Sub-zero

This is the most compelling version of these comparison charts that I have seen.  You really do have to look at the entire period since 2000 as a secular bear market.  The difference between the Great Depression and the Japanese Great Recession is that the US bubble burst in two separate waves -- stocks and then real estate.  All three are tied together by the de-leveraging of asset ownership.  Being forced to gradually cancel debt is like running the non-zero logic of economic cooperation in reverse.

Data Dump

Humans sometimes have the strangest squirrel mentality; god forbid you should forget where you put those winter nuts last fall.

Scientists who collaborate via email, Google, YouTube, Flickr and Facebook are leaving fewer paper trails, while the information technologies that do document their accomplishments can be incomprehensible to other researchers and historians trying to read them. Computer-intensive experiments and the software used to analyze their output generate millions of gigabytes of data that are stored or retrieved by electronic systems that quickly become obsolete.

"It would be tragic if there were no record of lives that were so influential," Dr. John says.

Yes, entirely tragic if all we could discover about them were the vast number of published papers, articles, books, lectures, and presentations mirrored throughout the web. That won't even begin to answer what the consistency of their ca ca was like on 090828.

The growing scale of new science projects, however, has university data custodians worried. "We are swimming in data these days, and people are overwhelmed," says digital curator Sayeed Choudhoury at Johns Hopkins University, the principal investigator for a national consortium of data preservationists called the Data Conservancy.

"Our ability to collect data now outstrips our ability to maintain it for the long run," says William Michener at the University of New Mexico, who leads a data-preservation network called DataONE. "We lose an awful lot of data that is collected with public funds."

"The problem is to actually capture the way scientists interact with the data," Dr. Szalay says. "Today's graduate students are starting to use instant messaging in their scientific work. We have to figure out how to capture these."

"Digital information lasts forever -- or five years," says RAND Corp. computer analyst Jeff Rothenberg, "whichever comes first."

There's no question that new tools mean new discoveries, new ways of working, and new relationships to power and history; how science changes as a result of networked computers is valid question. What's silly is this breathless, stuck-in-the-past conservationist mentality that privileges the recording every little cough and shift (kinda reminds me of Kenneth Goldsmith's book Fidget) over the synthesis of new ideas. Why are we always so constantly worried that certain things will simply pass out of existence -- species or languages or some geek's IM messages? Why are we so concerned that it is getting more and more difficult to write the "definitive history" of a scientific discovery or an artistic idea or a given year because so many things collaborated in its creation. Why do we spend more time worrying about keeping our data in one repository to end all repositories than we do in figuring out how to have our data make more data? We still think like puny humans.

So what if we lose bit here and there -- we have already arranged for everything of importance to go viral.

Tete a Tett

Gilian Tett is saying some extraordinarily crazy shit that you normally would only be able to read in the dustiest fringes of the blogosphere and never expect to see on the front page of the FT.

However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems should work. After all, as I wrote last week, ideologies are always rooted in shifting power structures and struggles. And just as the old intellectual model proved imperfect, any new "theory" that might yet replace it – with or without a Tobin tax – will have limitations too. What is needed now, in other words, is not so much a new creed or magic wand policies, but policy makers, politicians, investors and bankers who are willing to engage their brains, and keep remaking policy, as the world evolves.

Think Pig! 

All of this is apropos of one very simple proposal, the so-called Tobin Tax, which would levy a tiny transaction fee on every trade.  The fact that we're not hearing a word about this in the US is incredibly telling.  There's not going to be any reform -- Obama is Hoover, not FDR.

The Gridlock Book

Another book I finished recently and that I can recommend wholeheartedly is Michael Heller's The Gridlock Economy.  It's a brief meditation on the economic consequences of various forms of ownership and types of regulation, and it couldn't come at a better time, given how hysterical the ideological debate surrounding these issues has become.  Over time, we seem to have completely lost track of the fact that the reasons we have the social, legal, and economic institutions we do (or should) is because they work.  There is everything to be gained from thinking through the principals behind capitalism or communism or markets.  But in the end, our choices have to be primarily based on an empirical evaluation of whether these forms are producing what we want.  Heller's book takes a mighty step in this direction, philosophically, and then follows it up with a number of practical case studies and suggestions that put this empiricism into practice.

