Closer To The Ideal

Yesterday I wrote that patents are often bad for the economy.

Today, I see this article about how patents delayed the Industrial Revolution:

In late 1764, while repairing a small Newcomen steam engine, the idea of allowing steam to expand and condense in separate containers sprang into the mind of James Watt. He spent the next few months in unceasing labor building a model of the new engine. In 1768, after a series of improvements and substantial borrowing, he applied for a patent on the idea, requiring him to travel to London in August. He spent the next six months working hard to obtain his patent. It was finally awarded in January of the following year. Nothing much happened by way of production until 1775. Then, with a major effort supported by his business partner, the rich industrialist Matthew Boulton, Watt secured an act of Parliament extending his patent until the year 1800. The great statesman Edmund Burke spoke eloquently in Parliament in the name of economic freedom and against the creation of unnecessary monopoly — but to no avail.[1] The connections of Watt’s partner Boulton were too solid to be defeated by simple principle.

Once Watt’s patents were secured and production started, a substantial portion of his energy was devoted to fending off rival inventors. In 1782, Watt secured an additional patent, made “necessary in consequence of … having been so unfairly anticipated, by [Matthew] Wasborough in the crank motion” [2]. More dramatically, in the 1790s, when the superior Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system.[3]

During the period of Watt’s patents the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; while between 1810 and 1835 it is estimated to have increased by a factor of five.[4]…

In most histories, James Watt is a heroic inventor, responsible for the beginning of the Industrial Revolution. The facts suggest an alternative interpretation. Watt is one of many clever inventors working to improve steam power in the second half of the eighteenth century. After getting one step ahead of the pack, he remained ahead not by superior innovation, but by superior exploitation of the legal system. The fact that his business partner was a wealthy man with strong connections in Parliament, was not a minor help.

Was Watt’s patent a crucial incentive needed to trigger his inventive genius, as the traditional history suggests? Or did his use of the legal system to inhibit competition set back the industrial revolution by a decade or two? More broadly, are the two essential components of our current system of intellectual property — patents and copyrights — with all of their many faults, a necessary evil we must put up with to enjoy the fruits of invention and creativity? Or are they just unnecessary evils, the relics of an earlier time when governments routinely granted monopolies to favored courtiers? That is the question we seek to answer.

Marco Arment says software patents are bad for the economy:

I’ve considered the arguments by Stallman, John Gruber, and Tim Bray on software patents, and I side with Stallman in that software patents are inherently problematic and are a net loss for society.

The major difference in their arguments is that, while all three mention the realities and dysfunctions of the patent system, Stallman focuses strongly on the difference between what it’s intended to do and what actually happens. He also illustrates the reality of trying to develop any nontrivial software in a patent-filled landscape.

Many argue that inventors should be protected and incentivized by patents, otherwise they would stop inventing. It’s a nice theory, but it doesn’t hold up for software.1

We can argue about what the system should do, or what it theoretically does, or what it ideally does, but that’s an academic exercise at best. To evaluate whether software patents are a net gain for society, we need to evaluate their reality, which differs quite a bit from most arguments for why patents are necessary.

I’d go further. Most patents are bad most of the time. They are dangerous and need to be limited, no matter what industry we are talking about.

Patent is a government monopoly. In a liberal society, monopolies are usually seen as bad things. Monopolies, in general, can lead to non-optimal allocations of resources, and when the monopoly is defended by the government there is no way for any entreprenuer, no matter how talented, to offer a competitive alternative. Monopolies encourage rent-maximazation rather than innovation (in other words, the owner of the monopoly simply sucks up as much money as possible, and feels little need to innovate or reinvest their profits).

The Founding Fathers of America were on intimate terms with the harm that arose from government granted monopolies. At a stretch, we could interpret the whole American Revolution as a patent dispute, for it was when the British government granted a monopoly on trade to British merchants that the Americans were first moved to revolt. One of the first and largest American protests was the Boston Tea Party of 1773, during which the British East India Company, a large multi-national corporation that, at that time, had dealings in almost every nation on Earth, had its Boston inventories of tea destroyed. (In this case, the East India Company had a monopoly on “tax free” trade, whereas all American merchants had to pay an import tax, and therefore were at a competitive disadvantage. For instance, in 1768, John Hancock’s ship ‘Liberty’ was seized by customs officials and he was charged with smuggling.)

Because the Americans had suffered so much at the hands of government granted monopolies, they were commited to placing extremely careful limits on their newly independent government’s ability to grant monopolies. Thus in Article 1 of the Constitution, Section 8, they wrote:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”

The purpose of this section was likely meant to be two-fold: to allow government granted monopolies in one, limited, case, and to ban them in all other cases. Although the monopoly abuses of the Stuart Kings are now forgotten, they were vivid for the Founding Fathers In fact, in 1774, when the government of Virginia asked Thomas Jefferson to write up its formal letter of complaint to the British King, Jefferson starts off with the early history of Virginia and the Stuart Kings: “A family of princes was then on the British throne, whose treasonable crimes against their people brought on them afterwards the exertion of those sacred and sovereign rights of punishment reserved in the hands of the people for cases of extreme necessity.” That is to say, the King had to be killed because he commited great crimes against the people and oppressed them politically and economically. Among those crimes was an extreme abuse of the government’s ability to sell monopolies to the hightest bidder, as described in this passage from Christopher Hill’s book Century of Revolution:

It is difficult for us to picture for ourselves the life of a man living in a house built with monopoly bricks, with windows of monopoly glass; heated with monopoly coal, burning in a grate made of monopoly iron. His walls were lined with monopoly tapestries. He slept on monopoly feathers, did his hair with monopoly brushes. He washed his face with monopoly soap, his clothes in monopoly starch. He dressed in monopoly lace, monopoly linen, monopoly belts, and monopoly gold thread. His hat was monopoly beaver, with a monopoly band. His clothes were held up with monopoly belts, monopoly buttons, and monopoly pins. They were dyed with monopoly dyes. He ate monopoly butter, monopoly currants, monopoly red herrings, monopoly salmon, and monopoly lobsters. His food was seasoned with monopoly salt, monopoly pepper, and monopoly vinegar. Out of monopoly glasses he drank monopoly wines and monopoly spirits; our of pewter mugs made from monopoly tin he drank monopoly beer made from monopoly hops, kept in monopoly barrels or monopoly bottles, sold in monopoly-licensed ale-houses. He smoked monopoly tobacco in monopoly pipes, played with monopoly dice or monopoly cards, or on monopoly lute strings. He wrote with monopoly pens, on monopoly paper; read (possibly through monopoly reading glasses by the light of monopoly candles) monopoly printed books, including monopoly Bibles, printed on paper made from monopoly collected rags, bound in sheepskin dressed with monopoly alum. He exercised himself with monopoly golf balls and in monopoly licensed bowling alleys. Mice were caught in monopoly mousetraps.

…Monopolies interfered with the normal channels of trade. By the late 1630s, the economy was suffering. “If such a system had been maintained,” Mr Unwin wrote of Stuart economic regulations in general, “the Industrial Revolution would never have happened.”

