar on each square of varying heights. Agents (‘people’) are distributed across the squares with various abilities to find sugar, move around, and survival needs in terms of units of sugar. Agents are allowed to move around, eat, die, and have children, and Epstein and Axtell essentially just press go and see what happens.

What happens is a miniature economy, and one with very few assumptions embedded. Individuals move around and various patterns form: average wealth goes up, and over time average abilities increase as the more capable agents reproduce, and we see a fall in social mobility and increase in inequality as wealthy agents have children who also become wealthy. As Beinhocker rightly points out though, it is however not as simple as the skilled agents becoming wealthy; wealth levels are a function of the entire system, and no one factor appears to determine them. In other words, it’s complicated.

If the experimenters add a second type of resource, spice, then we also see trading. Trade routes develop, like virtual Silk Roads, and we see market towns, middlemen, and complex hierarchies of trade. If you want, you can even think of these as virtual investment banks and retail banks, though at some point the analogy will break down, or at least I hope so.

Beyond telling us that life is complicated, what does such a simulation give us? In broad strokes, it suggests modern economics is doing okay, at least in how it describes computer simulations: we see the development of trading as most economists would have predicted. It also gives us a lot more. It tells us what sort of fundamental conditions are necessary for an economy to appear; gives us an idea of how extremely complicated initial conditions will work themselves out; and it lets us work with entire populations where every single member is slightly different, rather than relying on simplified versions of populations as economics often does. Most of all, however, it lets us test ideas. We can introduce minor variations, and see what happens in the Sugarscape economy. Of course, our real economy is vastly different from Sugarscape, but it’s a start.

If you want to pick up The Origin of Wealth, you can get it here (or in the UK or Canada).

Debt: The First 5,000 Years – David Graeber

“How is it that moral obligations between people come to be thought of as debts and as a result, end up justifying behavior that would otherwise seem utterly immoral?”

A friend recommended Debt: The First 5,000 Years as a veritable bible of the Occupy movement, so I thought I’d pick it up. Its concern is distinguishing between moral obligations, as occur in a human economy, and market obligations (debts) that occur in a commercial economy. Graeber is worried that our modern economy has confused the two. Financial debts are denominated in money, and so are easily enforceable and transferable: moral obligations, like owing someone a favour, are not.

The book asks great questions, questions that aren’t studied nearly enough, like the effect of being in a perpetual state of debt on humanity, whether early cultures truly used a barter system (answer: usually only with strangers, not within the village, where non-market bonds held sway), whether debts of money and debts of morality are the same, and whether alternative systems to the current one exist. Overall, though, I was disappointed. His answers often feel confused, often asserting something only to disagree a few paragraphs later, or introducing what often felt like irrelevant distinctions instead of meaningful insights.

Unfortunately, as a result I struggled to find the book compelling. He makes blanket statements that barter economies never existed or world literatures condemned lending, for example, before backtracking and noting large exceptions shortly after. He also asserts that debts in monetary units are enforced by violence while moral debts are not, yet surely social norms and codes of behaviour, including what may be seen as a debt to society, were frequently enforced by violence. If you’re willing to overlook such claims, however, there are also important insights: it’s probably true that monetary debt’s ability to be transferred between creditors makes it more impersonal, and so justifies otherwise outrageous behaviour, for example. There are also great stories in it, like the discussion of the Tiv, who worried about being tricked into turning into witches by being fed human flesh.

The book does therefore have strengths. The questions and stories are interesting, and if a psychologist happens to write a book about the effects of debt on the human psyche, I’d definitely read it. For the nature of financial markets and moral markets, however, I found Michael Sandel more compelling and more clear, and for studies of how ancient cultures felt about debt and exchange, I’d turn first to Jared Diamond. If this is a subject you’re interested in, it’s definitely worth picking up Debt, but I’d start first with Diamond or Sandel, to get a grounding in the subject.

You can get a copy of Debt here (or in the UK or Canada). Or, wait for my review of Diamond’s The World until Yesterday, which I’ll post in the next few weeks.

Getting to Plan B – John Mullins and Randy Komisar

“[T]his is not a book about ‘business planning.’ It’s a book about, in a sense, ‘business discovering.’”

