In lieu of actually writing something, I can tell you what I’m reading:
At NYT: The End of the Financial World as We Know It. Michael Lewis and David Einhorn talking about why nobody cared what Bernard Madoff was doing - among other things.
Thomas Levenson’s “Measure For Measure: A Musical History of Science”. This book hinges on the etymology of the word Instrument: It has broadened over time to include quite a bit of semantic territory, but its concrete usage Music and Science both lay claim.
Levenson attempts to tell a big story about how the aims of “science” have changed over the years in Western society: “The kind of question being asked”. Our concept of the scientific revolution - Galileo, Newton, and the early chemists, certainly - represents a shift to a different question. It’s a story I’ve heard told in many ways before.
Denis Donoghue’s “Ferocious Alphabets”. This book has been languishing on my bookshelf for years. I think I may even have carried it with me to India in 2000 - I brought a lot of books because I suspected that I would have downtime rained in at hotels (I did), and I thought it might be hard to purchase books (it wasn’t). Remind me to talk about the book stalls of Calcutta one day.
But my appreciation of “Ferocious Alphabets” was increased vastly after reading “Proust And The Squid”. The main thing I can say about it quickly is this: Donoghue holds up examples from several writers to illustrate several major approaches to writing. He leads us inevitably back to Plato’s Phaedrus, and the original complaints about writing versus speech.
Posted in economics, books, writing-craft | no comments | no trackbacksPosted by Evan Bittner
Mon, 05 Jan 2009 01:44:00 GMT
I just read “A Modest Proposal For The Auto Industry: Stop Building Cars” over at the TechCrunch website.
For a moment there, my preconceived notions made me think it was going to be about something else… My pet theory is that the auto makers should be moving sideways. If costs are going up and demand is going down, then those companies are going to make a lot fewer cars and employ a lot fewer people. We should already have been thinking about what else that labor and capital could be building, and whether it will still even be those companies.
A recession is like one enormous game of musical chairs - with a lot of chairs suddenly missing. It’s hardly weird to have people out of a job, especially in heavy industry. Are we going to have these people sit around waiting for product demand to return to normal? On automobiles only? How many automobiles do you think we should have? Don’t answer yet! Wait until you’re sitting in traffic on an interstate.
The article is actually about Vertical Integration, and the opinion that American car companies are too integrated. Amusingly, the comparison is with PC manufacturers. Not the same thing, but still instructive. You’re not really interested in enormous economies of scale on a product with decreasing demand schedules. And how are these heavy industries going to come up with new ideas when they can’t add state-of-the art factories or hire a lot of new workers? They’re still only riding it out.
Although there was some talk about outsourcing a lot of the factory work, we do still have auto plants here. Don’t assume that it will always make sense to build our stuff in China. When transaction costs were low, it was a great idea. It might still be a good idea now, but things could change abruptly. If the big three automakers spun off their supply and manufacture, they could still exist as brands. They could focus on design. They might even learn more quickly what drivers actually need. Some of these vertical layers would thrive and some wouldn’t. There would be freedom to merge operations once separate, and to enter new markets. Design would have lower barriers to entry, and should spawn a lot of new competition, with plenty of new innovation to go with it. Customers might get the opportunity to buy vehicles better suited to their needs.
Some Links & Quotations
“…in the early 1960s, the machine aesthetic and Taylorist ethic of standardization had been supplanted by the all-American atomic-age look of NASA engineering. The brawny, grease-smeared mass production characteristic of automotive factories had been replaced by the ideal of skilled technicians in clean-room suits constructing spindly structures from foils and plastics.” “Star Wars: A New Heap” online at Triple Canopy
“I, Cringely” at PBS: Insanely Great: What if Steve Jobs ran one of the Big Three auto companies?
Posted in economics | no comments | no trackbacksPosted by Evan Bittner
Thu, 04 Dec 2008 16:16:00 GMT
Clusterstock: America Discovers That Bailout Will Be Used To Pay Wall Street Bonuses
After some time spent reading the comments on this article, I realized that it relates to my earlirt post Profits And Altruism. You don’t put money in a tip jar so that some drug addict can come along and steal the jar - so why should taxpayer bailout money be poured into financial institutions so that some executive can take an enormous bonus?