Against this the citizens of the British Empire revolted, killed their King, and, after an interlude, passed the English Bill of Rights. Jefferson’s point was that the rights described in the Bill Of Rights applied to the colonists as much as to the citizens in the home country, but the British Parliment disagreed. Therefore when the colonists won their independence and set up their own government, they were keen on ensuring for themsevles certain rights, and protecting themselves from certain abuses, among them the abuses of monopoly.

Article 1, Section 8 of the Constitution makes clear that the American Federal government will not be handing out monoplies on tin, rags, golf balls and butter. Monopolies will be reserved for one limited case: “securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”. The Founding Father’s knew that government granted monopolies were dangerous, and needed to be carefully limited. This is a bit of wisdom that the US government has largely forgotten in recent decades. Patents are dangerous, and need to be carefully limited. For many industries, they should never be allowed.

I’ve noticed this too. Few people will do things they know to be evil, but they can rationalize the worst kind of behavior, and convince themselves that bad behavior is good. And when there is an incentive involved, the bias gets a lot worse:

Incentive-cause bias, both in o ne’s own mind and that of o nes trusted advisor, where it creates what economists call ‘agency costs.’

Here, my early experience was a doctor who sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln, Nebraska. And with that quality control for which community hospitals are famous, about five years after he should’ve been removed from the staff, he was. And o ne of the old doctors who participated in the removal was also a family friend, and I asked him: I said, “Tell me, did he think, ‘Here’s a way for me to exercise my talents’” — this guy was very skilled technically– “‘and make a high living by doing a few maimings and murders every year, along with some frauds?’” And he said, “Hell no, Charlie. He thought that the gall bladder was the source of all medical evil, and if you really love your patients, you couldn’t get that organ out rapidly enough.”

Now that’s an extreme case, but in lesser strength, it’s present in every profession and in every human being. And it causes perfectly terrible behavior. If you take sales presentations and brokers of commercial real estate and businesses… I’m 70 years old, I’ve never seen o ne I thought was even within hailing distance of objective truth. If you want to talk about the power of incentives and the power of rationalized, terrible behavior: after the Defense Department had had enough experience with cost-plus percentage of cost contracts, the reaction of our republic was to make it a crime for the federal
government to write o ne, and not o nly a crime, but a felony.

I’ve trouble believing a dictatorship like China can grow faster than a democracy like India, over the long term. Usually dictatorships can use brutal methods to enable 10 or 15 years of growth, but then they collapse because of the internal or external social tensions that inevitably arise due to the nature of dictatorship. Articles like this one offer further clues on why China’s growth is not likely to last.

John Quiggan feels Europe’s current focus on the welfare of its people is unique.

Almost every state of any significance in history has aspired to dominate its known world. In the last century, Britain, Germany, Russia and even France[1] aspired to this role, and right now Russia and China are keen to try. Religiosity, militarism, inequality, and governments that do little for their subjects are the norm rather than the exception. Long hours of hard work have been the lot of humankind at least since the arrival of agriculture.

The real exception to all of this is Europe[2]. The largest economic aggregate in world history, it has enough military power to repel any invader, but is deeply uninterested in using this power to any more glorious end. It grows by a process of reluctant accretion, controlled by ever more onerous admission requirements. In all of history, it would be hard to find anything comparable in terms of pacifism, godlessness, equality, leisure for the masses or public provision of services.[3]

Then the EU itself. There aren’t many historical parallels and those that I can think of (the US under the Articles of Configuration and the Commonwealth of Independent States, for example) were rapidly abandoned. It’s ungainly, unloved and bureaucratic, and yet it has persisted for 50+ years (nearly 60 if you count the ESC). The Great Powers of the 19th are now, with marginal exceptions, parts of this post-sovereign collective.

It’s for these reasons that American views of Europe resemble de Tocqueville in reverse. Something so unprecedented, and against the laws of nature, they think, cannot possibly survive, let alone prosper. And yet it does.

Not sure what to make of supposed graduate students (in economics) supposedly bad-mouthing one of the winners of the Nobel Prize. Especially hard to understand are the attacks based mostly on gender. In 2010? The attacks suggesting that economics are better than political science are also worrisome – the events of the last 18 months have taught us that some in the economics profession are already frighteningly out of touch with reality. To have young economists closing their minds to what various disciplines can teach them would amount to a worrisome trend, if it turns out to be anything more than ranting on a website.

It got worse and a bit embarrassing when Steven Levitt noted that he too did not know who she was but thought that “the economics profession is going to hate the prize going to Ostrom even more than the Republicans hated the Peace Prize going to Obama”.

Unfortunately, as I found out Levitt was right. Nowhere was this more evident than when I went to the Economics Job Rumors website. The site is frequented by economics graduate students who are on the academic job market, and as such is a reasonable barometer of the ways in which such students in the field are thinking. What I found was really disturbing. There were over 200 responses to a thread called“NOBEL BULLSHIT” in which the undisguised ignorance, tribalism and vicious misogyny of the graduate student pool were starkly evident. Here are a choice few comments which are, I hate to say, not unrepresentative of most of the discussion there.

“This is the problem with Affirmative Action: last time a woman tried to go to the moon, the Challenger exploded 73 seconds after the launch. Now this is the end of Economics.”

“Economics is superior. Don’t let political science conteminate (sic) us”

“she’s not top 5% on ideas on any ranking!!”

“susan athey or nancy stokey if you want a woman. This girl seems to be a political scientist. I don’t think she has published original research in any major economics journal”

This is the average opinion among the pool of people in their late twenties and early thirties who are going to be the teachers of economics and the leaders of thinking about economics and society in the future. It is enough to make you want to quit the discipline in disgust. All right, yes, anonymous posts bring out the worst in people, but the absolute nastiness of these responses suggest a visceral set of reactions which lays bare some of the culture of economics as a discipline. These include a thoroughgoing disregard for other disciplines (even those we take our ideas from), an inherent inability to respect ideas which do not conform to the strictures of what is acceptable knowledge (top-tier peer reviewed journal articles) and a deep-seated sexism which allows a young brash student to call the 76 year old past president of the American Political Science Association ‘this girl’.

I usually like Clay Shirky a lot, though his most recent piece seems poorly reasoned. Shirky suggests that women are not aggressive enough in negotiations, but then he mentions how this hurts them in 2-sided markets, and he lists colleges as one such market. Did he miss the fact that the majority of all college graduates are now women? Nearly half of medical school students nationwide are now female. Young women are out-earning men in some areas and professions:

Women’s pay relative to men’s rose rapidly from 1980 to 1990 (from 60.2% to 71.6%), and less rapidly from 1990 to 2004 (from 71.6% to 76.5%), though young women have started to outearn young men in some large urban centers with young women earning up to 20% more than their male counterparts.

But women with children have less negotiating power:

However, other trends are decidedly negative: a study at Cornell University concluded in 2005 found that women with children were less likely to be hired and if hired would be paid a lower salary than male applicants

These 2 facts suggest that raising kids limits women’s negotiating power. Women don’t have an innate lack of negotiating skills, but the circumstances of raising children imposes some hard constraints, that fall disproportionately on women. Shirky is ranting about the wrong issue.

This is what Shirky says:

This worry isn’t about psychology; I’m not concerned that women don’t engage in enough building of self-confidence or self-esteem. I’m worried about something much simpler: not enough women have what it takes to behave like arrogant self-aggrandizing jerks.