Business planning is a major industry, with management consultants, industry experts, and other finance professionals all spending significant time attempting to predict the future of a firm (see Antifragile for why that doesn’t work). Mullins and Komisar, on the other hand, have a much more simple principle. Try things. And if they don’t work, try something else.

This simple point flows from what I found a fairly profound observation. Big businesses may be wrestling with “Big Data”, they point out, but entrepreneurs usually have a want of data; they don’t even have enough information to know if their guesses and assumptions are correct. Instead of recognizing their limited data, however, many entrepreneurs leap immediately into business planning, writing up 50 page business proposals. By the time they find out their idea doesn’t work, they’re already mentally committed, and fail to properly adapt to new information.

The best entrepreneurs, however, remain open to Plan B. They test their original assumptions, and use the data they get to modify their plans as necessary, sometimes changing their entire product, as with the founders of Paypal, who started off trying to market a cell phone encryption method, for which they posted a free demo of a payment system online. When the demo proved more popular than the encryption, they adapted, and the rest is history. Experiment, measure, analyze, repeat.

For someone with a business idea in mind, the book is an excellent walkthrough in carefully keeping an eye on your business model while maintaining flexibility. For those not interested in entrepreneurship, the book can feel repetitive, but I think there’s some wisdom there for the rest of us too. In many situations, there’s no need to pick a single best plan and charge forward; we can experiment a little to discover information, whether that means doing a summer internship, trying a new diet, or starting up a small business of our own. It seems to me we too often stress about making the best decision in the first place, rather than trying out an option and learning from it. Life, rather conveniently, has very little to do with Dragon’s Den.

Average is Over – Tyler Cowen

“The key questions will be: Are you good at working with intelligent machines or not? Are your skills a complement to the skills of the computer, or is the computer doing better without you? Worst of all, are you competing against the computer?”

If you were paired with a machine to do a task, could together you do better than the machine alone? For Cowen, the answer matters more than you might think – with intelligent machines, he believes, lies the answer to The Great Stagnation he has worried about in the past.

There are two types of people in the world, he argues; those who can increase the productivity of machines, and those who will be replaced by them. One group will earn increasingly higher wages and rewards; the other will earn relatively less and less. Average is over, and though machines won’t replace human labour entirely, as the Luddites feared, they will completely change how labour is allocated.

This is not to say that computer programmers are the only ones who will make money, of course. Rather, Cowen thinks of working with machines more broadly; using the automatic checkouts in supermarkets, for example, or adapting your smartphone to improve workflow. It is these teams of humans and machines, he argues, that can really make our productivity soar. This is true of life in general, he says, not just the workplace, whether it be relationships, hobbies, or education.

It’s a provocative idea, particularly in light of today’s concerns over inequality. The Economist this week, for example, quotes Daimler as describing their employees as “robot farming” because the workers are there to shepherd the robots as they do the work; presumably the ratio of sheep to shepherds is diminishing. To my mind, Cowen has a point; the highest payoff activities in life will always be those that cannot be done by another person or machine.

What I am less sure of is how this affects young people preparing to enter the workforce. In some ways there have always been key skills that are most lucrative in the world of work, but if Cowen is correct, the segregation of students who do not learn to work with machines may be even more extreme than the income divisions between disciplines today. Is it possible, however, to conduct a classical education while also developing those skills? Should that be the point of education? Degrees that focus on deep, reflective thinking, like philosophy, may find significant difficulties adjusting if indeed they even want to. Either way, our society may lose out, as certainly do our would-be philosophers. The rise of the machines may decide much in the world to come, but under it lies a perspective that may not be compatible with everything we do – can and should we attempt to reconcile them?

Anyway, the book is clearly fascinating: you can keep reading it here (or in the UK or Canada). Or, join the Subtle Illumination email list to your right! Disclosure: I read Average is Over as a free advance reader copy – it is released tomorrow.

Antifragile 2 – Nassim Nicholas Taleb

“The best way to verify that you are alive is by checking if you like variations. Remember that food would not have a taste if it weren’t for hunger; results are meaningless without effort, joy without sadness, convictions without uncertainty, and an ethical life isn’t so when stripped of personal risks.”

Last time we explored the idea of antifragility – what, though, are its implications? Taleb has but one core lesson; we cannot escape or prevent volatility, so we must love it, and we can only do that if we are antifragile.