The problem with a lot of on-line arguments is the disconcerting sense that the participants are not actually arguing with each other. And, this is such a complicated topic that unstated assumptions play a major role. Add to that the fact that someone firing off a quick comment is not going to be able to address the full scope of what they intended to talk about anyway.
So, I’d like to try my hand at it in this slower format:
There have been a number of misunderstandings about the Wall Street Bailout. How much money is it, really? (I’ve heard the $700 billion figure mentioned a lot…) Where does the money actually go? (CEOs awarding themselves bonuses?) and finally, Did the government get any equity / Were there any conditions tied to the money?
I noticed that the defenders of the Street took the vague argument “those guys were expecting those bonuses” and fleshed it out with some nuance: The bad guys who created the mess have already been fired (I’m not sure where the proof is - I just take their word for it?), and there is a formula used to calculate bonuses for the rank and file investment bankers which includes factors for individual performance, unit performance, and firm performance. That’s all well and good, but don’t you think the fact that the firm had to be bailed out is a big negative on that ‘firm performance’ term? Avoiding the disaster of a firm “too big to fail” may be warranted - stability of the markets is a good thing for everybody, especially the poor - but everybody may have to accept some sacrifices for that stability. Good individual performance ought to be rewarded, and many people commented that the rewards are largely in equity - equity that tanks with the firm’s stock price, so they really are being penalized despite the stated value of their bonus. That might argue against direct punishment… Had there not been many excellent performances throughout the firm, the whole thing would have been an unmitigated failure much earlier.
Another argument among the defenders of the Street was that those payments fuel the economy. Granted. But, how that money is apportioned makes a lot of difference. They don’t dump cash out the office window (there’s a cartoon somewhere of Alan Greenspan doing this when the Fed couldn’t lower rates any further) - but does that mean the bonuses are necessarily being awarded fairly? Of course not. If we the people have an interest in making sure there is fair play, but we don’t get to see behind the curtain, people are obviously going to be a little worked up over it.
Here’s an idea: take that $700 billion and split it evenly among the taxpayers: What’s that per person in the US? For something in the neighborhood of 200 million taxpayers? I calculate roughly $3500. Why don’t they do that? The big firms would fail, but everybody would suddenly have some money to keep spending or even invest. Some people would use it to make payments on their mortgage or car loan. Other people would see a new opportunity. People who had a lot of money already wouldn’t notice much difference. Isn’t that the reason we got those economic stimulus checks? Paying off debts with your windfall isn’t sexy - it destroys wealth in the same sense that credit creates wealth in the first place - but it results in a more orderly shrinking of the economy, not an abrupt collapse.
If these big firms fail, and the premise is that they were “adding value” to the economy - creating wealth - then where has that value gone? People had jobs for a while. They worked hard, got paychecks, but eventually the all the excess value in the firm got sucked out and sent somewhere else. If you accept that the creation of wealth is a non-zero sum game, then the corresponding destruction of wealth during these catastrophes is also a non-zero sum game - only the sum happens to be negative in this case. It may not be so bad if the participants were well compensated for their time and effort - that’s one component in the removal of wealth from the firm. Seen as a whole, a failed firm isn’t necessarily a total loss if people benefited to a certain degree over a period of time. Perhaps there was a way for the firm to survive longer by reducing the amount of wealth it let people take home month after month. Then again, maybe none of them would have stayed for long.
BBC just reported that Treasury Secretary Paulson has decided that the bailout money will not be used to buy “toxic assets”, but be used instead to buy stock in those companies. They are also presenting a story about the global economic downturn in “rubbish” (for a second I thought they were saying that the downturn was rubbish - a lie)l However, the Chinese have stopped buying waste paper to recycle into boxes since they’re suddenly not able to export as much.
Posted in economics | no comments | no trackbacksPosted by Evan Bittner
Wed, 12 Nov 2008 21:19:00 GMT
Wikipedia: Nomothetic And Idiographic
I can no longer remember where I saw a remark on these two words. One of the non-fiction books I’ve been reading, no doubt: It was definitely a remark about academic modes in History vs. Economics. But as you can see from a quick search, these words can also be used to refer to personality types(!)
From the Wiki: “In sociology, the nomothetic model tries to find independent variables that account for the variations in a given phenomenon… The idiographic model focuses on a complete, in-depth understanding of a single case.”
