Eye Candy: The HDI of BRICS

Phew, that’s a lot of acronyms. But this is a great map:

NOL map BRICS subunits
Click here to zoom

Orange and yellow is bad, green and blue is good. HDI stands for “Human Development Index,” which is a measurement that’s not nearly as good, in my opinion, for understanding how wealthy and happy a population is. Nevertheless, HDI is still one of the better measurements (Top 5, again in my opinion) out there. Here’s the wiki on HDI.

The maps are colored according to “subunits,” or provinces (which are like American states, such as Nebraska).

Brazil, India, and South Africa are multi-party democracies, while the other two are not. So what do all five have in common?

Rent isn’t a four-letter word

download (3)

Inspired by the publication this week of NYU scholar Alain Bertaud‘s critical new book Order without Design: How Markets Shape Cities (MIT press), Sandy Ikeda‘s pre-book development series Culture of Congestion over at Market Urbanism, and London YIMBY, here is a note on housing reform.

Classical liberals see the economic solution to housing as relatively simple: increase supply to better meet demand. By contrast, the political economy of housing is almost intractably complex. The reason for this is that there are endless externalities associated with new housing: access to light, picturesque landscape, open space and uncongested roads just for starters. These gripes and grievances are the bread and butter of local politics. Unlike consumer product markets, housing cannot be disentangled from these social, political and legal controversies. A successful market-based housing policy must establish institutions that not only encourage housing supply growth but navigate around these problems while doing so.

Policy reform proposals that deliberately favour increasing owner-occupied single-family homes, as tends to be the focus among market liberals in the UK (and to some extent in the US), are currently self-defeating. As justified as they were in the past to achieve a more market-friendly political settlement, they are now a barrier to achieving plentiful, affordable housing. This is because every new homeowner becomes an entrenched interest, a potential opponent to subsequent housing development in their area. They impose more political externalities than renters. I propose we cut the link between support for home ownership and housing supply policies. This would free up policymaking to focus on expanding provision by all available market-compatible means.

This should include greater encouragement of institutional landlords, especially commercial enterprises. Commercial landlords have more incentive and capability to expand supply on estates that they own, while long-term renters (unlike homeowners) have an interest in keeping rental costs low. The lack of private firms dedicated to supplying housing in England compared to much of the rest of the world is startling and yet often overlooked even by friends of free enterprise.

Continue reading

Innovation and the Failure of the Great Man Theory

We tend to think about innovation as inventions and particularly about the inventors associated with them: Newton, Edison, Jobs, Archimedes, Watt, Arkwright.  This Great Man Theory of incredible technical innovation is mostly implicitly held by quite a few of us, celebrating these great men and their deeds.

Matt Ridley, the author of The Rational Optimist and The Evolution of Everything among other credentials, has spent a lot of time and effort in recent years arguing against this theory. In his recent Hayek Lecture to the British Institute of Economic Affairs he convincingly outlines his case: so many independent innovations take place roughly at the same time by different people. The Great Man Theory leads us to believe that  hadn’t it been for Edison, we’ll all be in the dark and humanity deprived ofall the benefits that came with the innovation.

Not so. There were a great number of contemporary inventors who came upon versions of the lightbulb (Ridley cites 21 or 23 or them, depending on whom you include) around the same time as Edison. The story can be repeated for most other great inventions we know of: laws of thermodynamics, calculus, most metals, typewriting machines, jet engines, the ATM, Oxygen. Indeed, the phenomenon is so common that it has its own term: simultaneous invention.

It seems, in complete contrast to the Great Man Theory, that history provided a certain problem, a sufficient number of people working on solving it at a certain time, and eventually similar inventions taking place around the same time. The process is, Ridley concludes, “gradual, incremental, collective yet inescapable inevitable […] it was bound to happen when it did”.

Interestingly enough for those of us schooled and fascinated by spontaneous orders and bottom-up social and economic phenomena, the Great Man Theory is remarkably similar to other beliefs about the world. It is a symptom of the same reasoned short-comings that makes us humans susceptible to believing in zero-sum thinking, top-down organizing and “design-implies-a-designer”. Instead of grasping the deep insights of gains from trade, spontaneous order or evolution, we are tempted by the militaristically directed organizations that we believe we understand rather than the emergent order of many independently acting individuals’ trials and errors.