To do so, focus on doing, not on theory. Taleb argues that progress comes from small advances by doers, while theorists usually just post-hoc justify the progress of doers. As Yogi Berra tells us, “In theory there is no difference between theory and practice; in practice there is.” [Nick Note – I’m not sure I agree with this, and will object below, but I thought I’d pass it along anyway]

Second, focus on dispersion, not just on averages. For a stock portfolio, for example, don’t have all your money in a fund with moderate risk/return; put 10% in an extremely risky fund with a large upside, and the other 90% somewhere very safe. We are best, he argues, when faced with alternating periods of recovery and high intensity, whether we are talking weight lifting, investments, diets, or emotions.

Third, obey nature in the absence of opposing evidence. Taleb follows Burke, arguing that the burden of proof always lies with the unnatural or new. The natural or traditional has been tried and turned antifragile through an evolutionary process, while the new has not. It’s a principle he lives by; on breaking his nose and failing to find empirical evidence of the value of ice, he dutifully refused ice. I can only respect his adherence to principle.

Fourth, value heroism. Heroes, Taleb points out, are people who sacrifice for the community; they are extremely antifragile, taking society’s risks on themselves. As a society, we should only respect people who take risks for their opinions. Roman engineers, for example, were required to stand under their bridges after they were built, while bankers in Catalonia were beheaded if their banks failed. Consultants and investment bankers today, on the other hand, bear almost no risk from their advice. This, Taleb argues, is the core problem with capitalism; the basic unit of interaction is the corporation, by means of which no individual bears any risk for their decisions.

It can sometimes feel like Taleb is taking an unjustifiably extreme position to provoke controversy – perhaps it’s effective, but it’s also somewhat annoying. He is convincing that practical knowledge is undervalued, for example, but that is hardly the same as showing that theory is always useless. More generally, his book can sometimes feel a bit one sided, as he writes to convince, rather than to inform. That aside, the book is phenomenal; Taleb is one of the foremost thinkers of our age, and if he sometimes seems overeager to support his own ideas, the rest of the time is he is truly wise. He’s also, by the way, one of the rare authors who can throw in a line like “Genoa and Venice were competing for the Eastern and Southern Mediterranean like two hookers battling for a sidewalk.”

You can get your copy here (or in the UK or Canada), and it’s definitely worth a look. Antifragility is a concept all of us could benefit from.

Antifragile – Nassim Nicholas Taleb

“Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.”

(Part 2 available here)

What’s the opposite of fragility? Most people say robustness, resilience, or strength. Most people, says Taleb, are wrong. Fragility is to be weakened by uncertainty or volatility, while resilience is to be unaffected by volatility. What we need is something strengthened by volatility and change – something antifragile.

In antiquity, Taleb points out, he would rather be the hydra which regrew two heads when one was cut off, rather than the phoenix, which rose identical from the ashes when destroyed, or the Gordian Knot, which fell apart at the first unexpected shock (a sword, to be specific). It’s not enough to ignore volatility; we must love volatility.

That, in a nutshell, is Antifragile. Like all the best ideas, it’s a simple idea with immediate, important, and interesting consequences. In particular, Taleb argues that the modern world, in its quest for efficiency and optimization, has ignored the effects of volatility. As a result, shocks (Black Swans) have catastrophic consequences. When one hits, however, we ask the wrong question. We demand to know why we failed to predict the housing bubble or disease outbreak, instead of asking ourselves why we built a system that is tremendously vulnerable to such shocks.

Instead of eliminating centralization and vulnerability in our systems, like big corporations or big bureaucracies, however, we keep trying to predict the future, an endeavor doomed to failure. Shocks, as Taleb has argued in other books, are rare, and so attempting to predict them is impossible because they happen so rarely – we never have enough data points to draw conclusions. (For the economists reading, he believes in fat tails). Rather than trying to predict the future, we should build systems that can evolve and adapt to it.

The second major problem he points out (the first being that our world is extremely fragile), is that many areas of antifragility in our world today are only so because people have shifted risk to others. Bankers, for example, are antifragile because they can just get a bailout if something goes wrong, while taxpayers and/or deposit holders get it in the shorts.

Above all, Anti-Fragile is a work of tremendous insight, one of interest to both layman and specialists, though laymen might be well advised to take Taleb’s advice to skip certain sections. We’ll further discuss some of the implications later this week, but in the meantime you can get a copy here (or in the UK or Canada).

