Add the New Blog!

I am moving over to the domain www.cheapseatsecon.com! There isn’t really any real reason for the switch besides I wanted my own domain name. The transition seems to have gone fairly smoothly, and all of the comments and posts transfered over…along with anyone who had a comment account.

In any case, here is the updated RSS feed, and here is the comments RSS.

Unfortunately, the current theme did not transfer over to my satisfaction, so there is a whole new theme over there. I kind of like the way it works. I’ll be adding different types of functionality as time progresses. Updates will still be sent via Facebook and Twitter, so add me there to keep up-to-date if you wish!

And, of course, thank you for reading!

 

A Warm Welcome

James Oliver recently e-mailed me a shortlist of people I could consider adding to the “Too Brittle to Sustain” club:

• Bill Woolsey
  Bill Woolsey is an excellent monetary economist who (as far as I can tell) favors free banking, and private currency issue. On his blog, he has advocated price level targeting to stabilize the growth rate of NGDP, and has outlined many monetary concepts (from Austrian to Keynesian). It is well worth a read!

• James Buchanan
  The famous Nobel laureate, public choice expert, and GMU professor.

• George Selgin
  Famous (at least in my mind) for his work on the history of money systems. See here and here, as well.

  Mr. Oliver has also commented on money on his blog as well, in a post that could echo my own sentiment:

  I think that the monetary system is not robust because it did not evolve or at least its evolution was stopped when central banks were created. From your (econtalk) Free Banking Pod Cats with George Selgin I got the idea that free banking was evolving toward a system where money was backed in nothing but assets of the bank. The evidence is that they had gotten to the point where they held 30 capital but only 2 percent gold. The money was backed in bank capital not gold to dump the gold backing all together would be only a crisis plus one innovation away. IMO such a system would be robust.

  I have a few comments on this, but they’ll have to wait for now.

   

A Token of Your Appreciation

Leigh Caldwell has an interesting reconciliation of Arrow’s Impossibility Theorem, and also takes a swipe at my contention about initiatives (not quoted):

So what I propose is a points system. We each get 100 tokens to allocate to different policies. Each of these policies has a price, and we choose which ones matter to us.

How is the price set? By the tokens of those willing to bid against it. If I pay 50 to stop Trident being renewed, you need to pay at least 51 to get it.

Of course these things bring financial costs too, and if Trident is approved then about £3 billion a year in taxes will have to be found to pay for it. These are intrinsic parts of the policies, so you can’t bid for Trident without also being willing to accept the cost of it. If you’ve spent all your tokens on Trident, you may find that someone else’s tokens get to decide whose income tax is going to pay for it.

Being the electoral reductionist^[1] that I am, I’ll sign on with one major caveat: An explicit guarantee that the tokens would not be banned from being redeemable in (legal tender) cash. The monetary base of the tokens would be fixed (endogenous) and grow at a predictable rate (population). The value of a token would be determined by the market exchange rate (like flexible exchange rate regimes today), and tokens would be able to find their way to their most valued use.

Sure, it’s “unfair”, as poor people will have a much greater incentive to give up their tokens for cash, and rich people (or pools of people) visa versa — but unless you’re willing to admit that the poor are absolute fools; in a transparent market with low transaction costs, they would still be able to give up their tokens for a basket of policies that suit their preferences fairly closely (like say, a progressive selling their tokens to the Center for American Progress). But *gasp* does that mean corporations would be able to vote? Absolutely. Their effectiveness only limited to their ability to generate sufficient enough interest in their platform to entice people to sell their tokens.

Thus poor people would get both cash for their vote, and the relative security of knowing that their interests would still be represented at some level. Pareto efficiency for everyone!

Of course, this is completely compatible with futarchy, a concept I also admire.
____
^[1]Meaning I would like to see a reduction in the amount of real voting that gets done. You may think this is at odds with my enthusiasm about Swiss referenda…but I don’t stand behind that very strongly, I just really hate Kurt Andersen.

 

What is Goldman Sachs’ Competitive Advantage?

Talk about a Catch-22. Turns out Goldman Sachs didn’t have a single day of trading losses during 2010Q1. That’s great news for anyone, except:

The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, one shareholder said.

“It will reinforce the heads we win, tails you lose mentality that people think actually exists and promotes the concept of an unfair advantage,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kan. “It’s too politically charged not to. How is that possible that they only make money?”

Even though (as evidenced by the article) it will be perceived that Goldman literally never lost, that is not what this means at all. Only that on net, their winning trades outweighed their losing trades. The EMH cannot be reached for comment.

Does Goldman Sachs have an ‘unfair advantage’ in the market, or an ‘unfair advantage’ in rent seeking through the government? I lean toward the latter.