Let's consider private property.  There are people that see property as inherently natural and inalienable and there are others that see it all as robbery.  Heller sees it as a social technology.  A certain regime of property rights has particular consequences for how people behave.  If you want to see people behave differently, you should invent a new technology of ownership or tweak an existing one till you get what you want.  Within broad limits, we have a way to do this (called a government).  The apparatus may be broken right now, but that's a separate issue we'll come to in a moment.  Consider the wise words of Interfluidity:

The only bilateral contract is a gentleman's agreement. Binding contracts involve an implicit third party, the state which (through its courts system) stands ready to enforce the terms of private arrangements. The state is not, and cannot be totally neutral in its role as contract enforcer: Communication between contracting parties is always imperfect; the universe presents an infinite array of unforseeable possibilities; even very clear contractual terms can be illegal, repugnant, or contrary to the public interest.

 

... every contract is a negotiation between three parties, the two who put a signature at the bottom the document, and the state which will be called upon to give force to the arrangement when disputes arise or someone fails to perform.

Once you get past the basic philosophical admission that contracts are a three party system and that ownership will always have something to do with the state, that legal rights are fundamentally subordinate to the cooperative action they were invented to support, you can start to appreciate the cases where a given ownership system has produced terrible results.  The most famous of these is the well-known tragedy of the commons; if we all collectively own a piece of land, we are incented to take as much as we can from it and contribute as little as possible to its care.  This type of public ownership doesn't work (at least in many common cases).  Unfortunately, people mixed a healthy dose of ideology (not to mention anti-communist paranoia) with this empirical observation, and together the two hardened into a rigid doctrine recommending the privatization of everything. 

This, alas, also doesn't work in many common cases.  The bulk of Heller's book is devoted to examining such cases, which he terms tragedies of the anti-commons, and trying to uncover why they happen and how we might prevent them.  The simplest illustration of the idea is an ingenious Quaker Oats marketing scheme from the 50's called the Big Inch where they gave away deeds to square inch parcels of land in the Klondike.  The land was eventually forfeited back to the state because the freeloader brats didn't pay their real estate taxes.   This was just a funny story really, but you can imagine what would have happened if someone discovered oil or gold on it.  But there are a host of real cases where too many, rather than too few private owners caused a particular resource to go underused rather than getting overused:

• Robber barons on the Rhine during the middle ages -- everybody sets up a toll booth and eventually nobody can afford to ship anything along the river.  Bad for commerce, and bad for the barons; all the castles now lay in ruins.
• Patent thickets in drug development -- a scientifically viable research program might lead to the development of a drug whose path to market necessarily involves licensing the many patents that were involved in its discovery.  Negotiating a collective settlement amongst these holders, any one of which can block the entire process, is about like herding cats, so it's best not to waste your time developing this sort of drug.
• Ownership of spectrum rights in the US -- The management of our spectrum is a disaster all the way around.  The largest owner is the military, who doesn't allow anyone to interfere with their bands despite the fact that you can't exactly run out and ask the enemy not to broadcast on that frequency.  Next come the broadcast TV networks, who got their spectrum for free and "own" it but cannot sell it.  They have no impetus to use it efficiently, or to let anybody else make use of it.  This incumbent position is what has delayed digital TV for so long, while in the meantime cell phones went digital quickly because the people who licensed that spectrum had to pay for it; they saw greater wisdom in cramming more signal through the same bandwidth.  Finally, you've got the big cell carriers who pay up front for the right to gouge us with their monopoly later, and have on occasion even bought spectrum to leave dormant, just to be able to block their competitors from improving their networks in key areas.  All of these factors contribute to the fact that the US has some of the highest cellular rates in the world, not in spite of the private ownership of spectrum, but because of it.
• Certain real estate markets are famous for the way fragmentation of ownership makes it impossible to assemble a parcel large enough to build something useful on.  Tokyo and New York are particularly famous for this.  Heller divides the problems here into three types:
• Block Parties -- where one small owner with a low value parcel can block a much larger construction project by refusing to sell.  Sometimes this is solved via eminent domain.  Sometimes it's just a bargaining tactic.  The point is that the problem is real, and yet we have no good way of solving it in general.  We have no simple mechanism for rejoining land split asunder, and instead just rely on ad hoc solutions that don't tend to be fair.
• Share Croppers -- a common problem arises when family businesses or farms are divided amongst many heirs.  If just one heir wants to sell, the whole works often has to be sold because dividing the land is such a costly and difficult legal problem.  Apparently this has happened to many blacks' family farms, and is a major hurdle in using Native American land allotments now that generations of inheritance have made the pieces so tiny.
  