The Prize – Daniel Yergin

“[W]e should be able to raise the whole power and efficiency of the Navy: better ships, better crews, high economies, more intense forms of war power – mastery itself was the prize of the venture.” – Winston Churchill, talking of his decision to switch the British fleet to oil power in 1911

The Prize is one of the few books I’ve read I would describe as definitive. In it, Daniel Yergin tackles the history of the oil industry, and in scope, scale, and command of the subject he is unparalleled. It well deserved its Pulitzer.

Interpreting the history of the last 150 years through the importance of oil is somewhat disturbingly effective, a fact that Yergin makes the most of. World War 2, for example, he argues was won and lost due to the difference in oil supplies, forcing a German invasion of Russia and, in the Battle of the Bulge, leading to German tanks literally running out of fuel and grinding to a halt. The general lesson is perhaps that oil supplies have affected international policy for almost every nation state in the modern era, and almost no major event in the last century is left untouched by Yergin’s, as it were, oily hands.

The book is an impossible one to summarize in a few paragraphs, and I don’t propose to try. From Greek Fire, a mix of lime and petroleum used by the Ancient Greeks as an unquenchable war machine, to the first oil well, drilled in Pennsylvania in 1859 in order to make medicines and kerosene, through the breakup of Standard Oil and the world wars, to OPEC oil politics and Saddam’s invasion of Kuwait, Yergin explains history while exploiting his historian’s gift for finding interesting or amusing anecdotes in everything. I wasn’t aware, for example, that it took 1-3 kamikaze planes to destroy an aircraft carrier, or that President Carter referred to energy conservation as the moral equivalent of war (a quote from WIlliam James). Somewhat less grandly, I also wasn’t aware that the first motels were rented as often as 16 times per night (I leave to the imagination a nocturnal activity requiring 1/16th of the night), as they were valued for their convenient, by-the-highway location.

At 895 pages and seven years in the making, the book is hardly a light read. Nothing of its scope could be. It is however a fascinating read, and for anyone interested in the history of energy or global geopolitics, it is essential reading.

Up to the challege? You can get it here (or in the UK or Canada). Or, just join the Subtle Illumination email list to your right.

The Price of Everything – Eduardo Porter

A little bit late this week – my apologies! Life sometimes gets in the way of the internet, I find.

“Market-transactions do not necessarily provide people with what they want; they provide people with what they think they want… [Prices] provide a road map of people’s psychological quirks, of their fears, their unacknowledged constraints.”

What do religion, happiness, healthcare, women’s rights, culture, and gifts all have in common? For good or for ill, says Eduardo Porter, they all involve prices. In The Price of Everything he covers how these issues and more are affected by the price system, and how people directly and indirectly put prices on everything that we interact with.

The standard criticism of this perspective goes back Oscar Wilde, of course: that people know “the price of everything and the value of nothing.” Porter argues that this can actually be a strength: prices may have little to do with what is good for people, but they can tell us what they believe or what they are willing to pay for. Many of our everyday values can be captured by the implicit prices we assign them, and even when prices are inefficient or incorrect, they still tell us what the people involved in the transaction believe.

An iphone app entitled “I am Rich” (now taken down) did nothing but flash a red gem on the screen, and retailed for $999, providing a price on status. Organs in Iran go for $1,200. Monogamy, he argues, spread largely as a result of an increased price on social cohesion, while animal rights movements are more common in the developed world because humane actions cost more in developing countries. All of these prices may be interesting, but unfortunately though his arguments have some merit, they feel incomplete. Few of us would agree, for example, that the Protestant Reformation occurred because the Catholic Church wasn’t giving good value for money.

Porter’s knowledge is broad, and unfortunately as a result the book can feel like a literature review that brushes over the material instead of providing insight. A chapter per subject, when the subjects are as vast as happiness, culture, and religion, means the book sometimes reads like a list of facts. I would enjoy a chapter here and a chapter there, but reading it cover to cover can be a a bit dry. In the end, though I enjoyed the brief anecdotes, I would have preferred a book that engaged with the material, rather than listed it. That said, though I can’t tell you the price of everything, I can admit I only paid £2 for the book.

Want more about the price of religion? Keep reading (or in the UK or Canada). Or, join the Subtle Illumination email list to your right!