Remember David Hampton, the con artist immortalized in “Six Degrees of Separation”, who pretended he was Sydney Poitier’s son? He lied his way into restaurants and clubs, managed to borrow money, and crashed in celebrity guest rooms. He didn’t miss the fact that he was taking a risk, or that he might suffer. He just didn’t care.

It’s not that women will be better off being con artists; a lot of con artists aren’t better off being con artists either. It’s just that until women have role models who are willing to risk incarceration to get ahead, they’ll miss out on channelling smaller amounts of self-promoting con artistry to get what they want, and if they can’t do that, they’ll get less of what they want than they want.

…And it looks to me like women in general, and the women whose educations I am responsible for in particular, are often lousy at those kinds of behaviors, even when the situation calls for it. They aren’t just bad at behaving like arrogant self-aggrandizing jerks. They are bad at behaving like self-promoting narcissists, anti-social obsessives, or pompous blowhards, even a little bit, even temporarily, even when it would be in their best interests to do so. Whatever bad things you can say about those behaviors, you can’t say they are underrepresented among people who have changed the world.

Again, it is tough to reconcile the career success that young women are having with Shirky’s narrative of “They are bad at behaving like self-promoting narcissists”.

This is the dumbest thing I’ve ever read in any of Shirky’s essays:

Now this is asking women to behave more like men, but so what? We ask people to cross gender lines all the time. We’re in the middle of a generations-long project to encourage men to be better listeners and more sensitive partners, to take more account of others’ feelings and to let out our own feelings more.

Maybe “we ask people to cross gender lines all the time” but usually the goal is to make the world a better place. For instance, “encourage men to be better listeners and more sensitive partners” probably makes the world a better place, whereas encouraging women to be “anti-social obsessives, or pompous blowhards” does not. It is really disappointing to be reading stuff like this in an essay by Shirky.

However, even in an ideal future, self-promotion will be a skill that produces disproportionate rewards, and if skill at self-promotion remains disproportionately male, those rewards will as well. This isn’t because of oppression, it’s because of freedom.

If professional women in their 20s continue to pass by professional men in their 20s, then clearly women know how to promote themselves. If women with children continue to be handicapped in their careers, then we are dealing with oppression, not freedom. At the very least, we are dealing with work practices and family practices that are in need of innovation.

In these circumstances, people who don’t raise their hands don’t get called on, and people who raise their hands timidly get called on less.

…It’s tempting to imagine that women could be forceful and self-confident without being arrogant or jerky, but that’s a false hope, because it’s other people who get to decide when they think you’re a jerk, and trying to stay under that threshold means giving those people veto power over your actions.

Surely someone hacked into Shirky’s blog and is trying to discredit him by publishing an idiotic essay? Where is the nuance and subtlety of thought that gave us such classics as Power Laws, Weblogs, and Inequality? I feel like I’m reading a fundamentalist version of Shirky, a stripped down version of Shirky, lacking any of the careful qualifiers that grace his previous work.

My main problem with his essay is the broad-brush nature of his description of the problem. It is pointless to talk as if women are doing poorly in every profession, when nearly 50% of new doctors are female.

Since Shirky works in and around the tech industry, I suspect that a lot of his remarks were aimed at the tech industry. Had he explicitly said “What I’m saying here only applies to the tech industry” then he would have been on slightly safer ground. There are certainly some odd gender imbalances in the tech industry, which I just wrote about in my last post.

I feel like I know where Shirky is coming from. I’ve come close to writing a similar essay. I have seen talented women sabotage their own careers. For some reason, this happens more in the tech industry than anywhere else. I have felt a frustration similar to the one that I think Shirky was trying to express.

The title of this blog post is “The most disappointing essay Clay Shirky has ever written”. Why am I disappointed? Mostly because I have come to expect a great deal of emotional honesty from Shirky. In posts such as “The Failure of #amazonfail” he does a rare thing: he admits that he made mistakes of judgement due to being caught up in the emotion of the moment, and he also talks himself back to sanity, all the while being candid about the emotions he is experiencing. That kind of emotional transparency is missing from “A rant about women.” I understand the frustration of seeing talented women sabotage their own careers. On the one hand, I know it is damn tempting to rant about that frustration. On the other hand, I think it is important that I, and Shirky, keep ourselves from expressing that frustration in untruthful ways.

Shirky has been a supporter of many politically progressive causes. So have I. Most progressive activists occassionally suffer some moment of burn out, during which time, they may say some damn reactionary things. They lean on their reputation at such times. I’ve done it. Shirky is doing it here. His essay amounts to “I will say some unqualified, harsh things here, to vent my frustration, and surely people will cut me some slack, because my previous progressive efforts have surely earned me some good will.” There is some truth in that – no one will change their opinion of Shirky simply because he wrote one bad essay. But we will all feel disappointed.

For the first time in history, women are expected to become 50% of the workforce in America during 2010. Partly this is because they are getting more jobs, partly this is because of men leaving the workforce.

The article downplays some of the obstacles that women still face, though it mentions:

Only 2% of the bosses of America’s largest companies and 5% of their peers in Britain are women. They are also paid significantly less than men on average.

The interesting flip side of women’s increasing participation in the workforce is the declining participation of men. Men have been leaving the workforce for decades – first slowly, then more quickly:

(Graph is from Brad Delong’s blog)

In the 1950s and 1960s men lost jobs when agriculture automated. A lot of these were black males and racist laws kept them from moving to other parts of the economy. At the time, Ralph Abernathy said “Black men face a race between the civil rights movement and the tractor.” He meant that black men needed to gain the right to go to college and get highly skilled jobs, before the last of the farm jobs disappeared. That the disappearance of the farm jobs lead to a permanent increase in black male unemployment suggests that America failed to adapt quickly enough.

Male participation in the workforce never dipped below 90% before 1973, but it will probably drop as low as 80% during 2010. In the past the decline in workforce participation may have largely been confined to racial minorities, but now it seems to be effecting everyone.

Economists are divided about where these men are going, or why they are leaving the workforce. This graph only shows men of working age – between the age of 25 and 54 – so the large number of men who are of retirement age would not effect this graph.

It probably says something important about how deindustrialization has effected certain areas, that the male participation rate never dipped below 90% before 1973 but it never again rises above 90% after 1979. The loss of low-skilled industrial jobs (for instance, the loss of the textile industry during the 1970s) seems to have lead to a permanent increase in male unemployment, though it is hard to say why these men didn’t simply get low-skilled jobs in the retail sector – which is what a lot of unskilled women seem to have done.

The end of the graph (the last 3 years) is really dramatic – male participation in the economy has fallen off a cliff.

The peak on this graph is in 1952. The decline has been going on for 58 years. I wonder when this trend will reverse?

Adam Healey writes Charlottesville Needs More Nerds:

For some reason, there are just not a lot of startups being created here. On this mashup by fourio, web 2.0 start-ups are mapped globally. There are none, until now, in Charlottesville. Why is that? Simple. Charlottesville needs more nerds. UVA’s graduate engineering school is ranked 37th nationally. Ouch. There’s the problem right there.

Colin Steele echos the concern:

As CTO, I seem to be getting the recurring question, “Can you (hotelicopter) find the tech-savvy talent you need in Charlottesville?” It’s a valid question. Long gone are the days of Kesmai, EA, Mr. Goodbucks, and the beloved Value America. These days, we have influx of spooks, a smattering of biotech companies, and in the IT/Internet world… a whole buncha nothin’.