Precisely this bias makes us susceptible to the mistake Mariana Mazzucato has become famous for wholeheartedly embracing: the idea that, whatever the innovation, government probably did it. That government innovation is productive – or at least more productive than is commonly presumed – and indeed societies can greatly benefit from ramping up government R&D spending. Nevermind incentives, track records or statistical robustness.

Indeed, what Ridley points to is precisely that valuable and life-changing innovation cannot be directed. Admittedly, some innovation does occur in labs, but only a vanishingly small part. Mazzucato and other top-downers could have benefited greatly from listening to Ridley (or reading his book The Rational Optimist; or reading Demsetz’ devastating 1969 article ‘Information and Efficiency’).

Coming full circle and espousing the Hayekian insights, Ridley notes that the price is everything. Specifically the reduction in prices is what matters for innovations to be spread and adopted rather than the ideas themselves. Very little happens in terms of adoption and transmission until prices start to fall dramatically (hint, hint, Bitcoin… or nuclear energy, or renewable energy…). Like the printing press and the steam engine, interesting things start to happen when prices fall – not because an innovation is particularly cool in some subsection of society.

Innovation is a deeply decentralized yet deeply collective process. We face similar challenges that occassionally come to similar conclusions – and history would in all likelihood have progress exactly the same had we not had a Newton or Edison or Jobs.

Do You have Silver?

In an episode of the Netflix medieval series The Last Kingdom, the protagonist Uthred, trying to purchase a sword from a blacksmith in a town he is just passing by, is instantly asked “Do you have silver?”.

In one scene, insignificant to the plot, the series creators neatly raised some fundamental questions in monetary economics, illustrating the relative use of credit and cash and the importance of finality.

For many centuries, the very payment system between people set severe constraints on what kinds of transactions they could – or dared – engage in. There are two main ways of providing payments (with quite a few variations within these categories): cash or credit.

Cash (sometimes referred to as ‘money transactions’) refers to payments with direct finality; the economic chain is instantly settled, and gives rise to no other economic relation. Examples here would be pure barter (where one object is traded for another) or commodity money (where an object is traded for a common media of exchange, with history providing countless fascinating examples: cattle, skin, olive oil, feathers, pearls etc).

The other category, credit, involves trading someone else’s liability or incurring a new one. Modern credit cards easily comes to mind: swiping that card settles the trade between the vendor and the customer who used the card only by creating two new (future) economic relations – a promise by the credit card company to transfer funds to the vendor, and a promise by the customer to pay the credit card company at the end of the month. The same features can be – and were – applied in many early societies; I give you some of my items, and you owe me; later I may transfer this “claim” to somebody else is the community in exchange for something I wanted, and instead of owing me, you owe them.

Some of the difficulties of monetary economics are here quickly revealed. In order for credit to work, a sufficient level of trust, repeated dealings or enforcement mechanisms must exist. If one or more parties do not trust each other, the two are unlikely to trade again or cannot socially or legally force the other into upholding his or her contract, they may refuse the deal up-front and lose the benefits of trade (the “backward induct,” in Game Theory-speak). Nevertheless going through with this transaction requires a different payment system: instant finality, such as provided with cash. Here’s the conundrum that troubles monetary economists:

The frictions that are needed to make money essential typically make credit infeasible and environments where credit is feasible are ones where money is typically not essential (Ugolini, The Evolution of Central Banking, p. 169)

If we trust each other enough (or have enough repeat dealings and a system of keeping track of everyone’s debts), there is no need for cash. If there is need for cash, that means we do not trust each other (or can’t keep track/enforce debts), indicating the presence of “frictions” that make us reluctant to use credit at all.

