Beliefs and non-beliefs (2): the Eurozone

Here's the widely-held view. Germany must stop being intransigent, bail out the Southern Europeans (and thereby save the world economy) by standing behind their debt and/or issuing new Eurobonds. The political price for that is some degree of fiscal and political union. (Yesterday's agreement is a step along this path.)

This is nuts.

First, it doesn't solve the problem except in the short-run. Eurozone debt in the aggregate is about 80% of GDP and this is being bandied about as less than the US and therefore somehow manageable. Well, yes it is better than the US, but that does not necessarily make it manageable with low European growth rates. And this number does not include the very large off-balance-sheet liabilities from e.g. public pensions. There is a story from The Big Short about a trader who decided that some of these US mortgage securities were going to blow up. This smart guy therefore planned a massive swap for other, safer mortgage securities, which he had to accumulate in large quantities. Unfortunately he missed the big picture: all the mortgages were crap. He ended up buying a load of junk from the book's autistic Goonie heroes.

For mortgages, read Euro debts. What if they’re all crap? (Le Monde Diplomatique describes a French movement to “re-examine” their public debt.)

The political side of the Grand European Compromise is equally unappealing. What Greece, Spain et al. are being offered is essentially “Germany chooses how much you can spend”. This is not democratic, and there is no way it can be made so. (The European Parliament? Please.) Even if these decisions were made by an elected body at European level, this would still be a massive increase in centralization, with a concomitant massive decrease in human freedom. The famous EU “democratic deficit” has deep causes: no European public sphere, not enough common interest and/or mutual altruism for a true European demos.

In better times, the lack of democracy would just be a worry for earnest political theorists. Most people care about “output legitimacy” i.e. bread and butter. Unfortunately we are going through a very painful crisis and there is no output legitimacy: all politics has to offer European nations at the moment is blood, toil, tears and neoliberal reforms. That offer is far from attractive when made by your own politicians. Even less when it comes from foreign politicians and bureaucrats. In tough times, communal solidarity is not a luxury but a necessity.

Conclusion: we are trying to avoid ten years of economic pain, by setting ourselves up for a century of political disaster.

Why David Cameron is going along with this and demanding that Europeans implement the Grand Compromise, I do not know. The best outcome possible is that Britain ends up with a politically unified Eurozone as its nearest neighbour, thus defeating our central foreign policy objective for the past three hundred years. The more likely outcome is that we end up as neighbours of a continent-sized Argentina. This suits the short-term interest of the banks, not the long-term interest of the nation.

Rainald Grebe translations

A quick translation of some Rainald Grebe lyrics. I chose these ones because they rely more on concepts and wit than on wordplay and rhyme. Corrections welcome.

Prime of life

Dear motorway, I’m going to lick your central reservation

A bath in the day, I think I’ve earned that

Bottom line – which line? – it was a good year, a good year

Tralala

Another company car... Always left, always left!                    [ie overtaking]

And the jacket in its foil

Yeah, Peter, Peter, clock kilometers, Peter.

My God how everything’s shaken up and down in this country

30 year olds, 40 year olds, what they put away, awesome, awesome!

Go on ask the satnav, when are we in Osnabruck

The satnav is broken, ticka ticka ticka ticka tick!

The hedgehog tells the hare: lame rabbit,

I’ll prick you with my little speedo needle!

We start the day with a delicious coffee and a working breakfast

Swallow it! Chop chop! The receipt in the box, you can claim it back, claim it back

I swear, my girlfriend and me, it’s just a working relationship

Come on, give us a kiss, a kiss, kisses you can claim them back, claim them back

You’ve gotta fuck, fuck, the Ministry of Labour said

Go on get fucking, get fucking, plenty fuckee you get a special year-end bonus

I look at old people and think: “They’ve got it behind them”

I look at little kids and think: “Look forward, look forward to what’s coming!”

The hedgehog tells the hare: lame rabbit,      [a ref. to the Grimm fairytale]

I’ll prick you with my little speedo needle!

We’re calling from the prime of life

Calling from the prime of life

I’m normal. I’m normal

Calling from the prime of life

Calling from the prime of life

Teteretetet

OK that’s what it is, right? That’s normal!

The customer is the measure of all things – oh right! –

What we do we do just for him.

Now is the time, if you haven’t yet

Then you never will

Yeah, yeah, you wanted to just look around in life a bit more –

Sure, the sun shines so nice in your back yard –

Are you dumb? No! No!

We are now we’re the ones who, who are standing at the machine

Produce, produce, I want to see your backs in it, backs in it

The 35 year old stutterer makes 35 year old promises –

The 35 year old criminal does 35 year old crimes –

“I’ll do my best tomorrow” is New Year already

“I’ll do my best tomorrow” is New Year already

It was it was it was a good year

Great buffets, and the eggs still recognizable as eggs!                       ["eggs" here also = "balls"]

If you want let’s meet in August for a coffee

“How do you do?” “How do you do?” How do I do what?

Those with work complain they’ve got so much much much much much

Those with none complain they’ve got none none none none none

At Penny and at Plus there’s organic really cheap cheap, oh I need it!

When every tramp can eat healthy, yeah, then I don’t know

Have you got time for kids, have you time for a boyfriend?

No! No! No! You don’t need Powerpoint to get it!

The hedgehog tells the hare: lame rabbit,

I’ma prick you with my little speedo needle!

We’re calling from the prime of life

Calling from the prime of life

Teteretetet

I love Berlin... I love normality!

It's good

I wanted to do so much

Now the day’s already done

So many important things

Not today I’ll stay at home

I wrote three bestsellers

And built four dams

Grated so much cheese

Chewed off so many ears

My jets have jetted all around

From here via Munich to Milan

And I still haven’t saved the world

So another saviour can

It’s good, it’s good, it’ll be over soon.

No fuss, no howling at the moon.

It’s good. I count the sheep

Until I finally sleep.

When will the sandman come to call

To sail my boat along the wall?