[H/T Mark Thoma]

 

Thinking About Complexity

As loyal readers will have probably surmised, I try my best to capitalize on people that are smarter than me writing about the same concepts I write about. I’m relatively unknown as far as the economics entire world goes, so cross-referencing what I write with more credible people signals my own credibility. Unless you ruin it by explaining the mechanism (but I’m pretty sure you get the gist if you spend any amount of time and/or energy reading Robin Hanson).

In any case; today Jodi Beggs, of Economists Do it With Models, briefly discusses one of my favorite topics in a very worthwhile post discussing the concept of “marginal product of labor”:

I suppose that the diminishing marginal product of labor concept could also arise because more employees mean more meetings, and we all know how productive the typical meeting is.

Now as anyone in the business world (except middle-managers and annoying marketing types) intuitively knows, meetings themselves have a steep diminishing marginal utility. Not only that, but it gets more complex. A lot of types of meetings have strong network effects. Thus given the proper resources, a single meeting attended by a large group of engaged people has a much larger marginal product than multiple meetings with few people. Furthermore, mirroring what Jodi said, I had this to say about the exponential explosion of interactions in a densely connected network (like a startup):

Now at this point, your company is (characteristically) disorganized. Your four departments come to you for decisions. As a founder, with your new product idea, instead of one connection, you now have to have meetings with marketing, finance, and customer service to ensure that they are all on the same page. You now have three meetings instead of one. Since you are becoming tired of being the focal point of information, you promote a head of each department, and instruct them to coordinate with each of the other departments (which they do…e-mail inboxes and conference rooms are full!). Now, you have an idea for your third-generation product…but you find something strange has happened. You have a meeting with marketing, but before you get the department’s “okay”, the marketing managers have to meet with finance about a budget. The finance folks have to estimate the customer service impact…and the customer service department needs to check with marketing to make sure their information is in line with brand imaging…you just went from three meetings to ten.

This exponential increase in the amount of meetings is caused by the increase in the density of your network connections. If you added merely one more department, the number of meetings would jump to 25. You have a bureaucratic quagmire. Small changes in one part of your network (marketing) have cascading effects throughout the network. Imagine if one department got held up during the development cycle…every one of your departments would be in gridlock. This is called complexity catastrophe. Densely connected networks become less adaptable as they grow. The existence of such phenomenon is the reason that the armed forces inflict such disproportionate costs on insubordination.

Networks are fascinating, and going forward with my education plans, I will be exploring the effects of network phenomena on the formation and evolution of human capital…which means I’ll be spending my days in fairy-tale land.

 

Selfish Reasons to Have More Kids Book Cover

Since Bryan Caplan has not sent me his manuscript, I have been forced to interpret from his blog posts as to the subject matter of his upcoming book, Selfish Reasons to Have More Kids. Below is the first conceptual design I have come up with.

Being in close proximity to Robin Hanson, I would imagine that Bryan will create a no-barrier/modest reward contest in order to let a the market decide on a high quality book cover, so that he doesn’t end up with something like this. If so, consider this my first entry!

[Click Image to Enlarge]

Update: Here is entry number two!

[Click Image to Enlarge]

 

Surprise! Recession II

This is the second part of the series started with this post. It is well worth it to begin by reading the first part, as it lays the foundational framework for the topics discussed in this post. If you would like to skip the math, scroll down to From Natural Systems to Economic Systems.

Update: Found the paper [also here (gated)].

Up to this point we have only outlined events i and j in vague terms. We will now narrow our focus to only transfers or transformations. Event i will signify that some quantum of medium is transferred or transformed from component i. Correspondingly with j. Aggregation of all quanta both leaving i and entering j during a unit of time — the transfer or transformation from i to j — will be signified by T_{i j}. Thus, T_{i j} might represent the flow of electrons from point i to point j in an electrical circuit; or the flow of biomass from prey i to predator j; or the the transfer of money from sector i to sector j in an economy.

T_i. will represent everything leaving i during the unit time interval, and T_.j will represent everything entering j during the same duration.

The above equation represents the total activity of the system, or “total system throughput”.

These definitions allow us to estimate all the probabilities defined previously in terms of their measured frequencies of occurrence. Thus:

You can then substitute these estimators in for p in all of the previous equations (H = X + φ), respectively.

Further, we need to impart physical dimensions to the measures using the scalar constant, k. Accordingly, we will scale each index by the total system throughput, T_... We will give them all new identities.