I’m not sure what all the fuss is: This feels merely like a difference between general and specific; the tendency to generalize and the tendency specify.
Posted in economics | no comments | no trackbacksPosted by Evan Bittner
Tue, 11 Nov 2008 23:44:00 GMT
Over at Seed’s Science Blogs there is an interesting little piece by Jonah Lehrer (author of “Proust Was A Neuroscientist”) where he compares the current financial market crisis with the overfishing of Atlantic cod…
“People love models, especially when they’re big, complex and quantitative. Models make us feel safe. They take the uncertainty of the future and break it down into neat, bite-sized equations. But here’s the problem with models, which is really a problem with the human mind. We become so focused on the predictions of the model - be it the cod population, or the risk of mortgage derivatives - that we stop questioning the basic assumptions of the model. (Instead, the confirmation bias seeps in and we devote way too much mental energy to proving the model true.) It’s not just about black swans or random outliers. After all, there was no black swan event that triggered this most recent financial mess. There was simply an exquisite model, churning out extremely profitable predictions, that happened to be based on a false premise. Hopefully, the markets will recover quicker than the Atlantic cod.”
Posted in economics | no comments | no trackbacksPosted by Evan Bittner
Sat, 01 Nov 2008 17:27:00 GMT
Thanks again to Jason Kottke for pointing out an interesting thing I might have missed: Obama has apparently read Michael Pollan and taken him seriously (…full Time interview with Obama here. A book excerpt and Pollan interview here ).
My dear sweet mother has been telling me all my life that “they’re messing with the food”. As a kid I already knew her theory that chemical additives and cheap substitutions were causing the rise in childhood allergies. I took it seriously, even when I was skeptical (in fact maybe I owe my skepticism to her).
It’s the same old story of Prometheus that we get into with every new technology, isn’t it? Ham-fisted attempts to take the benefit of a new idea ignore the dark side of tinkering with nature and suddenly you’ve got high rates of cancer in your neighborhood, or soft cadmium leaching into your bones - and you don’t know why.
But that’s okay - they assure us - it will all be fixed in version 2.0… I’ve got as much enthusiasm for new technology as the next guy, but it does seem to be a youthful obsession - I could be losing my grip on it. And, technology is mute on the problem of risk management and quality assurance - those things are up to us. Which takes me right back to externalities and the temptation to cheat for higher profits. And the need for us to all make these decisions together. One of the effects of profit is to abstract away all those externalities, making them seem not to be anyone’s fault in particular.
The Pollan article is right up my alley: It’s another angle on the Peak-Oil Problem. I just wrote a big thing on inflation last night, then spent part of this morning editing it, and it just occurred to me that cheap energy will naturally worm its way into everything we do. I see an analogy with money bidding up derivatives in lieu of raising consumer prices: Supply and demand operating on ingenuity. But, the ingenuity is only in plentiful supply because the raw inputs are so cheap. Pull that pin out of the machine, and the whole thing could fall apart. If cheap energy boosts the process at every stage, then prepare to see the process decidedly unboosted.
This is all to remind us that economics is not just about money. Much of the theory of economics has developed in recent centuries, long after money hit the scene. To live life obsessed with money is to ignore the processes by which wealth is actually created; It results in all manner of streetcorner hustle - no matter if you’ve got a three piece suit and a downtown office suite.
It also emerges that people will play some dangerous games with nature when they’ve got their eyes on the dollar. Well intentioned folk come up with reasonable standards for the mass market, then ingenuity strikes: Every loophole is exploited, studies are commissioned to find the minuscule benefit in an additive. From Pollan’s book “In Defense Of Food”:
Yet as a general rule it’s a whole lot easier to slap a health claim on a box of sugary cereal than on a raw potato or a carrot, with the perverse result that the most healthful foods in the supermarket sit there quietly in the produce section, silent as stroke victims, while a few aisles over in Cereal the Cocoa Puffs and Lucky Charms are screaming their newfound “whole-grain goodness” to the rafters. Watch out for those health claims.
Posted in politics, economics, books | no comments | no trackbacksPosted by Evan Bittner
Wed, 29 Oct 2008 15:23:00 GMT
What do you want to do?
Is it profitable?
No?: Then forget it. It can’t be done.