To me, the issue seems related to the decline of New York during this last decade. I mean, hell, if even New York was in decline, then what chance did Charlottesville have? The simple fact was that a lot of the tech industry was consolidating into Silicon Valley (or moving off shore). But if it is true that New York is set for a rebound, then perhaps other east coast locales will also see their fortunes improve.

Nowadays, people do not dream of a better tomorrow, they simply hope won’t be much worse than the present:

The difference, says Blom, is that the beginning of this century has not yielded any hope for the future. Blom utters a depressing sentence: “We don’t want a future, we want a present that doesn’t end.” It isn’t as if this present were so attractive, he says — it’s just that people are worried that things could get even worse.

In a few days, the first decade of the 21st century and of the third millennium will come to an end. It was a decade that began, not with a smooth transition into a new era but with a bang. It was a decade filled with crisis years: the 9/11 crisis, the climate crisis, the financial crisis and the crisis of democracy. Taken together, they represent a general crisis for the West. Things could hardly have gone any worse over the course of decade.

…The internationally most successful film of the decade was “Lord of the Rings: The Return of the King.” Harry Potter was the most successful literary character. Both are children’s stories that are also enjoyed by adults. We are withdrawing into an infantile world, in which attractive heroes conquer evil. The modern fairy tale is our response to a harsh world.

In the reality of the first decade, evil did not come from monsters but from our neighbors, who had no bad intentions. Our neighbors’ stock market investments stoked the financial crisis, their SUVs contributed to the climate crisis, their abstention from voting to the crisis of democracy. And now their viruses are transmitting swine flu. With the exception of terrorists, the villains of the decade were innocents.

It is astonishing that, despite all the bright hopes of the Internet, the last 10 years have been the worst in history for the economy of the United States.

Paul Krugman writes:

It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best-selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520.

I could almost write:

I sit in one of the dives
On Fifty-second Street
Uncertain and afraid
As the clever hopes expire
Of a low dishonest decade:
Waves of anger and fear
Circulate over the bright
And darkened lands of the earth,
Obsessing our private lives

When my dad was dying of cancer I sat by his bed for most of each day. I ran errands for him, like getting him coffee when he wanted a coffee. One thing I learned was that it was important for him to stay on pain killers at all times (not actually morphine, I’m just using that in the title since it is easy to recognize). When he was on pain killers, he could momentarily pretend that he wasn’t really that sick. When the pain killers wore off, he was in agonizing pain. So I became diligent about reminding the nurses to be prompt about delivering the next dose of pain killers. The important thing was that my dad should get the next dose of pain killers before the last dose wore off.

This memory influences the way I think about the economy. Everyone I know, including myself, is currently walking around saying, “Hey, this recession isn’t really that bad. I thought it was going to be a lot worse.” But it is noteworthy that the government’s economic stimulus wears off in 6 months.

Every time a society is doing economically well, someone emerges to suggest that that success is based on innate differences that go back thousand of years. Meanwhile, when a society is doing poorly, someone argues that it is being dragged down by forces that have been pending since the beginning of time. The most notorious example was the preening that the West engaged in during the 1800s – Asians and blacks were naturally lazy, whereas white people were biologically superior. The grotesque reality is that such attitudes were used to justify genocide.

Anyway, now China is doing well and America is doing poorly, so David Brooks starts writing a eulogy for the US:

David Brooks: Asians place emphasis on context while Westerners place more emphasis on individuals. This seems like a gross generalization but it is robustly supported by hundreds and hundreds of studies. Richard Nisbett’s book, “The Geography of Thought” summarizes some of the evidence.

If you show Americans a fish tank, they’ll talk about the biggest fish in the tank. If you show Asians a tank they will make, on average, 60 percent more references to the context and the features of the scene. Western parents tend to emphasize nouns and categories when teaching their kids, Korean parents tend to emphasize verbs and relationships. If you show Americans a picture of a chicken, a cow and grass, they will lump the chicken and the cow, because they are both animals. Asians are more likely to lump the cow and the grass because cows eat grass. They have a relationship.

The mode of thought more common in Asia is better suited to the complex networks that make up the modern world. The contextual, associational style is simply more valid. The linear style we’ve inherited from the Greeks is less adaptive toward the modern age. I think the West may be doomed.

For my part, I think the hype about China is over done. The problems in the US economy were created by forces internal to the US, and they can be fixed by internal forces as well.

Bryan Caplan:

How much does increasing college-going rates matter to our economy and society?

Caplan: College attendance, in my view, is usually a drain on our economy and society. Encouraging talented people to spend many years in wasteful status contests deprives the economy of millions of man-years of output. If this were really an “investment,” of course, it might be worth it. But I see little connection between the skills that students acquire in college and the skills they’ll need later in life.

For the last 50 years a small group of people have been worried about America’s economic decline relative to the other developed nations. President Eisenhower was the first to be concerned about this, and convened a special commission of economists to examine the issue. Starting in the 1970s, the pace of decline accelerated, and the decline began to erode the standard of living for the poorest 40% of all Americans.

Here is one more small article documenting a small part of that decline:

The number of companies listed on U.S. exchanges has dropped by more than 22% since 1991 and nearly 39% since 1997, even though that was around the beginning of the dot-com boom, Grant Thornton reports in a study that was two years in the making and was first reported by peHUB.

U.S. exchanges are losing ground to exchanges in China, London, Italy, Tokyo, Toronto, Australia and Germany, where listings continue to increase. In the U.S., meanwhile, there are not enough new IPOs to replace the number of companies that are being delisted.

Edward Tufte has argued that graphics should be information rich. A good graphic is one that people can spend 10 minutes exploring. If you ever go to one of Tufte’s workshops, he ambushes the audience with a graph that shows the history of Rock and Roll, which artists did what albums when. The room falls silent as people start looking at what music came out when they were a certain age.

“Do you hear that?” says Tufte. “Do you hear that silence? That is what you want whenever you present a graphic to a live audience. It means the graphic is genuinely interesting.”

Tufte is deeply critical of the newspapers. His books are full of horrendous examples of bad graphs that the newspapers publish.

To give credit where credit is due, the New York Times published a fantastic graph the other day, “The Unemployment Rate For People Like You“. This a graph that you can spend several minutes exploring, thinking about people who are similar to you, and people who are different.

For the last few years I’ve been pursuing accidentalism as a theory of economic development. This is a vein of insight that I will continue to mine, as I feel I still have much to learn. But I am fascinated to read Nicholas Carr’s criticism of the theory:

Now, I understand what the Accidentalists are getting at: Technology builds on technology, and at any given time in human history only certain technologies are in the realm of the possible and of those only a subset will actually be developed and put to use. Those technologies will in turn influence the means of production and the modes of consumption both directly (through the characteristics of the technologies themselves) and indirectly (through the economic tradeoffs inherent in using the technologies). Every technology, every means of production, every mode of consumption is hence provisional. Something better or at least cheaper or more convenient may come along tomorrow and displace what we depend on today.