Prosperity Without Growth – Tim Jackson

“We must bring back into society a deeper sense of the purpose of living. The unhappiness in so many lives ought to tell us that success alone is not enough. Material success has brought us to a strange spiritual and moral bankruptcy.” – Ben Okri

Prosperity Without Growth tackles an intuitively fascinating subject. Economists and politicians tend to assume that the key goal of policy is to create perpetual economic growth. There is, however, a finite amount of resources on Earth, whether oil, steel, or even volume of sunlight. Are these two facts compatible?

Unfortunately, despite my interest in its subject, I didn’t find Prosperity Without Growth compelling. The first two thirds seemed to add little to the discussion, while frustratingly the final third introduced ideas and frameworks that could well have made for an interesting book had they been discussed earlier. The book’s audience also seems unclear: he goes from introducing macroeconomic equations, likely appealing only to economists, to explaining very basic economics of little interest to the same.

In that final third, Jackson points out that to reconcile growth and limits, one of two things must happen. Either we must have sustainable growth, in which the economy grows but doesn’t require more energy inputs, as for example when we move employment to low-carbon jobs, or we must have a sustainable no-growth economy, as when productivity increases but we work less hours to compensate. To do either, he says, we must establish limits, fix our economic system, and change our social logic.

Perhaps the most interesting piece I have read on this subject is a discussion between an economist and a physicist, available here. It introduces ideas that had never occurred to me, like a planetary heat death from waste heat, and though I’m not sure I agree when we discuss that scale of issue that ruling out space travel is fair (you’ll have to read the link for yourself), I found the whole thing fascinating. I’m not sure I can say the same about Prosperity Without Growth. Still, it’s a book that tackles a critical issue of broad interest to many, and for that alone it deserves some credit. It does also manage some nuance and depth at the end – I just regret it didn’t manage it earlier.

Keep reading here (or in the UK or Canada). Or, get more illumination by joining the Subtle Illumination email list to your right!

Numbersense – Kaiser Fung

“Big Data has essentially nothing to say about causation. It’s a common misconception that an influx of data flushes cause-effect from its hiding place.”

You recently graduated from a law school, and are still searching for a job. You get a voicemail from your school telling you that they are conducting a survey of whether recent graduates have gotten jobs. If you do not respond, they will assume you have a job. Do you bother to call them back to tell them the disappointing news?

Odds are, you don’t. That’s why law schools use this and other techniques to game the law school metrics, disingenuously boosting their entrance GPAs and LSAT scores, reputational reviews, and post-graduation employment statistics. Too often, unfortunately, those metrics are taken at face value.

In Numbersense, Kaiser Fung argues that we are in the age of Big Data – an age of extensive, personalized information useful for purposes including marketing, economics, and sports, but also a source of confusion, doubt, and increased evidence for theories both good and bad. Numbersense is the willingness to probe behind headline figures and decide if the data is actually meaningful, whether law school statistics or the unemployment rate. We turn to data for answers, but it is too often overwhelming, misleading, or evidence only of correlation, not causation.

The last point is perhaps the most critical. Target, a large shopping chain, was so effective at predicting pregnancy from consumption patterns they accidentally informed parents before the daughter had herself let them know – a triumph for Big Data, if something of an awkward one (details can be found in Charles Duhigg’s report here). Unfortunately, this doesn’t mean buying a large purse causes pregnancy, but simply that they correlate. Regardless of the size of the data set, Fung argues, Big Data shows correlations, not causations.

Big Data has become something of a buzzword in recent years, and the explosion in available information is indeed of huge importance. It is not, however, a panacea, and Fung rightly emphasizes this. Whether giving a how-to manual for Law School Deans looking to game the system, criticizing the Groupon business model, or studying obesity, Numbersense is an entertaining read. It will likely have the most appeal, however, to non-statisticians: Fung has succeeded in creating an almost entirely non-mathematical introduction to big data, explaining the challenges of econometrics without requiring knowledge of statistics, and for that reason alone the book is a worthwhile read. Understanding the difference between headline and core inflation may not induce murder-mystery suspense, but Fung makes it both interesting and enjoyable.

Still interested? Keep reading (or in the UK or Canada). Or, sign up for the Subtle Illumination email list to your right! Disclosure: I read Numbersense as an advance reader copy – it is released tomorrow.