Or, maybe… Someone will contribute: Grant money, a government subsidy, a tax break. Maybe someone will look the other way on ‘externalities’: let you cut costs by dumping, pick up the tab for the social fallout so that you don’t have to… Is it profitable yet?
ROI And Discount Rates - A Diversion
Something I learned in a Project Management class has never sat well with me… I knew something was wrong at the time when my classmates couldn’t explain how the professor came up with the discount rates in her example. I jumped to the conclusion that she didn’t know herself. My classmates had only the thinnest grasp of the foundations - they clearly weren’t comfortable tinkering with the numbers beyond the examples from the blackboard. Perhaps this is just one of my bad habits: Asking too many questions… And there was a lot of grumbling from both sides when I would ask questions about this. Everyone just assumed that I was an idiot - Questioning the gospel. The answers tended to go around in circles - circular logic. The answer given was “Cost of Capital”, but with every step away from the core of the material in search of answers, people got understandably wary that it would never end, and irritated with me for caring. So much for education: We were spending a lot of time memorizing acronyms from Earned Value theory of Cost Control. We were too busy to learn about Asset Pricing Models or some-such.
Discount rates make sense in a stable environment: A volatile environment is precisely the situation where you run into difficulties. What’s in store for the future? Inflation? Hyper-Inflation? Maybe Deflation? What discount rate should you choose when you make descisions about a reasonable Return on Investment? In a deflationary period, you could make a profit even with a nominal loss.
But as you may or may not have discovered, supply and demand on money is affected by ‘substitute goods’. Also, if everything is a transaction, how can money be created or destroyed? - Even with taxes or fees, isn’t there a kind of ‘conservation of cash’? When the stock market goes down, it means money is being pulled out. Doesn’t that money have to go somewhere? Money taken out of stocks gets put somewhere else: A bank account, then maybe commodities, durables, consumables. But the seller of those items receives the money. And the taxman takes his cut. No money created or destroyed - just ‘redistributed’. Help me out if I’m working with any bad assumptions here. When you lose money on stocks (or gold, or land, or antique cars), it is actually on a pair of transactions. Same thing when you win: Buy low, sell high. Why doesn’t everybody get to do that?
Inflation is often blamed on the volume of money - the ‘Money Supply’. That’s a big theme in that book “The Great Wave” that I’m reading. And in those plumbing models from 20th century economics. Money supply is more than just cash, depending on your definition, it includes a bunch of I.O.U.s in transit - checks in the mail, but also ‘corporate paper’ and some other financial instruments you and I will probably never encounter in real life. Anything that increases the supply of this definition of money creates a bidding war on anything hard cash can be traded for, and that causes inflation. The only problem with that is we tend only to notice inflation on everyday items. If some complicated theory is used to price financial instruments, the rising prices on things like stocks, bonds, or Collateralized Debt Obligations are either some indication of economic health, or just another place to stash big stacks of money that don’t raise the price of bread, milk, gasoline and washing machines. Bubbles can happen in anything from Internet start-ups to real estate, and the general effect there is once again to prevent all that money from bidding up the price of consumer products.
From “The Great Wave”, I learned that inflation doesn’t affect all products the same way. In historical periods of inflation (the very Great Waves Fischer is referring to), prices on raw commodities go up faster than manufactured goods: Food and fuel that even the poor must consume vs. Fancy goods that only the wealthy would buy anyway.
Many governments have tried to print their way out of a budget crisis, and that makes everything worse. Just look at Argentina, or Weimar Germany… Inflation erodes the value of the cash you’re holding. It punishes the creditor because the money is worth less when they get it back… Enter the discount rate. Let’s jigger it so the debtor has to pay back a little more the longer they wait to do it. Whatever the payment schedule, we can tack on 10% to what’s left unpaid.
Now it’s investing time. I’ll have to measure my ROI against inflation: I’ll want a higher percentage than the inflation that I can expect over the life of the investment - If I stuff the money in my mattress, it’s losing value, so I am virtually forced to invest it in something. There is even some risk to the mattress strategy - maybe the house burns down. Within a certain range, investing is stimulated. Outside of that range, not so much… During deflation, that mattress strategy starts looking pretty good. During deflation, the value of the money you hold is going up, so why would you loan it out to anybody? On the other hand, if inflation gets too high, you’ll have some trouble finding a high enough ROI. Demand all the profits you want, but will any venture be able to provide them?