All that’s true. But is it really accurate to describe the process as fundamentally accidental? Does the word “accidental” accurately reflect the complexities of technological and economic development? I don’t think it does. In fact, I think it’s difficult to imagine a poorer choice of word. When you describe an event or a thing as an accident, what you are doing is draining it of all human content. You are saying that human intention and will and desire played no part in its occurrence. A volcano is an accident in human history (if not natural history), and if it’s a big enough one it may well influence the course of that history. But the the book, the printing press, the publishing house, the newspaper, and the newspaper company are not volcanoes. Their development was guided not just by blind circumstance but by human intent and desire. They represent, not just in the abstract but in their concrete forms, something that people wanted and that people consciously brought into being, for human purposes.

I don’t think it is right to say that an event or development is drained of its human component when we call it an accident. Doris Lessing has said that it is part of human nature to be, at all times, in rebellion against circumstance (she said this, I believe, in her book Prisons We Chose To Live Inside). When I read that, I think of her horrible childhood in Africa, and then her horrible first marriage, before she was able to escape to England. She felt herself trapped by circumstance, that is, a series of accidents that built up to a particular situation. Nevertheless, in her case, we are talking about a circumstance full of emotion, trial, stress, anger, striving, dreaming. It would be a mistake, I think, to say that her circumstance lacked a human dimension, even though we must acknowledge that much of what she experienced was shaped by accidents – the accidents of birth (where was she born, who were her parents, how much money did they have), the accidents of her education, the accidents of whom she first met romantically.

Having a fate doesn’t make us non-human.

Oddly, the part of his post that I most agree with is a part that Nicholas Carr offers in jest:

If we suspend our disbelief and accept the Accidentalist view that both the media of the past and the means of their production were accidents, then we have to also view the media of today and the means of their production as accidents. If the book is a historical accident, then the web is a historical accident. If the newspaper publisher is a historical accident, then the blogger is a historical accident. To think otherwise – to think that all mankind’s past blundering has brought us suddenly to a perfected state, that the long chain of accidents has been broken in (surprise!) our very own lifetime – is to abandon any pretense of a consistent and rational view of history and leap into the realm of quasi-religious faith. We were lost, and now we’re found!

Without a doubt, all of our current technologies are accidents. All of our current economic processes are accidents. And all of our future technologies and advances will also be accidents. A comparison to Darwin’s theory of evolution would be useful here – in the same way that wolverines, spiders, humans and bacteria are accidents, so to, every existing business is an accident, existing in a transitional state between what it has been and what it will be.

“Accident,” I hardly need point out, is a word with strongly negative connotations.

I can think of counter-examples. Winston Churchill praised certain accidents of history for allowing Europe to remain free of the Khan, during the Middle Ages. Sir Alexander Fleming openly described the discovery of penicillin as an accident. Charles Darwin suggested that all species were accidents, and many of the biologists who have lived in the modern era have been forceful in asserting that the human race is an accident (I am thinking of Stephen Jay Gould in particular).

Nicholas Carr has a particular target that he is going after:

Accidentalism, in other words. provides the perfect backdrop for the liberation mythology promoted by many of the web’s most ardent proponents, which is built on the idea that old technology put us in chains and new technology is breaking those chains.

I don’t have a problem with Carr criticizing those people. No doubt there are some who are promoting a millennialist interpretation of the Internet. But Carr specifically mentions Clay Shirky, who is clearly not a millennialist.

Any theory of the future that requires a distortion of the past should be greeted not with applause but suspicion.

What should we say of a theory that distorts what people are saying right now, in the present?

A bestiary of algorithmic trading strategies

One of the things which confronted me when I got interested in quantitative finance is the varieties of different kinds of quant. Now I realize this is pretty simple. Quants come in three basic varieties.

1. Structurers: people who price complex financial instruments.
2. Risk managers people who manage portfolio risk
3. Quant traders people who use statistics to make money by buying and selling

It took me quite a while to figure this out. I don’t know why people haven’t bothered to state this taxonomy of quant jobs. I suspect it’s because most quants are structurers. Of course, there is often bleed over between these varieties -but it’s a useful taxonomy for looking for work. I’ve done a little of all three at this point (very little, honestly), and have always liked quant trading problems more than the other two varieties. It’s the most ambitious, and the most likely to net you a career outside of a large organization (go me: Army of one!). It’s also the most mysterious, since successful quant traders don’t like to talk about what they do. Structurers and risk managers have to talk about what they do, almost by definition. Quant traders gain little from talking about their special sauce. The ones who have spilled the beans are guys like Ed Thorp -who only talk about old strategies, or guys like Larry Harris, who wrote the best book there is on trading, though he wrote it without any interesting equations in it. Of course, there are going to be quant jobs which don’t fit exactly into these categories; there is a lot of overlap between traders and risk managers, for example: I’m only presenting them as a useful framework to hang some thoughts on.

People who attempt suicide, and survive, see big gains in their income:

Last year Dave Marcotte, a professor of public policy at the University of Maryland, Baltimore County, pushed the field forward when he wondered what happens to people like Jones who attempt, but do not achieve, suicide.* There are about 20 attempts for every successful suicide. (Approximately 2.9 percent of the U.S. population has attempted suicide—1,760 attempts per day.)

…Marcotte couldn’t test the relative “life improvement” of successful suicides—since they were, of course, dead—but he could study those who had failed at suicide to determine if their lives improved after the attempt. The results are surprising. Marcotte’s study found that after people attempt suicide and fail, their incomes increase by an average of 20.6 percent compared to peers who seriously contemplate suicide but never make an attempt. In fact, the more serious the attempt, the larger the boost—”hard-suicide” attempts, in which luck is the only reason the attempts fail, are associated with a 36.3 percent increase in income. (The presence of nonattempters as a control group suggests the suicide effort is the root cause of the boost.)

Dan Bezdek posted on LinkedIn, suggesting that it was impossible to launch an online business nowadays due to the hyper-competition on the web. He wrote:

I still think there is a huge difference between an online business and a traditional business. We have this grocery store in the neighborhood which is right next to Safeway. Now, you’d imagine there is no hope for this store; however, not only it is surviving, but in fact has so many customers.

He also wrote:

The main problem is that the culture of internet is free service, and this problem will remain with Internet forever. You might spend a couple of years in development, and provide a great service; but you can’t charge users even a $1 except in very few niche sections.

I wrote a response, but LinkedIn limited me to 4,000 characters, so I was not able to post my whole response. I post it here, instead.

- – - – - – - – - – - – - – -

Dan Bezdek, I’m afraid I’m unable to understand your reasoning. I’m going to try to paraphrase what I think you are saying.

You write “It is so easy for anyone in the world to compete with you even in places that $100 is a week pay.”

I think you are trying to say that because computer programmers can be hired cheaply, it is more difficult for you to build a business? But the opposite is true: cheap computer programmers make it easier to launch a new business. I can not think of a single case in economic history where the falling price of a supply factor made it more difficult to launch a new business. A few examples:

1.) During the late 1600s, in Europe, the dramatic fall in the price of paper allowed for the creation of the first modern newspapers. The Spectator launched on March 4, 1712.

2.) During the mid 1700s, in Europe, the dramatic fall in the price of coffee beans allowed for the first coffee houses to open. Paris had hundreds of small coffee stands at the outbreak of the Revolution.