The “capacity” for system development is given as:

The scaled mutual constraint, which we will call the system “ascendency” is given as:

And the scaled conditional entropy, named the system “reserve” is given as:

Uniform scaling does not affect decomposition, which now appears as;

From Natural Systems to Economic Systems

The above equations states that the capacity of a natural system to undergo change is given by it’s ability to both exercise sufficient power as to be able to sustain itself over time, and it must possess a reserve sufficient to allow flexible reactions to novel disturbances. In this model, these two features are literally complementary. Thus, we can see in the figures below^[1] that given an ecosystem with a total carbon throughput of 102 mg Cm^-2y^-1 there arises multiple channels by which carbon flows through the ecosystem. These alternative channels give the system the reserve capacity needed to survive a shock to the most efficient transfer means.

Figure 1: Three pathways of carbon transfer between prawns and alligators.

Figure 2: The most efficient pathway in Figure 1 after elimination of other pathways.

Figure 3: Possible accommodation by turtles and snakes to the disappearance of fish as intermediaries.

In our graphical examples above, we can see that Fig 1 represents the optimal balance of efficiency and robustness. We can see that carbon throughput is more efficient in Fig 2 and less efficient in Fig 3. However, if Fig 2 were to experience a catastrophe (like a disease affecting fish), all transfer between prawns and alligators would be affected in direct proportion. Given a robust population of snakes and fish, it is possible that these pathways would buffer the loss of fish in the ecosystem. In terms of the equations above; if snakes and turtles are present, rather than total system collapse, throughput falls modestly, ascendency falls marginally, and reserves (being the chief casualty) falls by almost half. Thus our system adapts to buffer performance (A) by expending reserves (ϕ).

This brings us to our current money system, which is a monopoly of state issued legal tender — with stiff barriers to entry to any complementary system. It is exemplified best by Fig 2; a widely used system which places utmost importance upon efficiency. However — and of course this is not theory, both the Great Depression and Great Recession bear this out — in the event of any monetary disturbance, you have total system collapse. And because the monopoly of our money system has relegated all “second best” systems (like barter, or gifts in kind) to marginality, it lacks the reserve capacity to continue functioning at its previous level. In economic terms; assuming no intervention, if M*V in a given economy falls, then wages and prices must fall proportionately. The economy then begins growing again from the new, lower level of output. Much like our ecosystem (if it survived) would begin growing again at a lower level of throughput once the population of prawns was sufficiently high, and alligators sufficiently low.

However, given a robust complementary currency, an economy would be given the reserve capacity to weather a catastrophe in its most efficient throughput mechanism, as throughput and ascendency would not fall nearly as much — and the economy could fall back on its reserves. Again, this is not theory, but has been shown to work this way. Complementary currency systems around the world have likely (as I have not surveyed them) allowed people within certain communities to better weather the current global recession. Of course they did not get so lucky due to “keeping money in the community”, quite the opposite — complementary currencies buffer communities from a fall in M*V by supporting V, and thus sustaining an adequate flow of ‘legal tender’ through the community to sustain a certain level of aggregate demand.

In the recent recession, businesses throughout the economy faced a tough time due to a fall in M*V exacerbating problems in the financial sector, cutting off their supply of credit through traditional lending channels. Had the US a robust B2B currency (like the Swiss WIR), actively participated in by businesses throughout the economy, businesses could have turned to eachother to support the lending that they needed to continue growing — and our recession would likely have been much milder.

– — – —

Note: Our recent recession would also have been milder had the Fed kept NGDP growing at a rate consistent with previous trend as well. After all, a central bank has never failed to hit a nominal target. However, as is always the case, greater diversity would still have helped cushion even a the mild recession that would have resulted. Instead of grappling with 6-7% unemployment from 2007-2008Q3, we could have been dealing with 4-5%, which is not too shabby given we are stuck over 9% right now.
____
^[1]Ulanowicz et. al., 1996

 

Quick Notes About Greece

I’m learning a lot about Greece reading about reactions to the recent “fiscal austerity” measures taken up under the auspice of the EU/IMF $145bn bailout. Case in point:

And there is a hotheaded minority, at least, that does not believe the government when it says it had no choice. Mikis Theodorakis, Greece’s most famous composer, expressed the visceral reaction of many when he said the crisis was probably a plot by dark forces in America and other capitalist centres to subdue proud, independent nations. Crazy as such talk may sound to euro-zone governments that believe they have strained every muscle to save Greece from collapse, it will convince some people in a country where conspiracy theories (and, indeed, conspiracies) have a long history.

and

Greek politics still includes a Communist Party that is rigorously Stalinist (it damns Khrushchev as a liberal backslider) and commands some 8% of the vote.

The riots are instructive as to the future path of the United States in particular, and other countries in general. The US may, indeed, have a mechanism by which it can devalue and avoid the worst of a crushing public debt problem…and as I have said previously, I think inflation is more likely an outcome than outright deflation in the US. However, if the need for strong, meaningful cuts (or even restructuring of public programs) comes, are we willing to face the backlash from populists? I doubt it. That is the reason we have such an bafflingly complex tax code.