Did you figure out what the discount rate should be yet?
Then we should add in the ‘risk premium’: If the investment is risky, the discount rate should be higher. The investor should get something extra back, since he might not get anything at all. Paying that back can be tricky, so the expectation of a high profit goes up too.
We’re back to the beginning now: It’s not the good ideas that will win, but the profitable ideas. One school of thought holds that the profitable is the good. But since high profits are often the cover for some negative externality, maybe the ideas attached to them are not so good.
Have I Rambled Too Far?
What is altruism, after all? If we want to give something away, where is a good place to do the giving? Should we give a boost to the profit extractors, or the good ideas that won’t profit left to themselves?
At Wikipedia I read: “For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.”
Can you refine your definition of “worthwhile”? Isn’t it also worthwhile to achieve a desired goal, even if you should lose some money in the process? Isn’t that a vehicle for altruism? Don’t governments generally engage in that type of behavior to provide for the society in general? By losing money on an investment, you pass along wealth to some effect: But be careful when you do - It might improve life for the masses, or it might ‘line some billionaire’s pocket’.
Posted in economics, school | no comments | no trackbacksPosted by Evan Bittner
Wed, 29 Oct 2008 14:28:00 GMT
Among the other books I am reading right now, I started re-reading David Hackett Fischer’s “The Great Wave: Price Revolutions and the Rhythm of History”. I wanted to consult it after reading some of the Floyd Norris Blog at the New York Times this afternoon. I read “Great Wave” a couple years ago, and I suppose I am instinctively looking for background material in making sense of the current economic situation. Here’s a little gem from the introduction:
“The economic consequences of decelerating population growth are[:] slowing demand and downward pressure on prices throughout the world, which lead in turn to severe financial crisis in economies that were organized on expectations of very rapid growth.”
This cuts right to the heart of the matter: ”expectations of very rapid growth”. If we are having trouble because of our expectations… Is there anything we can do?!?!
Posted in books, economics | no comments | no trackbacksPosted by Evan Bittner
Sun, 26 Oct 2008 03:45:00 GMT
WETA is showing Wall Street tonight. I’ve always wanted to watch it. More so now that the real Wall Street is getting into trouble.
Small Is Beautiful
When I was in India, I bought a copy of E.F. Schumacher’s “Small Is Beautiful”. It’s a book that relates well with the Peak Oil school. I’ve read some criticism of Schumacher somewhere along the way, but I don’t expect every author I like to be 100% right, all the time. Do you?
Let’s just say for the sake of argument that we are headed into an energy scarce future. Survival in that future will not be easy - not just because there will not be enough easy wealth to go around (is there enough now?), but because not enough people have the skills they need to survive it.
Say what you want about Malthus, but I think he is going to be our guiding star once more, should we actually live long enough to see it. This many people extracting what they need to survive is not going to be viable. If we are successful, it’ll be hell on the planet, and if we fail… well, that’s a bit dark for this discussion.
I’ve mentioned price as a negative feedback mechanism before, right? It’s no different from the electrical feedback that stabilizes an amplifier - at the cost of reduced output. Did you want stability or maximal output? That’s a matter of taste, I guess. Like strapping a rocket on your car to go faster, but then, always in danger of being blown to bits.
High prices are a signal. They say: “Use Less”. If prices are kept artificially low, then people do not use less. It’s business as usual.
My feeling about “Small Is Beautiful” - and I think it deserves to have me defend it - is that the lesson applies at all scales. Big isn’t necessarily bad - size should be sensible relative to the goal. We see it now in space exploration: Small companies are getting into the launch business. We have NASA precisely because we needed an escape valve for all our excess wealth. In many ways it was a good investment, but I wonder at the cost of it all. How dearly did we purchase the benefits of the space age? Did we perhaps lose opportunities to do something better with that money? Things that we simply failed to imagine?
Maybe it’s just human nature to want to gamble with the whole wad - take stupendous amounts of surplus (even when the surplus is a temporary illusion and the next disaster is on its way, unbeknownst to us) and blow it on that one big spectacle. This may be why we also developed a brain. Maybe human nature was leading us astray so often that only the smart survived - those people who could prudently circumvent their human nature when it was most advantageous.