3.) During the late the 1800s, in America, the dramatic fall in the price of communications (the telegraph and the telephone) allowed for the organization of businesses over a distance, and at a scale, never before seen.

4.) During the late 1900s, all over the world, the dramatic fall in the price of computing power brought several new technologies into the mass market, including cell phones, personal computers, and personal (non-business) software.

As a general rule, the cheaper supplies get, the easier it is to start a business.

You also wrote this:

“In any case, the point of all this is to say that developing even a barely successful online business is probably 10 times more difficult than setting up a grocery shop.”

You didn’t mention which country you are in. If you are in the United States, then your statement is incorrect. The retail sector in the US is overbuilt and is expected to consolidate over the next 10 years. Many grocery chains are expected to go bankrupt. Meanwhile, the Commerce Department projects that the software industry will continue to grow, and much of that growth will be happening on the web.

If you do not live in the US, then I’d have to know what country you are in, to know if there is any truth to what you are saying. Some countries, such as France and Italy, offer strong legal protections to small firms. In those countries, small groceries have some hope of surviving, but that is because of government protection, not economic fundamentals.

I think the concept that you are trying to get at is what economists would call “barriers to entry”. That is, what barriers keep competitors from entering your market and competing with you? And I think what you are thinking is that a local grocery store, because it is grounded in a specific geographical space, has some immunity from competition, whereas a web site has to compete with every other web site on the web.

Again, if you are speaking about the US, you are plainly wrong. The history of post-war economic development in the US is the history of retail consolidation. Mom-n-Pop stores have been relentlessly replaced by big chains such as Wal-Mart. Massive numbers of bankruptcies have happened in every state. The small-scale grocery was once common, and now is nearly extinct. They’ve been hunted to extinction through the relentless competitive pressures of market consolidation.

Consider the graph that the US government has posted here:

In the late 1990s, a number of leading grocery retailers went on a buying spree. Between 1997 and 2000, more than 4,100 stores were acquired, amounting to almost a fifth of all U.S. supermarkets. Mergers and acquisitions by large grocery retailers, including Kroger, Albertson’s, Ahold USA, and Safeway, produced a significant increase in the share of grocery store sales by the largest firms. By 2005, the 20 largest retailers accounted for 61.6 percent of total U.S. grocery store sales, up from 40.6 percent in 1995.

If you look at the facts, you’ll admit that small-scale groceries have mostly been wiped out. And this happened during some of the same decades that saw the explosive growth of the US software market.

Clearly, it is possible to make a lot of money on the web. 37 Signals makes millions of dollars in sales, and Amazon makes billions of dollars in sales. AOL is making a shockingly large gamble on weblogs.

You include this surprising comparison:

Now, compare this store to many 2-3 men operations online trying to make it online offerring some service; there are thousands of such operations which wish they were making as much as that grocery store.

I assume you meant “people” where you wrote “men”. A 3 person web start-up will cost less than running a grocery store. Even a small grocery store is going to have more than $50,000 worth of inventory in it, then it will have labor costs, rent or real estate taxes plus land cost, licenses for health, fire, safety, etc. If you are going to compare businesses that have different capital requirements, then you might as well write “I tried to run a lemonade stand, but it never made as much money as Toyota.” The comparison is absurd.

Of course, as segments of the web mature, the capital requirements for starting a web site go up for that particular segment. Once upon a time, a long time ago, you could start a successful weblog for free. Nowadays, if you are starting a weblog which you hope will develop a mass audience, then you should probably have $100,000 for marketing and writers. Likewise, if for some crazy reason you decide to launch a competitor to YouTube, you should start with $100 million in the bank. In the future, you may need millions of dollars to get into any established segment. But some segments will remain open to the sudden hit that comes form nowhere. Weblogs, for instance, began to consolidate some time ago, yet new weblogs still occasionally burst forth and become large-scale hits. And one of the great things about the web (so far) has been the speed with which new segments emerge.

I’ve already written extensively about the costs of building a web site. And I’ve helped launched a number of successful sites that cost less than $100,000 to get going. And I continue to work with start-ups that have budgets under $100,000, and I’ve great faith that a number of these will become successful.

If you are thinking of starting a new business, you’d be wise to start it online.

Recessions are great times to invest for the future, if you know what you are doing:

Not every startup CEO is cutting back. Apple spent their time innovating during the last downturn and look where it got them. I’m thrilled to have just passed out big, healthy profit-sharing bonuses to all of our employees this week for the 5th consecutive year. We think and hope they’ll be even bigger next year.

SmugMug was founded in the middle of the last “nuclear winter” in Silicon Valley. Everyone told us we were crazy, and we knew there was no chance at raising venture capital at a decent valuation, even with our impressive backgrounds. So we did what any good entrepreneur would do: We did it anyway, with both eyes firmly on our business model.

So if you’re running a startup, or thinking of creating one, take heart – downturns are a fabulous time to build and grow businesses. Focus on your revenues and your margins, not your growth rate or # of unique visitors. Find some stable income streams and a customer need. Listen to your customers and give them what they want – and what they’re willing to pay for. And take care of your employees – they’re your most valuable asset.

Jory Des Jardins writes with nostalgia about what print media used to be like:

I’m sure if I had stuck it out a bit more and not taken a new media job five years in I might have made more of a go of it. But things discouraged me about traditional media. It had an established power structure that made it nearly impossible to get noticed. I wrote things I was proud of on the side, while editing more established writers in the waking hours and writing uninspired copy as a freelancer. But I hadn’t really established a voice that was worthy of cashing in favors from editor friends of mine.

…I’d only hoped I would be able to pursue this growing interest in a model counter intuitive to the people I used to work for. A model that democratized media, to a large extent, and made possible a notion terrifying to most people like me who hinged their self-worth on “making it” in traditional media: that there’s a whole helluva lot of talent out there and it ain’t all on the Hearst, Conde Nast, or Time Warner payrolls. Traditional media just took in whom they could fit, who matched the pedigree, or who had an uncle who could introduce you to the editor, or who had this random bit of luck and was seen for what she could produce, and sometimes bonafide talent. But so may others could not even make it to the filter, let alone make a living at it.

Back in my print days, there was something so alluring about being one of a few selected, whose name would be committed to print. And there’s a whole community of folks, I’m sure, who still hold print sacred. I’m one of them, even as someone whose name has only made it via her work in new media. I fretted so long about being a part of it that even while it’s suffering I promise to someday return — if it will have me. Many bloggers who are doing just fine building platforms online still look at the book deal as the summit of success. I’ll know I’m fully evolved when I couldn’t care less about hardcover, softcover, or any cover.

Traditional media was hierarchical and often unfair. One’s actual talent was often overlooked due to the personal politics inside each organization. It is hard for me to feel nostalgia for the old model, though possibly I feel a slight nostalgia for the great era of photojournalism, when people like Henri Cartier-Bresson were at work, an era which was funded by the mass circulation magazines.

But all business models die, eventually. In the modern era, we’ve achieved the freedom to constantly re-invent ourselves. While this is occasionally stressful, it is a freedom that people have spent centuries fighting to establish. And this freedom is one of the most exciting aspects of being alive during this era. Karl Marx has a reputation for being critical of market based economies, but few people described our era as perfectly as he did:

Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into the air, all that is holy is profaned, and man is at last compelled to face with sober senses his real condition of life and his relations with his kind.

