Today's Quote

"Whoever tries to imagine perfection simply reveals his own emptiness."

By George Orwell

All efforts to describe permanent happiness, on the other hand, have been failures. Utopias ... have been common in literature of the past three or four hundred years but the 'favourable' ones are invariably unappetising, and usually lacking in vitality as well.

Read the article and think about it, if you are so inclined.

Paper Clips

Paper clips were amazing.

I am serious.  Consider the state of metallurgy 200 years ago.  If you have seen a blacksmith working at a history demonstration, think about just how hard it would be for that blacksmith to make a paper clip.  It might not even be possible.  You would have to get really good steel, with very few imperfections.  Even if it were possible, it would be incredibly expensive.  Before modern technology, wire was rare and expensive.  Someone would have to make the wire by hammering the metal into shape.

But now, we have machines that just churn the stuff out.  Wire is cheap and it is everywhere.  The base technology took about 100 years to perfect, and then some inventor in the late 1800's figured out how to use it to make the convenient paper fastener that we all use without a second thought.

The fact that we have such vast quantities of cheap paper is another marvel.  It used to be horribly expensive to make something white and flexible that you could write on.

That is real technical progress.  Not the fancy toys, but the ubiquitous tools.  Nobody in the year 1810 could have imagined a world full of paper clips.  What will we have in the future that we cannot imagine today?

This Is Awesome

This is pure genius. Someone is printing and distributing zero rupee notes. Why would they do that?

But there has been a problem: the Revenue Department official responsible for giving out the patta has been asking you to pay a little fee for this service. That's right, a bribe. But you are poor (you are officially assessed to be below the poverty line) and you do not have the money he wants. And the most absurd part about the scenario you find yourself in is that this is a public service that should be rendered to you free of charge in the first place. What would you do? You might conclude, as you have done for the last 1-1/2 years, that there isn't much you can do…but wait, you just heard about a local NGO by the name of 5th Pillar and it just happened to give you a powerful ally: a zero rupee note.
...
Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success.
...
For people to speak up against corruption that has become institutionalized within society, they must know that there are others who are just as fed up and frustrated with the system. Once they realize that they are not alone, they also realize that this battle is not unbeatable. Then, a path opens up—a path that can pave the way for relatively simple ideas like the zero rupee notes to turn into a powerful social statement against petty corruption.

from this article

Plausible but Unfalsifiable

Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.'s that they will hand power to people with Ph.D.'s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.'s that they will hand power to people with M.B.A.'s. Members of the ruling class love populism because they think it will help their section of the elite gain power.

From this article

Chess and Tool Use

This article has a very important anecdote:

In 2005, the online chess-playing site Playchess.com hosted what it called a "freestyle" chess tournament in which anyone could compete in teams with other players or computers. ...

Lured by the substantial prize money, several groups of strong grandmasters working with several computers at the same time entered the competition. At first, the results seemed predictable. The teams of human plus machine dominated even the strongest computers. The chess machine Hydra, which is a chess-specific supercomputer like Deep Blue, was no match for a strong human player using a relatively weak laptop. Human strategic guidance combined with the tactical acuity of a computer was overwhelming.

That is interesting enough.  But it gets better:

The surprise came at the conclusion of the event. The winner was revealed to be not a grandmaster with a state-of-the-art PC but a pair of amateur American chess players using three computers at the same time. Their skill at manipulating and "coaching" their computers to look very deeply into positions effectively counteracted the superior chess understanding of their grandmaster opponents and the greater computational power of other participants. Weak human + machine + better process was superior to a strong computer alone and, more remarkably, superior to a strong human + machine + inferior process.

This is what the future will look like.  Human entrepreneurs will use new technological tools to find ways to overcome both the existing experts and machines working alone.

Today's XKCD

I'm not sure exactly why I find this so funny.

Terrorist Damage

I've said similar things before:

Americans are, by and large, a courteous bunch. Interactions with strangers are typically sweetened with a generous frosting of "Sir", "Ma'am" and "Excuse me". Yet in a survey commissioned by the travel industry, more than half of visitors found American border officials rude and unpleasant. By a two-to-one margin, the country's entry process was rated the world's worst. This is not a problem only for whingeing journalists and other foreign riff-raff. It is also a problem for America.

The system is geared towards keeping out a tiny number of terrorists. Fair enough—such people should indeed be kept out. But there should be a trade-off. An immigration official lives in fear of admitting the next Mohammed Atta, but there is no penalty for excluding the next Einstein, or for humiliating tourists who subsequently summer in France. Osama bin Laden has arguably inflicted more harm on America indirectly than directly. To stop his acolytes from striking again, the government has made entering America far more difficult and degrading than it need be.

From this article ( Read the whole thing. )

In my opinion, our ability to attract skilled immigrants is the single most important determinant of our long-term prosperity and status.  We will always be a wealthy and powerful country as long as good and/or smart people want to come here to build a better life.  But if we lose our ability to attract high-quality immigrants, we are doomed to stagnation and relative poverty.

Haiti and Preparedness

Here is a good analysis of what the earthquake in Haiti might mean for the future.

Politicians always want to get busy doing things when they come into office.  This is an example of why they should not.  Governments are almost always judged by how well they respond to crises.  But if you are spending all of your time and energy trying to make things happen and pushing a legislative agenda and trying to leave a legacy, you diminish your government's ability to respond to unexpected situations.  Each new task you add to an individual or organization diminishes their ability to handle their existing responsibilities.  Governments should spend far more time in emergency preparedness and contingency planning than they do.