And the volcano's extinguished

The chip pans on standby

Even in far-off Baikolo

The rockets have the day off

And hell is yawning sleepily

In the Great White’s mouth

Just an untiring hammer thrower

Still spins himself around

My jets have jetted all around

From here via Munich to Milan

And I still haven’t saved the world

So then let someone else, someone else...

It’s good, it’s good, it’ll be over soon,

No fuss, no howling at the moon.

It’s good. I count the sheep

Until I finally sleep.

When will the sandman come to call

To sail my boat along the wall?

On the flight back from New York

Coming back from ESA. New York was great and the conference was fabulous too. There were several panels on “dishonesty and corruption”. A nice one with Marco Piovesan looked at people who did not buy bus tickets on the Italian public transport system.

Outsiders often think of experimental economics as proving that people are much nicer than Rational Economic Man – altruistic, unfair, averse to inequality and so on. In fact, a lot of recent work goes the other way, exploring spite, dishonesty and hypocrisy. The picture of man that comes out of this is not a Noble Savage, but more a flawed, selfish creature whose vices are partially checked by his fear of social disapproval.

Intergroup emotions in Germany

In the Old National Gallery guest book, Berlin

East door of the Berliner Dom

... and the most moving thing in that grandiose building.

Linkage

Evolution does not always lead to efficiency.
Jonathan Portes explains how the Cameron government has quietly U-turned. I told you it would.
Elinor Ostrom's last writing, very much in the vein of her life's work.
Botticelli's Venus gets Photoshopped up to 21st century fashion industry standards.
Half-arsed attempt to be democratic leads to utterly predictable outcome.

Beliefs and non-beliefs, part 1

I have finished teaching my "Making of Economic Policy" class for the year, and the students have done their exams. Modulo the usual pain for precious research time lost, teaching it was a lot of fun.

Now that I am not going to affect anyone's opinions before the exam, it seems like a good time to describe some of my personal beliefs about the course's topics; and some of my non-beliefs. These are all highly provisional, unscientific and evolving. ("Evolving" is a bit hopeful. Maybe "changing".)

• I do not believe that a more open immigration policy to the EU and the UK is an obviously good thing which is held back only by voters' irrational xenophobia. 

Linkage: how to measure the universe

via kottke.org.

Measuring the Universe from Royal Observatory Greenwich on Vimeo.

Medieval polisci

For Sunday, here's François Villon's version of a famous theory.

Au temps que Alexandre regna,

Ung hom, nommé Diomedès,

Devant luy on luy amena,

Engrillonné poulces et detz

Comme ung larron; car il fut des

Escumeurs que voyons courir.

Si fut mys devant le cadès,

Pour estre jugé à mourir.

L'empereur si l'arraisonna:

«Pourquoy es-tu larron de mer?»

L'autre, responce luy donna:

«Pourquoy larron me faiz nommer?

«Pour ce qu'on me voit escumer

«En une petiote fuste?

«Se comme toy me peusse armer,

«Comme toy empereur je fusse.

In the time of Alexander's reign

A man, by name Diomedes,

Was dragged before him

Thumbs and fingers in irons

As a robber; for he was

One of those pirates that we see.

He was brought before the judge

To be sentenced to death.

The emperor questioned him:

"Why are you a robber on the sea?"

The other replied to him:

"Why are you calling me a thief?

Because you see my piracy

In a tiny little boat?

If I could have your armaments

I would be emperor like you..."

Ariely on dishonesty

I got the new Ariely book about dishonesty the moment it landed. Now that is an interesting topic, probably one of the most interesting topics in social science. Why? Well, take any game, i.e. any economic or social situation. Almost all of game theory, i.e. of the study of conflict of interest, becomes irrelevant if the players can sign contracts, because they can just agree on one of the possible efficient solutions. So why then is game theory still widely studied and important? Because in lots of important situations -- war, crime, non-contractible outputs -- legal contracts can't be made.

Except that if people are honest, then they will do what they say; and so promises become contracts. Robert Solow makes this point in his review of Titmuss' book on blood donation. Thomas Hobbes understood it earlier, and put it as rule number two of the Law of Nature: "That men perform their covenants made."

So, dishonesty makes game theory interesting, and social outcomes much worse for everyone.

Professor Ariely's book has a really simple, interesting thesis. Most dishonesty, he says, is not bad people cheating; it's good people cheating a little bit. The most powerful example is when he computes the money he's lost by being actually swindled, compared to the amounts he's lost because of insurers, advertisers etc. marginally overcharging, marginally exaggerating the benefits of their product, and so on. Anyway, he pursues that thesis in many clever and interesting experiments, all written up in his witty prose. Top-notch popular science.

Ironically for a book on dishonesty, many of the experiments involve deception of (as well as by!) the experimental subjects. For example, sometimes the researchers hire an actor to pretend to be dishonest, so as to see if others copy him. In the world of social science experiments, this is a controversial topic. Sometimes deceipt can be unfair to be participants. A much bigger problem, in my view, is that deceipt is going to make future subjects suspicious. Suppose this book is as successful as it deserves -- and students love this behavioural stuff right now. Suddenly, all our potential experimental subjects are going to be in our labs going "where's the trick? Who's the actor?"

Of course, once that happens, we lose control and have no way of knowing how subjects see their situation. (Here is the classic example: when a subject in a psychological experiment had an epileptic fit, 3 of 5 other subjects thought this was part of the experiment!)

For this reason, many experimental economists believe, as I do, in making experiments honest wherever possible. Then at least our experiments will have a good reputation. In future, we may even have to announce "In our experiments, unlike the psychology department's experiments, you will not be deceived"! That's harsh, but if psychologists like Dan Ariely keep writing these brilliantly popular books about experiments where they deceive people, it may be necessary.

Linkage - warning, adult themes and emotional content

Oh, this is very serious: after 115 years together, two tortoises in Klagenfurt zoo have ended their relationship. (Link in German).

Elinor Ostrom is dead

Boo. I think of her as a proper social scientist -- interested in big, deep questions, and pursuing them tenaciously with all the tools at her disposal.