Let’s go back to our Last Kingdom protagonist. It is clear that the two characters are strangers (no previous dealings, no trust) and from simply passing through a village, no reason for the blacksmith to believe that there may be repeat dealings. A credit transaction is thus clearly out of question. Instead he directly asks for silver (cash), which initially seems to solve the problem. However, two further issues emerge:

  1. if all transactions were like this, the amount of cash everyone must carry around in the economy would be enormous. A common problem in medieval and even early modern societies were the lack of coins. If enough cash was simply not there and recourse to credit system unfeasible, we quickly realise how difficult transacting would be.
  2. even if the customer had enough cash, the very reason they were reluctant to use credit in the first place (no trust, no repeat dealings, no credible enforcement) harms their ability to transact in cash. Howso? Because both parties can opportunistically defect from the agreement. If the sword is paid for up front, the blacksmith can take the money and run – since they are strangers and unlikely to meet again, the cost of cheating is comparatively low. If the sword is paid for at delivery, the customer can easily renege on payment once delivery is obtained.

Is there no way out?

Uthred and the blacksmith use a method most of us are familiar with – indeed, probably even used as kids – pay half up-front, and half on delivery, with the possibility of a bonus payment (tip) at the end. Risk-minimising, yet offering payoff through the gains from trade.

Good monetary economics does precisely that: illustrating how monetary systems, including payment systems, can facilitate transactions and expand rather than limit the available gains from trade. It concerns itself with one of those spheres of (economic) life that we don’t notice until they breaks down. Try completing everyday transactions in countries with small-change shortage for a neat flashback to eighteenth century Britain or U.S., or in countries impaired by hyperinflation or sanctions. Monetary economics, in essence, is fascinating in its complexity of otherwise quite mundane things. Thanks to The Last Kingdom team for illustrating that.

Economic Liberalism and (Re)Building Europe after WWII.

It is important to understand that economic recovery and growth in Europe after World War II is not as tied to Keynesianism, unfunded welfarism, and corporatism as is sometimes assumed.

The Glorious Thirty Years of European recovery from world war and subsequent growth were not due to ‘Keynesianism’ etc. The Thirty Years ended because the influence of liberal policies had weakened and the costs of other policies had accumulated to create an obviously dysfunctional system. Left-wingers (and communitarian-corporatist conservatives) who think ‘market fundamentalists’ overthrew a well functioning social and economic settlement which was behind all the economic growth and associated institution building (post-war national recovery and European Union construction) are in error. It is a major error to ignore the influence of Austrian School liberals (see the discussion by a leading current practitioner of Austrian economics, Peter Boettke) and the related Ordoliberalismus of the Freiburg School.

My remarks on what the major terms and schools in this paragraph refer to have become uncontrollably long, so they are relegated to the bottom of the post. I hope readers will have the patience to reach them.

The key points are that the German post-war Economic Miracle came from Ordo-liberal policies, while economic growth in France after Charles de Gaulle came to power for the second time in 1958 comes from the policies of Jacques Rueff, a civil servant, judge, and economist who participated in the 1938 Walter Lippmann Colloquium in Paris, a decisive event in the revival of liberal economic thinking attended by Hayek and many other notable liberal thinkers.

Such ideas have had a lot more influence in France than lazy propagators of clichés about statist France and liberal America understand. Of course, if we look at the French and American economies we can see notable ways in which the US economy is more liberal, but that should not obscure the reality that France has had good economic times and that these have come about because liberal economic policies were applied, even where, as under de Gaulle, the political narrative of the government was not liberal. The France of 1958 and after was able to stabilise institutionally after a real danger of the collapse of constitutional democracy and have a good economic period because of neoliberal economic ideas.

Some on the left think the relative revival of market liberalism in the 1970s can be rooted in the Chilean Coup of September 1973, after which economic policy was to some degree influenced by Chilean economists with doctorates from the University of Chicago. This revival of market liberalism is known as neoliberalism, a potentially useful term which came out of the Lippmann Colloquium (see below) that has unfortunately collapsed into an empty term of abuse for any kind of market thinking in government policy, wherein even the most modest accommodation of economic rationality is labelled ‘neoliberal’ and therefore extreme, authoritarian, and based on the narrow greed of the rich. It is sometimes accompanied by attempts to read enlightenment liberals as somehow ‘really’ left-liberal, social democratic, or even socialist.