• BANANA republics -- this stands for "build absolutely nothing anywhere near anyone" and I can tell you from first hand research it's a major source of profitability for certain companies.  Just try to get a cell tower put up or a landfill, power station, or transmission line built.  This isn't directly the result of overly fractured property ownership, but operates indirectly through the ability of many players in the legal system to block one another.  The benefits of even sensible property definitions at the physical level can be ruined by gridlock at the political level.
  
• Property rights in post-communist Moscow -- apparently they decided that if a little bit of ownership was a good idea, a lot must be better, and they made the rights to buy a storefront separate from the right to use it, the right to rent it, the right to collect the rent from it, and the right to occupy it.  Needless to say storefronts stayed empty and for years everything was sold in the street.  This is another example where the divided ownership problem is not spatial but legal, but the underlying principle is the same; if the scale or type of ownership isn't adapted to the scale or type of practical use for an asset, then clear property rights can do more harm than good.   
• Finally, he tells an interesting history of oyster farming that is too complicated to recount here.
  

Before you despair that we'll never get anything done again, let me point out that we can prevent anti-commons situations that lead to underuse, and in fact, Heller gives a number of historical examples where these problems were overcome.  A simple law and accompanying court ruling at the beginning of the aviation era were sufficient to guarantee planes the right to fly over your land above a certain height.  The Google book settlement may establish a legal regime sufficient to allow for all books to become searchable.  Vitamin A enhanced "Golden Rice" was brought to market by a WHO patent consortium scheme.  And folks like IBM and even Uncle Sam (with their airplane technology falling behind due to patent lawsuits after WWI) have created patent pools that aggregate rights and license them to everyone who is interested.

The overarching message of the book is simply that we need to put ideology aside go back to the basics when it comes to our regulatory principles.  The idea behind private property was that it would give everyone an incentive to use and take care of what was theirs, and that together these incentives would allow for a competition that benefited everyone.  Property, in fact, should be defined as the type of ownership and control that lead to this outcome.  The economy is dynamic though, and the type of property that we need to produce the things we want changes over time.  If Adam Smith's same logic is to apply, we have to make sure that our system of ownership and control changes along with it.  If we don't, we will all just end up stepping on one another's invisible toes.

I've finally found it

The all time greatest business ever.  Bar none.  Period.  It gives new meaning to the Armageddon Put.

Money is the body-without-organs of capitalism

One of the things I've had to do in the last year as an investor is read a bunch of macroeconomics.  This didn't use to be necessary, because the type of investing I do is generally just a sort of comparative analysis -- my company will eat your companies lunch.  It doesn't directly depend on the overall economic level, so it's easiest to just bracket the complexity of determining changes in that level, and assume that we are at equilibrium.  There are some obvious exceptions to this way of thinking about things.  The tech bubble and the housing bubble were both pretty obvious, and of course in investing there's no way to ignore the secular trends that are always changing what the "equilibrium" looks like. But the bubbles were so enormous and so obvious that you could just turn them into exceptions and special cases, stay out of the way, and never fundamentally confront the fact that there is no possibility that our economic system is anywhere near equilibrium.  You could do this, that is, right up to the point where the whole system broke down, and went through what was quite obviously a sort of phase transition. 

Unfortunately, I have discovered that you cannot go looking for an explanation of the non-linearity and instability of the economy in traditional macroeconomics.  Despite the fact that macroeconomics as a discipline was actually born out of the Great Depression, and the fact that Keynes explicitly wrote a General Theory of Employment, Interest, and Money (so as to distinguish it from the special case neo-classical single equilibrium theory that had ruled up to that point) macroeconomic's real genius appears to have lain in proving that nothing like its birth could ever have happened. 

There are lots of reasons why macroeconomic theory is not terribly useful, but in my opinion, the biggest problem is that these guys never take the idea of money seriously.  They are always basically assuming money away as just a fiction useful for the exchange of real goods.  Needless to say, money exists.