Linkage

The future of the world? Bleak results from a simulation.

Biodiversity and trade

So, this Nature paper has been a weekend hit. It links threatened species to trade routes and shows that trade is a cause of loss of biodiversity. Or so it argues.

I am not sure the paper supports that claim, though. Suppose monkey production threatens a species of coffee -- hmm, too early in the morning. Try again. Suppose coffee production threatens a species of monkey, and suppose that 90% of coffee is exported. The paper then argues that 90% of the expected biodiversity loss is also being exported.

We seem to be missing a counterfactual. What would happen if the trade weren't there (e.g. if it were banned)? Presumably economic activity would not stop but would be diverted to alternatives. Some of those would be more ecological, some would not. Subsistence agriculture, plus overpopulation, can be pretty devastating to habitats, right?

It is surely true that rich countries have exported environmental destruction to poor countries which have lower protections for public goods. (Although those countries may also put a higher priority on economic growth.) And biodiversity certification a la the Rainforest Alliance logo might be a solution. It's just that I'm a bit unclear what the paper is actually estimating.

Linkage

Interesting (but at the end slightly scary) Chinese blog post on parenthood in China.

Linkage

Nature paper on tipping points in the earth's climate. (I don't know if there is an ungated version.) Here is an interesting paragraph:

Recent theoretical work suggests that state shifts due to fold bifurcations are probably preceded by general phenomena that can be characterized mathematically: a deceleration in recovery from perturbations (‘critical slowing down’), an increase in variance in the pattern of within-state fluctuations, an increase in autocorrelation between fluctuations, an increase in asymmetry of fluctuations and rapid back-and-forth shifts (‘flickering’) between states. These phenomena can theoretically be assessed within any temporally and spatially bounded system. Although such assessment is not yet straightforward, critical transitions and in some cases their warning signs have become evident in diverse biological investigations, for example in assessing the dynamics of disease outbreaks, populations and lake ecosystems. Impending state shifts can also sometimes be determined by parameterizing relatively simple models.

I had no idea there was a science of predicting state shifts... how cool. I wonder if you could apply it to social revolutions.

Interesting post on the jubilee and the Republic protesters

... at Boingboing.

I went down to the river, it was fun. I couldn't see a thing, the crowds were so tightly packed. Eventually on the South Bank I found a very narrow wobbly bit of fencing which people were standing on, and watched the boats go by for half an hour. It was quite fun and I saw a very small figure in white who was the Queen. (I think.) Then there were various small boats from the commonwealth, Dunkirk, etc. etc. Everybody was in a good mood, Union Jacks were everywhere and it only rained at the end.

This week I was chatting to a top academic who said, with a cheerful grin, "I was hoping for the Duke of Edinburgh to keel over. That would have been a result." There you have the republicans' image problem. Lots of them are nice people who bear no malice to anyone and simply want to change an institution; but some of them sound as if they bear a personal grudge against Ma'am herself, and this is not attractive.

I am ambivalent. The monarchy seems to embody some of the best things about Britain, and also some of the worst.

(By the way, that link will teach you the glorious fact that the President of Turkmenistan is called Gurbanguly Berdymukhammedov. If we have a president, let's have him.)

On soft power

Ideas are more powerful than guns. We would not let our enemies have guns, why should we let them have ideas?

-- Stalin 

US asks Confucius Institutes to apply for accreditation.

Steven Pearlstein on Britain

Here (via MR).

Other than Labor Party politicians, nobody seriously doubts the wisdom of cutting back on the number of public employees or the size of their pensions, or capping welfare payments to any household at the median income, or bringing more efficiency to public education or the public health service through greater competition. The idea that these will be done once the economy returns to normal growth is a political fantasy.

I wonder why Mr Pearlstein thinks this.

RA Summer Exhibition

Linkage

The people at Crooked Timber explain -- in a new way -- why socialism wouldn't work.

Economic imperialism

In the past half century economists have invaded other social science disciplines, bringing advanced techniques and original ideas. Long-suffering academics in those fields have complained of economic imperialism. Famous examples include the family (Gary Becker), crime (Becker again), race (OK, this is really just "Becker imperialism") and politics (James Buchanan and Gordon Tullock, Mancur Olson)*.

Nineteenth-century England, by a visitor

Conversation with an Englishman .... Twenty-five years of age; sneering, decided, incisive face; he has made, for his amusement and instruction, a trip lasting twelve months, and is returning from India and from Australia....
Of all the countries this Englishman has seen, England is the most moral. Still, in his opinion, the national evil is " the absence of morality." In consequence he judges France after the English fashion. "The women are badly brought up there, do not read the Bible, are too fond of balls, occupy themselves wholly with dress. The men frequent cafes and keep mistresses, hence so many unfortunate households...."

Followup linkage

Re alternative ways to present data, see also this. Time Out has more details. Their Twitter feed is here.

Linkage

Are CEOs with military experience more honest? (via marginalrevolution)
Dan Ariely has a new book on honesty: actually, I ghost-wrote that book for him while I was on leave from the SAS.

More linkage

Here is a great, informative rant on the internet and the music industry, from a Camper Van Beethoven member who is also an economist, a geek and an entrepreneur.

Re: crowdfunding

See Spacehive.

Doh!

http://www.bbc.co.uk/news/world-europe-18162443

Next up: Russian nationalists denounce Pushkin?

My problem with average utilitarianism

Today’s most influential moral framework is average utilitarianism (AU for short): the idea that whatever increases the average person’s welfare is good. It’s the default way economists use to make welfare comparisons. It is also reflected in the use of GDP per person as a measure of a society’s well-being.

By contrast, total utilitarianism (TU) says that good is whatever increases the sum of welfare. This only makes a difference when the number of people under consideration changes. For example, 1000 people with 2 welfare units each is better than 100 people with 3 welfare units each according to TU, but worse according to AU. (Never mind how welfare units are calculated or compared across people. That’s a problem for both varieties, and for another blog post.)