David Van Couvering is talking about a steady state economy.

A few reactions:

Imagine an accounting system that allows a company to treat all incoming cash as a profit. Expenses are not counted at all. If this company gets $1 million in money, and has expenses of $1.1 million, it records a $1 million profit. Sounds pretty crazy, huh? And if this company’s incoming cash increases to $2 million, while its expenses increase to $3 million, it is allowed to claim that its profits have increased by 100%.

I am exaggerating to make a point. But it is a point worth considering. The way GDP is calculated tends to count all increases as good. Many forms of losses are external to the way the GDP is calculated.

Imagine this scenario: A healthy and prosperous man is standing on a street corner. Another man approaches him, pulls out a gun, shoots the first man, takes his wallet and then flees the scene. Someone calls 911. The injured man is rushed to the hospital. Over the next 6 months he requires multiple surgeries and extensive physical therapy to recover. All of this medical care is counted toward the growth of the GDP. The emotional pain and suffering of the man and his loved one’s are not subtracted from the GDP. To the extent that the GDP is suppose to offer a rough indication of human welfare, it fails badly in situations such as this.

If the economy is at full employment (and let’s note that “full employment” is something of an abstraction) then, theoretically, there are no extra people who can replace that injured man at his job, so for the 6 months that he is recovering, his lack of labor is subtracted from the GDP. So in this scenario, the GDP would shrink somewhat, due to the man’s injuries (but let’s note that his lost ability to produce wealth is not the only loss that has been suffered). However, if the economy is not at full employment, then society has surplus labor, and so, in theory, someone could take the job that the injured man had held, and so the GDP would see no shrinkage at all (I’m leaving aside the issue of whether or not the man had a rare skill that no one else could replace). Though, from a moral and practical standpoint, the man, his loved ones, and society have all suffered a loss, the loss is never recorded in the GDP (if the economy is not at full employment).

Any exchange of money is treated as something positive. This is like the company I mention above, that gets to record all incoming cash as profit, and never has to record any expenses.

There are, at this point, some well known areas where losses are external to the way the GDP is calculated. Environmental loss is an obvious one. Property rights don’t extend to the air we breathe, so air pollution can not easily be recorded as damaging anyone’s wealth. “Tragedy of the commons” scenarios are common, especially involving areas such as deep sea fishing, where property rights are non-existent.

There are other scenarios that are less talked about. There are the emotional losses that a family might suffer when the forest they live next to is torn down and replaced with a chicken processing plant. The new plant produces wealth that is added to the GDP, but if something has been lost, it is not recorded. That sense of loss that people might feel in such scenarios is sometimes denigrated as a nostalgic and sentimental attachment to the past. Emotions show up in the GDP only when something symbolic of emotions is purchased, for instance, a wedding ring. Or, to bring up the issue of subjectivity, we could ask, what is the value of perfume? It’s practical value is difficult to assess. It’s value is determined subjectively, by each person who purchases it. It no doubt has some emotional value to the person using it, and we measure that value by its price, but other kinds of emotions, if they don’t involve a purchase of some kind, don’t get counted.

My point, in all of this, is to suggest that “growth” is a nebulous term. Or rather, when I hear the word “growth” I think of Mandelbrot’s essay “How long is the coast of Britain?” In the same way that he argued that the coast of Britain could be of any length, depending on how you wanted to measure it, so too, I think one could argue that we suffer, or enjoy, a lot of growth, a little growth, or negative growth, depending on how you might specify which inputs are valid. I can think of a thousand ways to measure to growth, and each way would give a different answer. As Joseph Schumpeter once said “The social process is really one indivisible whole,” from which economists pluck various aspects and call them “economic”. Given an endless stream of data that has as many dimensions as we wish to define, the process of deciding which dimensions shall be treated as important will always be arbitrary. Or rather, such decisions can be made to build models that work for us as useful tools (or un-useful tools). Such models don’t take us closer to any kind of reality, they simply give us feedback that we have decided that we need if we are to build whatever kind of world that we have previously decided we want to build.

Again, if you are measuring the coast of Britain, you first need to decide on what your goals are for doing the measurement. If your goals are to aid navigation by boat, you might come up with one method of measurement, useful for your goal. If your goal is to track the growth or shrinkage of the eco-system available to some ocean-loving bird, you might use a different method. All that matters is whether your method of measurement allows you to achieve your pre-determined goal. Neither method can pretend to be more accurate than the other. Accuracy is not a coherent concept, in this discussion. And likewise, the word “growth”, when applied to the GDP, has to be understood as a tool that is maybe useful, or perhaps un-useful, in achieving a particular kind of civilization. But there is no final reality behind it. We could use a different system of measurement and achieve a different result, and whatever system of measurement we used, none could be said to be more accurate than the others, they could only be judged on how well they help acheive pre-determined goals.

On a different note, right before he was assassinated, Robert Kennedy offered a similar critique, far more eloquent than mine:

We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow-Jones average, nor national achievement by the gross national product. For the gross national product includes air pollution and advertising for cigarettes, and ambulances to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. The gross national product includes the destruction of the redwoods, and the death of Lake Superior. It grows with the production of naplam and missles and nuclear warheads… It includes Whitman’s rifle and Speck’s knife, and the broadcasting of television programs which glorify violence to sell goods to our children.

And if the gross national product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials… the gross national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything about America – except whether we are proud to be Americans.

Penelope Trunk says you won’t make money from blogging. I assume she’s talking about personal blogging, otherwise her advice amounts to “You can’t make money with an online magazine” and clearly that is not true, since there are lots of profitable online magazines (like TechCrunch, Salon, etc).

Apparently, in the world of personal blogging mommy-blogging is a profitable exception:

Welcome to the world of mommy blogging, where women juggle the demands of childcare with building audiences online. It’s also, increasingly, a place where top brands battle for their attention, hoping for reviews from “real moms” and access to the valuable power of word of mouth. Being a player in the mommy blogger world can mean access to free products, getting big media buys and even trips to the red carpet in Hollywood and Caribbean cruises.

I think it’s tragic that Brad Delong is finding himself to the left of the administration of President Obama. Especially on the banking issue. Delong is a far cry from radical. Many on the far left have been uncomfortable with his positive view of markets. I recall the mailist that Doug Henwood ran in the mid-90s, where the radicals would call Delong a conservative or a right-winger, because of his celebration of the utility of markets. In a perfect world, Delong would represent the exact center of American politics, and then around that center would be the various left and right factions, each trying to pull the government in their direction. That Delong is not at the center of American politics, even when America has a nominally progressive President, leaves me worried that there is something fundamentally wrong with the political culture in the US.

Interesting post by Brad Sester, suggesting we can expect a pull back from the global economy:

The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“

My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.

Finance has traditionally been the most international of all types of business. This is true going back centuries, to when the merchants of Venice were making loans to the Ottaman Empire, and Genoa was helping Spain finance explorations of the New World, way back in the 1400s. If finance pulls back, then surely all other forms of industry are likely to pull back as well.