The reality is that neoliberal ideas were first obviously influential on Continue reading

The Incomplete Counterfactual Fallacy

Mariana Mazzucato has some interesting ideas, but her basic thesis (which I’m guessing based only on her recent Freakonomics interview) forgets a simple fact: had the government not made GPS, not only would we not have GPS, resources would have been allocated somewhere else.

In other words, she’s right that without government involvement we’d miss all sorts of valuable things like the basic research it turns out government has financed, physical infrastructure (no matter how neglected), GPS, the specific form the Internet we got, etc., etc.

But that’s only half the story. What happens if DARPA closes shop just before starting on GPS? Those engineers end up somewhere else, the money for the project goes somewhere else, the steel and titanium for the satellites they would have built end up in some other shop.

If we could know that nothing else would have happened at that point, then GPS is a free lunch–some bold committee scooped up a handful of clay, handed it to brilliant engineers, and created something from nothing.

More likely some of those engineers would have made dozens of other projects a little bit better, and one or two of them might even have, through some series of unpredictable events, ended up creating some totally different innovation that would have put us on to an entirely different path.

Which is the better path? There’s no way to know. The people on that other path exist in a completely different paradigm from our own. It’s comparing meta-apples with meta-oranges. We are where we are and we ought to appreciate all the costs and benefits of the system we’ve inherited. I think Mazzucato is right that many of us have underrated the government. (Certainly 23-year-old-Rick was guilty of the over-complete counterfactual fallacy.)

She makes a compelling argument that Solyndra doesn’t look like such a boondoggle when you take the wider view we would expect of the smallest venture capital investor. But if it’s true that pointing at government failures is invalid, then so is pointing at government success.

What’s important is improving the future performance of our current institutional mess. To do that, I think we’re better off backing away from her broad claims and focusing on her more sensible (and jarring) arguments about how the current system encourages destructive rent seeking through intellectual property protection of basic research that might be better left in the public domain.

We have seen the algorithm and it is us.

The core assumption of economics is that people tend to do the thing that makes sense from their own perspective. Whatever utility function people are maximizing, it’s reasonable to assume (absent compelling arguments to the contrary) that a) they’re trying to get what they want, and b) they’re trying their best given what they know.

Which is to say: what people do is a function of their preferences and priors.

Politicians (and other marketers) know this; the political battle for hearts and minds is older than history. Where it gets timely is the role algorithms play in the Facebookification of politics.

The engineering decisions made by Facebook, Google, et al. shape the digital bubbles we form for ourselves. We’ve got access to infinite content online and it has to be sorted somehow. What we’ve been learning is that these decisions aren’t neutral because they implicitly decide how our priors will be updated.

This is a problem, but it’s not the root problem. Even worse, there’s no solution.

Consider one option: put you and me in charge of regulating social media algorithms. What will be the result? First we’ll have to find a way to avoid being corrupted by this power. Then we’ll have to figure out just what it is we’re doing. Then we’ll have to stay on top of all the people trying to game the system.

If we could perfectly regulate these algorithms we might do some genuine good. But we still won’t have eliminated the fundamental issue: free will.

Let’s think of this through an evolutionary lens. The algorithms that survive are those that are most consistent with users’ preferences (out of acceptable alternatives). Clickbait will (by definition) always have an edge. Confirmation bias isn’t going away any time soon. Thinking is hard and people don’t like it.

People will continue to chose news options they find compelling and trustworthy. Their preferences and priors are not the same as ours and they never will be. Highly educated people have been trying to make everyone else highly educated for generations and they haven’t succeeded yet.

A better approach is to quit this “Rock the Vote” nonsense and encourage more people to opt for benign neglect. Our problem isn’t that the algorithms make people into political hooligans, it’s that we keep trying to get them involved under the faulty assumption that people are unnaturally Vulcan-like. Yes, regular people ought to be sensible and civically engaged, but ought does not imply can.