If Arnold Kling is to be believed, then these are very serious questions. Despite the fact that Greece has a much stronger strain of left-wing populism, we still have a very strong strain of ultra nationalism, and even xenophobia in our country — not to mention the lingering inertia of entitlement.

– — – –

For more on my view of US public finance, see here.

 

In Which I Say ‘Well, Maybe’…

Adam Ozimek wonders:

Provocative question of the day: should mortgage applications come with a short IQ test, where potential borrowers receiving a score below a certain level are required to undergo extensive counseling to make sure they fully and completely understand the mortgage, payment schedule, and the all the issues it is assumed a borrower should understand?

I’m confident that Adam recognizes the fact that, hyperbolic discounting being the problem, this would de facto exclude all but the most determined of those who lack basic arithmetic skills. But still there is a chance that people will put off their instantly-gratifying ways just long enough to get a loan, take the bad loan due to the stronger effect of larger monetary gain, and end up in the same boat. Fortunately, they will be able to draw out an amortization schedule that shows exactly where they went wrong. Unfortunately, they will have still gone wrong.

AND, given a central bank unwilling to satisfy AD, they will still have “caused” a deep recession.

As long as we’re being overtly paternalistic, why not just push for an 80%/20% loan-to-value rule? In fact, codify it into stone (for real; Kaufman, Levin, and Sanders can do the chiseling, because they’re morons). Thus we have a real barrier: the ability to save 20% on a down payment. That involves a much more serious time commitment — much longer than a 4-week math course — and it also involves a savings commitment.

Doubleplusgood as far as safeguards go.

Plus by using the impersonal price mechanism, we avoid the entire debate about the relevance to IQ to intelligence. Admittedly, we do dive headfirst into the homeownership/equity debate.

Oh the trade-offs!

 

The Semantics of Drug Prohibition

This Cinco de Mayo I’m going to use my blog to briefly speak against the one of the great injustices the world inflicts upon its people. Mexico, in particular, is severely affected by this injustice, and no; I’m not talking about free trade. It is America’s war on drugs that subjects the Mexican people to the horrors of a near-militarized country. Of course this is not the only injustice — our lack of a free immigration policy is just as great. But I’m going to focus here.

For a very long time, many people who have opposed drug legalization or decriminalization have stood behind the very valid assertion that there is no model to compare our current laws to…therefore, it amounts to wild speculation as to the implications of our actions regarding liberalization of drug policy.

Well, in 2001, Portugal decriminalized all popular drugs and narcotic substances, including cocaine, heroin, lsd, amphetamines, etc. Nine years later, the findings of the Portuguese experience, released in a report by the Cato Institute (2009), support the assertions of those who wish to see drugs decriminalized (still!).

You can read the report here.

On July 1, 2001, a nationwide law in Portugal took effect that decriminalized all drugs, including cocaine and heroin. Under the new legal framework, all drugs were “decriminalized,” not “legalized.” Thus, drug possession for personal use and drug usage itself are still legally prohibited, but violations of those prohibitions are deemed to be exclusively administrative violations and are removed completely from the criminal realm. Drug trafficking continues to be prosecuted as a criminal offense.

While other states in the European Union have developed various forms of de facto decriminalization— whereby substances perceived to be less serious (such as cannabis) rarely lead to criminal prosecution—Portugal remains the only EU member state with a law explicitly declaring drugs to be “decriminalized.” Because more than seven years have now elapsed since enactment of Portugal’s decriminalization system, there are ample data enabling its effects to be assessed.

One of the more interesting points in the report is that drug prohibition creates a wall of mistrust between society and the state, and thus severely retards the state’s ability to reach out to those who are using drugs in a positive, supporting manner. As you can see from the chart above, in a short time, most adolescent drug use has fallen due to liberalization. Recidivism has also declined, as well as drug-related crime.

And unfortunately it is not the United States that suffers from its own stupidity, it is the poorer countries in Central and South America. Mexico particularly suffers simply because of the border that we share. In a free and open market for drugs, violence would not be a viable option — indeed, it would severely hurt the bottom line. That is not to say violence wouldn’t exist, but that mutual cooperation through trade would be much more profitable. Not only would we be doing Mexico an immense favor, we would also be doing a favor to all of the people who are addicted to drugs and wish to seek help — but can’t currently, because we take a hard-line stance against drugs…not to mention we would be respecting the personal choices of law-abiding citizens.

It would be a victory for the cause of liberty, a victory for markets, and a victory for Mexico. I hope to see such a Pareto improvement in my lifetime!

And I hope everyone has a fun and safe Cinco de Mayo!