A spoonful of sugar

A friend at another university tells me that the exams committee are facing pressure from the administration to give out more Firsts and 2.1s. The argument is that employers won’t hire people with 2.2s or below. So, by giving out lower grades, they are harming their students in the job market.

This is an interesting example of what Chugh, Bazerman and Banaji call Bounded Ethicality. Giving out undeservedly high grades (1) is dishonest and (2) corrupts the degree grading system, and I guess a little thought will make that clear to most people. However, the administration makes the case that not doing so will harm the university’s students. The force of this appeal is: “ignore the global harm, focus on the local benefit”.

This argument is not seriously convincing, but it appeals to people’s instinctive moral parochialism. By doing so, it provides a cover for self-interest. (So it is also an interesting example of self-serving bias.) Fighting grade inflation would take time and effort, and will make you unpopular with important people (or if you are an important person, it would make your university worse off, and you personally less successful). Nobody wants that. But a naked appeal to these motives would probably not work as well as this version which comes dressed up in moral clothes, because academics like to think of themselves as high-minded guardians of the scientific flame.

Perhaps the new Centre for the Study of Integrity could do some work on self-serving moral arguments.

Oops! Another Paolozzi

Shablamidi, shablamida

Listening to my two favourite Donna Summer tunes, I Feel Love and State of Independence. I can see why Brian Eno said what he did. I first heard it in the 90s and it sounded completely up-to-date, and fitted alongside the blissed-out house music I liked. It's all about surrender to the moment.

State of Independence has the same sound but the lyrics are really different, more like a hymn to consciousness, home, commitment and God. (Donna Summer's family values led to a well-known controversial incident.)

Hmmm.

No, the Devil has the best tunes: I Feel Love is better.

Yet another Paolozzi

Kickstarter

In March, a gaming company called Double Fine sought funding for their next project on Kickstarter.

Kickstarter is a website where you can pledge to fund creative projects. The project sets itself a money target and a deadline. If enough people pledge money to hit the goal, then their credit cards are charged. If the goal is not achieved by the deadline, nobody pays.

Double Fine aimed to raise $400,000 in a month. In fact, they raised $1 million in 24 hours. The rest is history: total donations came in at more than $3 million, and the computer gaming industry went into a Kickstarter frenzy.

Websites like Kickstarter mitigate some of the problems facing projects with big startup costs. Suppose you are creating a computer game or a film or a ballet. You could sell advance tickets, but if you don't get enough, the project will fold before completion. This makes your potential customers nervous about handing over cash. And the nervousness can be self-fulfilling; if an investor thinks other people will be cautious in handing over cash, that makes it less likely that the project will hit its minimum, so s/he gets more cautious too. Kickstarter fixes that by guaranteeing a refund.

These projects are like what economists call club goods. The marginal cost of producing the second copy of a computer game is (much!) lower than the marginal cost of the first copy: software is partly non-rivalrous. Kickstarter and other crowdfunding websites make it easier to produce club goods. A first cousin of the club good is the public good, which is non-rivalrous and also non-excludable. I.e., whereas you can stop non-payers attending an artistic performance or downloading a computer game (well, maybe...), you cannot stop non-payers enjoying a public good. Those are the goods traditionally produced by governments: clean air, national defence and so forth.

Could crowdfunding transform the public sector?

Suppose you want the local park to be tidied up and get some new flower beds. You could pay for someone to do the work. But the benefit you personally get will be much less than the cost, even though the benefit to everyone might greatly exceed the cost. Your other alternative is to lobby the town council, perhaps joining with others, to provide this public good. With enough persistence you might get your way. Of course, governments are overburdened with demands, often inefficient, and perennially underfunded, so you may not have much luck. Well, those are your choices... until now.

Now, you can set up a Kickstarter project and a Facebook group to fix the park. Like-minded citizens can contribute some minimum donation. They know that if the project doesn't hit its goal, their money will be refunded. The biggest donors get their name on a park bench, just as big donors to video games get a personalized character in the game.

Crowdfunding solves some, not all, of the problems of providing public goods. It makes people more sure that their money won't be wasted; and it could provide a credible signal of unmet demand to government. (So in year 2 of your project, the council might realize the park is a big issue for voters and agree to fund further improvements.)

It doesn't solve the problem of non-excludability. Kickstarter can offer game copies only to contributors. You cannot ban non-contributors from the park.* So there will still be a temptation to free-ride on others.

One tweak would be to change the conditions. So, your pledge will be redeemed only if the project meets its goal funding and if everyone in the park's surrounding area pledges some minimum. Now, for those in the area, not contributing will result in the park not being improved. This condition makes every contributor pivotal, and that weakens the temptation to free-ride.

I don't know how much unmet demand for public goods is hidden out there, but I suspect there is a lot. By tapping it, crowdfunding could cause a governance revolution, making the public sector much more open, flexible and decentralized.

* Actually, you could do that. Kew Gardens charges £15 for entry. My inner economist approves, but my inner citizen feels that parks should be public.

Linkage

Can video games be intelligent? (via RockPaperShotgun).
Photojournalism: young women in Chechenya.
Journal citation cartels in academia.

Strand Magazine data presentations from 1906

The size of the people in each picture is proportional to some relevant statistic, usually their number in the population. Someone needs to create the R package for this.

Sports

Most popular authors in Britain, based on library borrowings.

From left to right: Thomas Hardy, Miss Braddon, Marie Corelli, Hall Caine, Rudyard Kipling, Mrs Humphry Ward, J. M. Barrie, Sir Arthur Conan Doyle, Stanley Weyman, R. L. Stevenson, W. M. Thackeray, Scott, Dickens, Henry James, Charotte Bronte, George Meredith, Trollope, Charles Kingsley, Bulwer Lyttton, I. Zangwill, Charles Reade and E. F. Benson.

World religions by number of adherents: Brahminism (=Hinduism) 223m, Protestantism 210m, Ancestor worship 283m, Buddhism 107m, Catholicism 353m, Taoism 40m, Islam 222m, Judaism 9m, Parseeism 150,000, Shintoism 18m, Polytheism 130m

Female occupations in the United Kingdom: 

Dressmakers 903,646; Mill-hands 867,259; Shop-girls 325,000; Domestic Servants 1,641,154. In the foreground are laundresses, charwomen, teachers, sick nurses, shopkeepers and landladies. On the table: actresses, musicians and authors (1,327).