As far as I can make out, the one good thing that macroeconomics offers is a view of the economy as a closed system.  Your perspective on the economy changes when you realize that one guy's spending is another's income.  A simple idea which is appalling easy to lose sight of.  While this insight is fundamental, I think it was historically as much a blessing as a curse.  The limited mathematics (ie. no computer simulations) people used to deal with such systems back in the formative years led them to adopt techniques from statistical physics that describe linear closed systems that inevitably tend towards equilibrium.  The classic drunk looking under the lamp post for his lost keys type stuff that characterizes a lot of science.  Nowadays, of course, after chaos and complexity theory and computer simulations and whatnot, we find it easy to imagine closed systems that don't tend towards equilibrium over relevant time scales.  And we find it very easy, in fact necessary if we want to talk about the physics of life, to think of themodynamically open systems, that continue to be "systems" precisely because they don't come to equilibrium.

Which bring us to today's article.  I link to Mark Thoma's version of it, because he makes some good comments and because you have to love a guy who is sitting on the side of the Utah highway writing about what the Japanese think we should do with our toxic assets.  But the main show here is the Keiichiro Kobayashi article that you will have to scroll down to read.  Here's the punch-line (for my purposes, his main point is actually that you need to do something about the toxic assets to get any recovery)

I have elsewhere attempted to construct a theoretical model that satisfies these requirements, in which I assume that assets such as real estate now function as media of exchange given the development of liquid asset markets but are unable to fulfil this function during a financial crisis (see Kobayashi 2009a). With a model like this, we can regard a financial crisis as the disappearance of media of exchange, which triggers a sharp fall in aggregate demand. In this case, both macroeconomic policy (fiscal and monetary policy) and bad asset disposals can be understood as responses targeting the same goal – restoring the amounts of media of exchange (inside and outside monies).

This model sounds interesting because it amounts to the hypothesis that trust (or credulity or suspension of disbelief and resulting greedy speculation or whatever) spontaneously creates money, and lack of trust destroys it.  This is a nice model of a non-linear two state system.  The trust/suspicion switch is sort of ad-hoc here, but later you might go back and try to understand what combination of endogenous variables causes this (ie. understand the change as a phase transition). 

Of course, you're not done at that point.  Once you've got a non-linear model that incorporates money and finance into the closed system, you still have only described a part of it. Today there's a large actor in the system now that doesn't obey the classical equations.  It's become pretty clear that government is "pumping" the system from outside (just don't call it pump and dump).  This is by Keynesian design of course.   Keynes's reached a certain level of generality in pointing out that the Depression was a (local) equilibrium phenomenon resulting from the paradox of thrift, and that the government, being outside that system at the time, was the only thing that could knock it out of the bad equilibrium it had settled into where people were too poor to save anymore.  Now, we actually have to reach a higher level of generality that incorporates the government within the system, because it has become so large that there is no way to analyze things without it. 

What's that you say?  Did I hear you whisper something about the capitalist axiomatic, that most abstract synthesis of state and industry?

What is the sound of one hand smacking forehead?

I wish I could put my finger on what exactly makes Free Exchange seem to me so ... superficial ... in general, but today's comments about natural selection in politics go in that direction.  The note is mostly a collection of quotes and is hard to excerpt, but you can get a sense of what I mean by reading the deep thoughts that conclude a discussion of why our political system produces moral monsters:

The system is quite disgusting when one steps back and takes a look at it, but there's nothing particularly surprising about it. As best I can tell, this is how things have always worked everywhere.

Jack Handy couldn't have said it better. 

Fortunately, some commentator weighed in with a more useful quote from a James Buchanan book called The Reason of Rules, that looks like it might be interesting.

"[S]uppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. . . . Is there any presumption that political rent seeking will ultimately allocate offices to the 'best' persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political office, to compete with those whose passions include the desire to wield power over others?"

I really really wish we would get over being shocked by the moral failings of a completely a-moral machine.  The transcendental field of politics is beyond good and evil.  The important thing is to analyze the actual mechanism, figure out in general which mechanisms produce which results, and try to engineer the rules and meta-rules so we go in the direction we want.  Evolutionary thinking, being a tautology, is true always and everywhere, as Mr. Handy so aptly concludes, but that doesn't mean that it's always applicable to the problem at hand.  The whole point is to design a political system that lacks the feedback loop of natural selection.  Long live Anarcho-Theism.