In the early 90s, during the recession, I read the newspapers and formed the impression that some of America’s major trading partners were treating America unfairly. Japan, in particular, seemed intent on boosting their own exports, without much thought to how their actions would effect America. At that time, I thought America should take unilateral action to set things right. Some of the policies that I would have supported at that time were immoderate. I was puzzled why the Federal government, under both President Bush and then under President Clinton, were so very careful and moderate in their dealings with America’s trade partners. All I could think of at the time was that the Federal government didn’t understand how hard the recession was for many people.

Nowadays, of course, I see things differently. A wealthy and powerful nation, such as America, has clearly benefited from the current world economic system, and thus America’s own self interest is best served by it making some sacrifices to keep the system working. The system will survive only if most nations feel the system is fair, so America has a self-interest to see that most nations see that the agreements that create the system are fair and universal to all.

John Maynard Keynes offered some very good advice back in the 1930s about the dangers of protectionist policies that damage trade:

In The General Theory of Employment Interest and Money Chapter 23 Notes on Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption Keynes argued that back in the bad old days, going for the gold was the only feasible approach.

Now, if the wage-unit is somewhat stable and not liable to spontaneous changes of significant magnitude (a condition which is almost always satisfied), if the state of liquidity-preference is somewhat stable, taken as an average of its short-period fluctuations, and if banking conventions are also stable, the rate of interest will tend to be governed by the quantity of the precious metals, measured in terms of the wage-unit, available to satisfy the community’s desire for liquidity.
At the same time, in an age in which substantial foreign loans and the outright ownership of wealth located abroad are scarcely practicable, increases and decreases in the quantity of the precious metals will largely depend on whether the balance of trade is favourable or unfavourable.

Thus, as it happens, a preoccupation on the part of the authorities with a favourable balance of trade served both purposes; and was, furthermore, the only available means of promoting them. At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment.

That does *not* mean that Keynes was a merchantilist. In particular one can imagine how delighted he was by a process that enriched the USA at the expense of Europe.

For this and other reasons the reader must not reach a premature conclusion as to the practical policy to which our argument leads up. There are strong presumptions of a general character against trade restrictions unless they can be justified on special grounds. The advantages of the international division of labour are real and substantial, even though the classical school greatly overstressed them. The fact that the advantage which our own country gains from a favourable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favourable balance which injures all alike.[4] And finally, a policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object, since private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended.
Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught;— against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time. For we, the faculty of economists, prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft.

We now live in a world where a corporation will report profits most years for a 10 year period, and then suddenly announce that, without massive subsidies from the government, it must declare bankruptcy.

One definition that I’ve heard used for “profits” is that it is “surplus cash, left over after all costs and investments of a business have been taken care of, unneeded by the enterprise and therefore free to be given back to the shareholders/owners.” That is, this is wealth that can safely be extracted from the enterprise and given to the owners. This definition is close to the one that Peter Drucker uses in his 1985 book, Innovation and Entrepreneurship.

But how can any business ever know if a given a dollar is unneeded? What if a great crisis lurks in the future? What if the money that a business gives back to shareholders this year turns out to be exactly the money that the business needs to survive the terrible financial crisis that just happens to break out next year? The overwhelming majority of all businesses that have ever been created have disappeared. How many businesses are there still surviving from the 1700s? If a business had the goal of surviving for as long as possible, surely, it would never declare a profit, never give any money back to shareholders. It would hoard every penny, and save it up for future disasters.

The question “How much profit does this company have?” reminds me of some aspects of the question “How long is the coast of Britain?” Obviously you can come up with some methodology which, if applied consistently, will give you an estimate of the length of the British coast. A different methodology will give you a different answer. Neither answer is more true than the other. There is no true answer, there is only the answer that a given methodology offers. And the same applies when you go seeking the profits of  a firm. You can use GAAP to estimate the profits of a firm. (Though, of course, GAAP is easy to game, as any of thousands of recent news articles will remind us.) You can use some other methodology, and it will give a different estimate of the profits of some particular firm. But it won’t give the truth.

If there is a truth to be discovered here, it would be that, over the very long term, there are no profits. There is no true surplus that a company can freely part with. There is no money that a firm won’t at least potentially need when the next crisis strikes.

But why would investors want to start a company if they can never get any of their money back? After all, most would argue that the purpose of a company is to generate profits. Most of the time, most people would argue that longevity should not be a goal for a business, but rather, longevity should simply be a side effect of being profitable. However, during the current crisis, both politicians and a large part of the  public seem to feel that longevity is more important than profitability. How else to explain the billions of subsidies being given to auto makers who have been unable to turn reliable profits for years?

As a practical matter, we might agree that there has to be some agreed upon methodology that gives an estimate of how much surplus wealth can reasonably be extracted from a business and given back to the shareholders. But it should be remembered that every dollar that is taken out of the firm, even in the most profitable years, is moving that company one small step closer to its death.

Marina Hyde is curious about the new era of celebrity, in which entertainers attempt to negotiate peace agreements in the Israeli – Palestinian conflict (as Richard Gere did). I appreciated this bit about Angelina Jolie’s tatoos:

Yet it seems she will at least endeavour to fill up Brad Pitt’s defaceable torso first. The first Brad unveiled was a forearm tattoo of Otzi the iceman. The second was a mysterious series of parallel lines that were diversely interpreted as a tribute to the great Nintendo platform games of the 80s, and a diagram of the New Orleans levee system. As it turned out, the speculation was way off target: Angelina herself had created the cryptic hieroglyph. “We went to Davos,” she said. “One night we didn’t have anything to do, so I was drawing on his back. It’s meaningful in that it’s us making angles and shapes out of each other’s body, that kind of a thing.” No. That is not why it is meaningful. It is meaningful because the kind of people who get so bored that they doodle on each other and turn the doodles into permanent tattoos are now attending the World Economic Forum. 

I disagree, the meaningful bit, in the sense of “What is changing?” is that we are now hearing these stories. Go back 20 years and people who went to Davos probably also had moments alone with their lovers. But back then, such information wasn’t shared publicly. I don’t see anything wrong with this, but this is one of those anecdotes that makes clear how society’s (international society, in this case) mores are changing.

Brad Sester catches this terrific bit of double-meaning:

From a Tuesday Wall Street Journal story on Citigroup’s efforts to raise common equity:

Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter.

Emphasis added

There is a difference between a minority stake held the investment arm of a government that doesn’t regulate a bank or backstop the banks’ liabilities and a large stake held by a banks’ home government. But it is striking that none of the “private investors” mentioned in the Wall Street Journal are actually, well, private investors. Sovereign wealth funds are at best a hybrid.

China for example has made it clear that it hopes that the US will protect at least some of its investments from the risk of losses. China’s Vice Premier Wang Qishan told Hank Paulson:

“We hope the US side will . . . guarantee the safety of China’s assets and investments in the US”

He may have just been thinking of the Agencies … but he also may have had a few of China’s other large stakes in mind. The classic response is that the only investment that is guaranteed by the full faith and credit of the United States government is a Treasury bond.

Yet, it increasingly looks like the US is inching toward severely diluting the common equity of a set of banks where sovereign funds have substantial stakes,* if not wiping out the existing equity entirely. That potentially — as Larry Summers warned in a former life — is a foreign policy issue.

Is it appropriate to refer to government agencies as “private investors”? What is the phrase “private investor” suppose to mean, if it includes entities such as  the Government of Singapore Investment Corp?