A bit more on democracy

The last decade has seen three serious blows to democracy’s credibility.

The first is the accumulation of public and private debt beyond what is prudent. (I include private debt because people or banks may avoid their debts by transferring them to the state, demanding their cancellation by political means, or by voting for parties that inflate the debt away.) This accumulation of debt made it much harder for European nations to respond to the financial crisis by Keynesian spending. You are supposed to save in the good times so that you can spend in the bad times. We spent all the time and when we really needed to spend, we stretched our credit with the markets. Now most European democracies have to perform a very unpleasant balancing act.

The second and much more serious is the violation of human rights by the Western democracies. We were not supposed to torture people, abduct people to be tortured by others, or imprison (“detain”) people for 3 months without trial. George W. Bush authorized torture and was reelected. Since then, nobody has been prosecuted for the torture that took place. The word for this in third-world dictatorships is "impunity". It is hard not to suspect that these events happened because very many Americans do not mind, or actively support, torturing America’s enemies. (Similar things have happened in Britain.) So, the democratic process failed to protect unpopular minorities. This is tyranny of the majority. When democracy eats away at liberalism, it is destroying its own moral basis.

Last, and potentially the most serious, there is the failure to deal with global warming. This issue dwarfs all others in its possible consequences. Again, one factor behind the world’s inability to come up with a solution is surely that in many democratic countries, large parts of the public do not understand the science of climate change, or are actively deluded climate deniers. It is as if human survival depended on the theory of evolution, in a world of creationists.

Dictatorship hardly has a better record in any of these cases. The Chinese also share the blame for Kyoto's failure, plenty of dictators have piled up debt and run down the country, and as for human rights, enough said. But if the failures above become more and more apparent, nobody will be calling for a home-grown Idi Amin. Instead more and more power will be handed over to unelected bureaucrats, with academics and others thinking up specious reasons why this is “really compatible with the principles of democracy” – just not with actual voting, you understand.

For these reasons, despite the inspiring example of the Arab spring, I am not sanguine about democracy's future in its heartlands.

HAHAHAHAHAHAHA

http://www.flickr.com/photos/25976845@N06/7000509380/

Chen Guangcheng

Chinese media react to the Chen Guangcheng case (1, 2)... and Chinese netizens react to them.

Invertebrates and discount rates

Grandpa, when you were young, did you see the Houses of Parliament?

Of course. I walked past them all the time.

There’s a school trip there next week. We’re going to sail the boat over the top of Big Ben. That was where all the decisions were made before the Emergency Committee ran things, wasn’t it?

That’s right.

Grandpa... why didn’t people then do anything about global warming? Didn’t they realise what was going to happen? Did they get the science all wrong?

No, lots of people realised and we had a pretty good idea about the science. We knew just what we were doing. In fact, we worked it all out using advanced economics. We calculated exactly how much effort we should make to move to a low-carbon economy.

So why did London get submerged, and we have to build dykes in play hour? You must have made some big mistakes in your sums!

No, we got our sums right. You see, we used a formula where your happiness now was as valuable as half of our happiness back then. So, for example, one person getting Ebolaic Footrot then was as bad as two people getting Footrot now.*

You counted us as half as valuable as you?

That’s right. Don’t upset the worm bucket or we won’t have any dinner. It’s perfectly simple. We used a time discount rate of 1.5 per cent per year. So over 50 years, a unit of your future welfare worked out to about 0.985 to the power of 50 = about 0.46. A 50% discount.

But why shouldn’t I count just the same as you?

Well some people suggested that we use a 0% discount so that the future would count just as much as the past. But other people said* that because people didn’t care much about the future, it would be wrong for politicians to care about the future either. 

So how did you come up with a 1.5% discount rate?

We worked that out from the capital market.

The capital market?????!!!!!

Yes. To calculate the discount rate people used, we looked at capital market returns, because that’s where people’s rational behaviour reveals their true long-term preferences.

Wow. And when did you work all this out?

About at the time of the Great Financial Crisis.

(Pause.)

Well, let’s get back to Mother for dinner.

Grandpa, one day can we use the worms to catch fish?

Nonsense! Worm soup is good for you.**

* Ungated version here.

Why Nations Fail thoughts, part 5

A&R argue that economic growth under extractive institutions is unlikely to be permanent. This is also what North, Wallis and Weingast think, and it leads all these authors to be skeptical of China’s present growth spurt. A&R use the analogy of the Soviet Union, which also grew fast up until the 1970s before crashing. There may well be a slowdown, or even a political crisis, in China, but I don’t believe in the USSR analogy, for the following not-very-scientific reason. Visitors to Soviet bloc countries in the 1960s found them drab and depressing places: think shortages, rationing and queues, bad service, no consumer choice, crappy cars, unhelpful and corrupt officials.... Visitors to China in 2011 come back with very different impressions – not uniformly positive, but far from stagnation – fast trains, massive growth, a booming middle class. Even the problems, like the arrogance of the newly wealthy, arise from rapid change. 

My instincts are that the statistics are not the whole story; and that if politics fights economics in China, economics will win and the new bourgeoisie will replace the Communists with a more pliant executive committee, or even perhaps a system of teams which compete for office. In short, economic growth can throw up new assertive classes and generate its own political pressure. 

There are certainly places which do fit the idea of unsustainable growth (Pakistan, Venezuela) and here growth tends to be based on commodity prices or foreign aid rather than innovation. (By the way, innovation does not have to mean “being the next Apple”. There is also what Dani Rodrik calls “within-the-frontier innovation”, ie within the technological frontier, ie being the first firm in your province to sell bottled lemonade or littlepackets of shampoo.) China just looks different to these cases.

[That's enough of my incoherent thoughts on this very interesting book. Go and read it!]