There is this presumption that solving the problems of each little individual is not worthy of our attention. Especially when we can have something flashy that no one person could have paid for. Credit and Banking are certainly necessary - I would never claim that there is nothing big worth doing - but, bigness for its own sake is misguided. The larger the goal, the more we need to be in agreement about whether it is worth pursuing. But, this doesn’t stop the scoundrels, who pervert the real good Capitalism does in creating wealth, satisfying needs, and improving the lives of all.
Who decides what is worth doing? And, for how much? Once again, it’s the price. If you create the illusion that gasoline is cheap, then people will drive like there is no tomorrow. If you structure a mortgage so that a poor guy with a family thinks his payments will always be that low, he will buy a house he cannot afford, then be unable to interest anyone in buying it at half the price later. And, if we allow Wall Street players to create bizarre investment vehicles where nobody can gauge the real risk - because it makes rich people so happy, chances are those things weren’t priced correctly.
Wall Street is a hell of a lot more complicated some 20+ years after the fictional Gordon Gecko, but I know GG is still the guiding light.
Henry Ford
I use Henry Ford as my code word for a particular factory scenario. Whenever I tell people that I can’t unravel this issue, they tend to treat me like I’m an idiot. I, on the other hand (and I accept that I might just be missing something, in an intellectually obstinate fashion…) think that they are all just afraid to question the sources of received wisdom.
Henry Ford thought he could sell more cars if he paid his workers enough that they could also buy one. And, apparently it worked.
Every time I look, I see the factory, taking land, labor and capitol to transform some amount of material into some number of finished automobiles. You have fixed costs of setting up the factory (buy the land, build the shed, take delivery on the equipment, and pay the industrial designers), then you have variable costs to transform inputs to outputs (rubber, wood, and metal as the materials; electricity to run the machines; paychecks for the workers) What comes out is more valuable that what goes in, otherwise there are no profits. Economies of scale allow you to produce enough units to amortize the fixed costs as a small fraction of the variable costs. With their paychecks, the workers can afford to buy a car that they just participated in manufacturing. But all the workers together cannot buy all the cars - it takes them some time to earn enough for one, and during that time each worker probably contributes the equivalent effort necessary to build hundreds (hard to gauge with specialization, but it’s in there). The cars bought by workers are not going to be much more than 1% of the total. The other 99% are bought by people who are not employees. So paying your workers enough to be able to afford one of your cars is a bit of a red herring, if you ask me.
Going back to price… I think that profit may only be possible in cases where an input is undervalued. And, can you see now why the idea of paying the workers more sets of an alarm bell for me? If workers are so undervalued that you can pay them more and still profit, then what other input is being undervalued? The factory is “getting away with murder” - some externality that subsidizes the cost.
One of the things you notice in Open Software projects is that people will contribute effort without pay. They are being ‘paid’ in other less tangible ways. This translates to other workforces… Any time you can inspire people to take part of the full monetary value of what they do as something non-monetary, you’ve got a shot at success: Any worker can be proud of what they help accomplish - all the more so if it’s a tangible output. And, the bigger the better: “Hey, I put five rivets in that jumbo jet! - It wouldn’t fly without me. I was integral to the success of this great thing.”
Posted in economics, film-and-TV, books | no comments | no trackbacksPosted by Evan Bittner
Sun, 05 Oct 2008 02:58:00 GMT
I have posessed a copy of Sir Peter Hall’s “Cities In Civilization” for quite some time now - the hardback was published in 1998, and I must have bought it within a year. It is quite the resource on comparative urban studies - he saw that there was a piece missing in the analysis of what made certain cities at certain times great. I’ve been nibbling at this thousand-pager a bit here and there, and it seems like a nice compliment to “The Riddle of the Modern World” - so many of those same issues are addressed by Hall. Any good remarks on economics are a special treat for me, and so the following bit about ancient Greece struck me:
“[The citizens of Athens] saw wealth as good and desirable, even necessary for the life of the good citizen. But its function was not to provide a base for more acquisition; it was the very reverse, to liberate the citizen from economic activity and concern.
Posted in books, economics | no comments | no trackbacksPosted by Evan Bittner
Sun, 05 Oct 2008 01:43:00 GMT