Depressing graph of the day

Patent applications of UK residents, 2002-2011:

Patent applications, residents

Data from World Bank

(Of course there are alternative interpretations. Maybe UK firms are patenting in the US more. Or maybe the UK was just very active around the dot-com period.)

Why Nations Fail thoughts, part 4

[Don't worry, this series ends soon!]

What creates good political institutions? A&R answer: “critical junctures” in which “small differences become important”. Game theorists would call this transitions between different equilibria. In a sense this is not a very useful answer, because “small differences” is likely to mean “differences too small to detect a priori”. But it might be a true answer.

However there are some unconsidered candidates. For example, Gibbon thought that the Roman empire’s break-up was important because it created a set of competing states in Europe. In turn, competition between states limited their ability to extract rents and gave them incentives to innovate. (Historically, a lot of innovation has been driven by war.) This argument suggests a corrective to A&R’s praise of centralization as a necessary condition for the development of inclusive institutions.

Why Nations Fail thoughts, part 3

A&R's story has two dimensions: economic and political institutions. The economic institutions story is basically Adam Smith’s: “peace, easy taxes and a tolerable administration of justice” lead to economic growth. For most of the past two centuries, with some unfortunate exceptions, this has been the conventional wisdom. The question is how you get good economic institutions. Here they argue that good political institutions, which allow people to control their rulers, are important. This is the nub.

A&R don’t list any particular institutions as always inclusive. Is democracy inclusive? (This blog post of theirs offers some relevant thoughts.) It certainly allows people to control their rulers and a change to democracy is likely to generate large one-off gains as policies are altered to benefit the people, not the elite. However, the potential for extraction (transfer of money from the many to the few) persists, for two reasons.

First, many political systems have very limited competition. For example, first past the post systems are basically duopolies, because once two parties are ahead in the polls, it makes no sense to vote for a third party. On subjects where competing parties share interests they will soon agree not to offer the voters a choice.

Second, voters are rationally ignorant of policy, and therefore easily swayed by intellectual fads and media manipulation. (I think A&R's blog post claim, "[t]he available evidence doesn’t indicate that the uneducated masses are ignorant and irrational" is quite wrong, if by "uneducated masses" you mean voters, and by "ignorant and irrational" you mean ignorant and rational. There is a ton of evidence for rational ignorance.) This allows for a lot of extraction behind their backs.

Another dimension is long-run prudence. A monarch who will tax his people ruthlessly may also take care of their long-term well-being, because he will benefit from it. A democratic ruler may provide short-run benefits to people for fear of losing office. But because he may lose office, and expects only to be in power half the time or less in future, he may also have few incentives to do the right thing in the long run. This means that democracies may under-insure themselves against rare risks, and may accumulate long-term weaknesses and vulnerabilities.

Why Nations Fail thoughts, part 2

Here is an alternative explanation of the fall of the Roman empire:

“No doubt the imperial State created by the Julii and the Claudii was an admirable

machine, incomparably superior as a mere structure to the old republican State of the patrician families. But, by a curious coincidence, hardly had it reached full development when the social body began to decay.

Already in the times of the Antonines (IInd Century), the State overbears society with its anti-vital supremacy. Society begins to be enslaved, to be unable to live except in the service of the State. The whole of life is bureaucratised. What results? The bureaucratisation of life brings about its absolute decay in all orders. Wealth diminishes, births are few.... After the time of the Severi, the army has to be recruited from foreigners. Is the paradoxical, tragic process of Statism now realised? Society, that it may live better, creates the State as an instrument. Then the State gets the upper hand and society has to begin to live for the State. But for all that the State is still composed of the members of that society. But soon these do not suffice to support it, and it has to call in foreigners: first Dalmatians, then Germans. These foreigners take possession of the State, and the rest of society, the former populace, has to live as their slaves- slaves of people with whom they have nothing in common. This is what State intervention leads to: the people are converted into fuel to feed the mere machine which is the State. The skeleton eats up the flesh around it. The scaffolding becomes the owner and tenant of the house. ”

This story is superficially close to A&R’s. But the author blames the Roman state itself, not the way that state was used, for the decay of the Empire. An important point is that the centralized state which is the focus of A&R’s story is not actually a historical constant. For much of history, the state has simply lacked the capacity to impose its will directly, and has instead ruled through intermediaries, such as aristocracies. A&R tend to treat these forms under the rubric of “inadequate centralization”. That is not revealing: the feudal system is really not like modern Somalia.

Just before this bit, our author explains how states can decay:

“But the mass-man does in fact believe that he is the State, and he will tend more and more to set its machinery working on whatsoever pretext, to crush beneath it any creative minority which disturbs it- disturbs it in any order of things: in politics, in ideas, in industry.

The result of this tendency will be fatal. Spontaneous social action will be broken up over and over again by State intervention; no new seed will be able to fructify. Society will have to live for the State, man for the governmental machine. ... Such was the lamentable fate of ancient civilisation. ”

Again this is close to A&R: extractive political institutions foreclose innovation. But here the problem is the existence of the state machinery itself, not its control by a greedy minority at the top.

The author of the above is Ortega y Gasset and the book is The Revolt of theMasses, mentioned in a recent post on the Why Nations Fail blog. My curiosity was piqued and I got hold of a copy. It’s an excellent book – highly tendentious, sometimes very prescient, sometimes way wrong. It provides a nice complement to the A&R book. (Off-topic: don't only read new books! Otherwise you will be historically provincial. Old books are mind-expanding.)

Why Nations Fail, random thoughts, part 1

This is a brilliant book. Daron Acemoglu & James Robinson (henceforward A&R) set out to answer the question “why are some nations poor and others not?” As social science questions go, that is the Big One. And their answer is appealing and plausible: poverty is the fault of elites who set up economic and political institutions to extract money from the rest of us. The next few posts contain some of my not very well-organized thoughts.

A&R make their arguments by historical narrative, although underlying these, there are often academic papers that use the toolkit of modern econometrics. This is a great approach – a credible historical narrative is much more convincing than a bunch of cross-country regressions. And, looking far back into history is surely the correct thing to do. For to answer the question above, you must think both about contemporary variation (why are some nations poor now and others rich now) and about historical variation – why were all nations poor for most of recorded history, before the take-off into growth of Britain, then Europe, then the world in the past 3 centuries. 

These guys are not professional historians by training. This creates a bit of a trust problem. When I read their (very interesting) stories about Ethiopia, the French Revolution, Indonesia, etc. I wonder to myself how many specialist historians of the time and place would agree. Their narratives are plausible, but I can often imagine alternative stories.

One episode where I do know a little is the decline of the Roman empire. Here A&R’s story seems pretty unusual. They blame the end of the Roman republic for the decline of the empire, which collapsed four centuries later in the West and fourteen centuries later in the East. In fact much of the empire’s expansion happened under the emperors. They have no persuasive causal link between political institutions and the overtaxation which may have caused the decline of the Roman countryside in the third century. (Here’s a modern book which gives lots of detail, without losing track of the big picture.)

A poem from long ago

Here's a poem by Enoch Powell from between the wars:

In far Australia to sleep
You snuggle down; I here
Fancy that in your arms you keep
The world’s wide sphere –
This whole great multi-coloured All,
No larger than a playing-ball.
But if I move my lips to speak
Or try to touch your hand,
The coloured tissues with a shriek
To monstrous form expand,
And I apart from you am hurled
Across the endless, dreary world.

(I haven't been able to find the copyright holder -- Falcon Press, which originally published this, doesn't seem to exist. Get in touch if you are the copyright holder and wish to object.)

Bernanke speech

Ben Bernanke's thoughts about the subprime crisis.

"... Contemporaneous data indicated that the total quantity of subprime mortgages outstanding in 2007 was well less than $1 trillion; some more-recent accounts place the figure somewhat higher. In absolute terms, of course, the potential for losses on these loans was large--on the order of hundreds of billions of dollars. However, judged in relation to the size of global financial markets, aggregate exposures to subprime mortgages were quite modest. By way of comparison, it is not especially uncommon for one day's paper losses in global stock markets to exceed the losses on subprime mortgages suffered during the entire crisis, without obvious ill effect on market functioning or on the economy...."

I don't really like 38 degrees, but...

They kind of annoy me -- all those chummy emails from "Marie, Becky, Hannah, David, James, Cian..." seem more like astroturf than a real decentralized group. Plus, I think they are a bunch of knee-jerk Lefties. Nevertheless, they are where the petition is, so I can't really complain when they push an issue I care about.

Therefore, I urge you all to go and sign up to:
https://secure.38degrees.org.uk/stop-the-snooping-plan

Probably late on this meme

But...

Immigration politics with cape and mask

http://www.arabtimesonline.com/NewsDetails/tabid/96/smid/414/ArticleID/181499/reftab/73/t/Lucha-libre-pushing-immigrant-storyline/Default.aspx

"Then he points to the message painted on the backside of his red trunks: “SB1070” - a reference to Arizona's controversial immigration law. The crowd, some wearing masks of their favorite Mexican wrestlers, shrieks even louder...."

Musical interlude

A song from my old landlord:
http://www.macjams.com/song/72513

Immigration politics: two approaches

Immigration in Hong Kong and Shenzhen. Via MarginalRevolution.

Great essay on Republicanism, 2011.

Fave quote: "Some call this the closing of the conservative mind. Alas, the conservative mind has proved itself only too open, these past years, to all manner of intellectual pollen. "

Went to see We Need To Talk About Kevin last night

1. Tilda Swinton is ridiculously good.

2. Lynne Ramsay: still the master.

3. ...And people say there is a dearth of great right-wing art.

Links

Voxeu explains some Eurozone central banking mechanics: http://voxeu.org/index.php?q=node/7391
At the same place, Charles Wyplosz argues for decentralised discipline: http://voxeu.org/index.php?q=node/7387

Immigration: ordure approaching fan

If the Eurozone does collapse, or if there is just a second European credit crunch, then Britain will be relatively insulated. We will still suffer a lot, but less than the Eurozone itself. However, the EU has a useful mechanism for sharing the pain: labour migration, guaranteed by freedom of movement within Europe. Although it is low compared to the US, it has still been high enough over the past decade to make immigration a big political issue in Britain. The government has pledged to cut immigration to the tens of thousands. Good luck with that when Eurozone unemployment increases above its already high level. There will be increasing pressure to pull up the drawbridges.

On the Euro crisis

Mainstream opinion seems to be as follows:

1. Creating the Euro was a mistake.
2. We should save the Euro at all costs.

“At all costs” means:

• In the short run, the ECB to buy member states' bonds, or to issue Eurobonds.
• In the long run, centralized budgetary discipline in the Eurozone...
• … and perhaps much greater transfers to provide “automatic stabilizers”

On the face of it (1) and (2) do not sit well together. The argument for combining them is that the alternative is disastrous: government default, one or more countries leaving the Euro, bank runs which governments can no longer prevent, and perhaps a second Great Depression.

Almost anything would be justified to avoid a really serious depression, because events on that scale do not just impose economic hardship – they also risk devolving into political chaos. For instance, I have heard the Great Depression and the collapse of world trade cited as a cause of World War Two, though I don't know enough history to evaluate that claim.

On the other hand, the argument is not completely obvious.

First, it isn't necessary to leave the Euro in order to default. Greece, for example, is keen to stay in the Euro. The cost of staying in the Euro is being stuck with an uncompetitive exchange rate. But countries have survived that. By defaulting they would at least rid themselves of the debt overhang that is forcing them to cut, cut, cut government spending in the midst of a recession. The cost of leaving the Euro is being stuck with a less credible currency, and probably facing bank runs as a result.

On the other hand, if countries do leave the Euro, that may not be disastrous for them. (Or why would they do it voluntarily?) Britain was forced to float its currency 20 years ago; the Conservative government was humiliated, but the economic results were actually beneficial, weren't they? There is a trade-off: chaos at exit versus increased competitiveness with your own currency afterwards.

At the very least, the economic tail is wagging the political dog. European government structures are being created as a panicked response to a crisis. These structures are likely to be less democratic, more centralized (with Germany being the centre), and also to set in stone the Eurozone's problems, as follows:

• There will still be a single currency without the integrated labour markets that would help it to work.
• There will still be the temptation to fiscal indiscipline, which will have to be prevented by centralized control.

Fans of democracy, freedom and responsible politics should not find this an appealing prospect. It would also be a national defeat for Britain, because we would be on the periphery of a large centralized Eurozone with very different economic interests and values to our own.

If the alternative is really a global economic collapse then perhaps this is the best choice of a bad bunch. My personal nightmare is different:

• Europe centralizes;
• Established parties, and elites more generally, face an ever-stronger backlash from their “angry and defrauded young”;
• A new generation of populists enters national governments. They offer fantasy solutions, play fast and loose with deficits, and fail to exercise mutual discipline at European level.
• We have a century of Argentina-style distributive politics, relative decline, and domination by a resurgent Russia.

My instinct is that failed ideas should be discarded; but if we are going to have the Euro, it seems better to have fiscal discipline and a hard budget constraint – a core condition for “market-preserving federalism”. The US has achieved this, so why can't Europe?

Perhaps I am missing something and there's an obvious reason that a default means a Euro collapse, and that Euro breakup must inevitably be an economic catastrophe. Certainly lots of people think so. However, perhaps some of the current panic comes from businessmen and bankers who naturally confuse short-term harm to themselves with the end of civilization.

Ezra Klein explains the Euro crisis

in eight graphs.

Christina Romer shifts my priors

 ... a speech on estimating the economic effects of austerity and/or expansion. Her conclusion: there is solid evidence that fiscal stimulus works, and that austerity is painful. Not something I' naturally am inclined to believe, but when the evidence is gathered so carefully, it shifts my priors.

Dodgy science

Alex Tabarrok spanks the BMJ over an article on the brain drain.

The BMJ and Lancet are publishing a lot of social science these days. The slant is usually Left-ish; more importantly, the methodology is often weak. When did social science overtake medical science in analytical rigour?

Blame the economists!

It is widely thought that the financial crisis shows up the flaws of neoclassical economists, who were so immersed in nerdy mathematical theory that they forgot about the real world.

However, many economists did predict aspects of the crisis. Not all were marginal voices, either. Some were very distinguished figures from the mainstream.

Here is Marty Feldstein in 1997 (ungated link), arguing that the Euro is an economic liability.

Here are Obstfeld and Rogoff in 2005 (ungated link), worrying about opaque networks of cross-holdings and counterparty risk (in the context of the US current account deficit).

Economists probably are not blameless, and certainly there were naïve optimists – I read a fabulous article recently, from about 2005, which said [re the strength of the dollar, but it seems to typify that era] “the markets can be wrong, but they can't be wrong for a decade”. But as a group, macroeconomists probably had a clearer and earlier sense of the dangers than anyone else. The problem is that their knowledge did not percolate to the wider public.

This seems like a growing problem. Social science has been getting better and stronger in the past two decades – we have rigorous techniques for untangling multiple causes, ever better datasets and now the possibility to integrate field and laboratory experiments into our theory. But very little of this knowledge has spread to the world in general. Popular social science (Freakonomics or The Tipping Point) has been in fashion recently, but we are still far from the point where people turn to social scientists for ideas about what is going on. For example, think of the referendum on the Alternative Vote in the UK this May. There is a lot of research on how electoral systems shape political and economic outcomes – not enough to decide definitively either way, but certainly relevant evidence. This research never got mentioned in the debate. (There was some very simple stuff, like simulations of how the 2010 election would have gone, but nothing of modern research in political economy.)

I am not sure how this could be fixed. We definitely need more Levitts and Harfords. Perhaps we need more social scientists blogging.

On the steps of St Paul's

Sitting on the steps of occupied St Paul's Cathedral. There's a funky brass band playing. Tents everywhere. Posters from anarchists, communists, loons of various descriptions. A couple of people in those masks from V. (Terrible, self-indulgent film.) There's one or two TV cameras, and a lot of tourists like me milling around.

The mood is unfocused and idealistic. The closest thing to a set of demands is posted up on the corner of the information tent. No to cuts, we won't pay for your crisis, the system is unjust and must be replaced. A lot of references to 19th-century protest. A strong non-violent vibe. Apparently all decisions are taken by a General Assembly. (By consensus, if you hadn't guessed.)

My favourite poster

Yesterday I bought The Big Short. It's a great story. If you spend a lot of time reading theorists' explanations of what caused the Global Financial Crisis – the GFC, as the jargon of my economic policy class would put it – it's good to compare them with a journalist's description of what actually happened. The Big Short focuses on the “heroes” of the GFC, if they deserve that name: the people who figured out early that the boom in house prices was unsustainable. They took large bets on this. Normally, in a market, if somebody bets against something, its price goes down. One of the puzzles in the book is that this doesn't happen. There seem to be two markets: one in which a small but growing number of smart people figure out that many US mortgage loans will not come good, and another official market in which these loans are expected, right until the end, to pay out. So, where did the buyers for the second market come from? The book never answers this very clearly except to say “idiots in Germany”.

A tent where you can meditate or pray. A notice up asking people not to drink on site, as requested by the London Fire Brigade. Inevitably, a sign offering FREE HUGS.

I'm sympathetic with these people's anger, and it's nice to see somebody in London doing something other than shopping. I think they need some coherent analysis. I'll leave them The Big Short for a start.

Shetland

Yup, the world's most Northerly ferry is on Facebook.

Rstudio plug

For a few years I've been searching for a GUI for the statistics program R. Now I think we have a winner: Rstudio. It doesn't bother providing menu items for graphs or regressions, instead focusing on a great script editor and command line (features like command line syntax highlighting and multiline entry), plus integrated plot, history, variable and help file display. It's really one of the best programming editors I've seen for any language.