It isn't just governments that need to do this.  A good plan for life, no matter what situation you are in, is to keep lots of excess capacity in your abilities.  Spend a lot of time gathering data about the world around you and honing your skills so you can react swiftly and intelligently to anything that is likely to happen.  When you make a budget, leave a line for emergency expenses, and save that money for later of there is no emergency.  When you plan your time, leave plenty of time to deal with the unexpected.  When you learn how to do a job or skill, learn it in depth so you can apply it even when something is messed up. 

The thinner you stretch yourself, the more easily you will snap.

Econ Quote

"Being an economist is like being a weather forecaster in a world where there are gods that routinely mess with the weather."

I like this analogy because it works on several levels.  Most people appreciate how complicated and hard to predict the weather is.  Even though the basic science is well known, there are a lot of confounding factors.  Tiny, unobservable fluctuations in the system can get magnified into large effects that seemingly come from nowhere.   Economics is also like that, making predictions very difficult.

But we have added complications.  The weather forecast never depends on what people think or how they react.  Meteorologists never have to worry about psychological factors like expectations or incentives or the political process.  But there are lots of 'gods' that can whip up economic storms at will.  Maybe they do it as a response to somebody's prayer, and maybe they are just following selfish goals.  A meteorologist in this world would have to anticipate these actions in order to make good predictions.

And then there is the added complication that the economists can change the actions of the 'gods'.  Economists have to figure out how to do the economic equivalent of telling Poseidon how to manage his storms so as to best further his goals, with the added complication that Zeus and Hera and all the rest are also messing around with the weather at the same time.  We have to predict what people will want to do and how their actions will interact in a system that is already full of chaos and instability.

All in Your Head

Here is an interesting story that relates to the psychology of pain and suffering.

A builder aged 29 came to the accident and emergency department having jumped down on to a 15 cm nail. As the smallest movement of the nail was painful he was sedated with fentanyl and midazolam. The nail was then pulled out from below. When his boot was removed a miraculous cure appeared to have taken place. Despite entering proximal to the steel toecap the nail had penetrated between the toes: the foot was entirely uninjured.

We can assume with high probability that the pain was very real and that the man was not faking.  He actually believed that a nail had been driven through his foot, and he believed that this should cause great pain, so he was in pain.  But it was all in his head.

This does not mean that his pain was any less real, nor does it mean that he could have eliminated the pain by deciding not to be hurt.  He was not in conscious control of the part of his brain that was generating the pain.  Yes, it was a delusion, but he simply did not have the ability to disable that delusion.

A lot of pain and illness have mental rather than physical causes.  But this does not mean that the people suffering are mentally or morally inferior in any way.  Psychological illness is real illness, it needs to be treated seriously, and the people who suffer from it need to be treated with respect.  But the fact remains that the only way to effect a long-term cure is to train their minds.

Mental therapy is like physical therapy.  It takes time and intelligent guidance to work.  A good physical therapist can help someone with severe physical problems recover mobility and live a normal life.  Good mental training can do the same thing for mental illness.  But telling someone who is in psychosomatic pain to 'grin and bear it' or telling someone with mental illness to 'just ignore the voices' is like telling someone with a dislocated shoulder to do a one-armed push-up.  It simply cannot be done in the short term with sheer willpower.  But with proper training and conditioning, you will eventually be able to work yourself up to it.

Upstate History Museum

On Saturday a friend and I went to the Upcountry History Museum in Greenville.

The best part was a temporary World War 2 exhibit. I liked it mainly because of the artifacts on display and the focus on the local area. They had on display the front page of local newspapers on various important dates of the war, and sections on the local training camps and a POW camp for captured German soldiers.

When I was younger, I always used to read the museum displays, learning what they said, while treating the things on display as mere background or visual aids. Now, I usually don't bother reading the text the museum has, because I already know most of it. I pay more attention to the period pieces, because I know enough context to appreciate what they can tell me about life back then.

For example, we read the full text of most of the newspapers on display. The news tended to be fragmentary or incomplete, lacking the clear structure and unhurried facts of a history book. It was also full of propaganda, downplaying the Japanese victories in the early war years and referring to the town of Hiroshima as a 'military base'.

There was also a copy of 'Life' magazine from August 1945. I flipped through it, and noticed several things. Most of them related to the advertisements. Whenever I look at anything really old, I find that the ads are usually more interesting an illuminating than the actual content, because they tell you more about the people and culture. They are a raw look at what people are selling and how they expect to sell it most effectively. Several of the advertisements were far more overtly sexualized than anything I am accustomed to seeing in modern media, and certainly more risque than anything you would find in a general interest magazine today.

There was a feature on the day care camps that the Nazis had set up to care for their 'eugenic' illegitimate children of soldiers and SS. It was written with an attitude of bemused contempt, but right beside it, there was an advertisement featuring a child that looked almost exactly like the Nazi children. There was also a series of fairly graphic pictures of a Japanese soldier being burned alive by a flamethrower, right next to an advertisement for Campbell's soup. I doubt the advertisers were amused in either case.

There was an interesting mistake, or rather omission, in the museum. One of the quotes featured prominently on the wall was from a woman going to a local college. It was something like "There were four women for every man. All of the men were either preachers or 4F's."

My friend, who knows a lot about history, did not know what a 4F was. I explained that it was a man who did not meet the physical requirements for military service*, someone who was not healthy enough for any kind of military job, and therefore, a man that women probably would not be interested in.

The exhibits had a lot of explanation of the basic facts of the war, enough to give a brief overview to someone who knew nothing. But they did not have any explanation of the contemporary slang used in that quote. It was almost as if they assumed that all visitors would either be extremely ignorant or extremely knowledgeable, with no middle ground.

In their defense, that would be an easy mistake to make. I did not spot anything odd about that quote until my friend asked me about it. But I have noticed that a lot of museum exhibits make mistakes like that. They explain the basics, and display things that an expert could appreciate, but make no effort to give you the context required to understand the quotes and primary sources and artifacts. All museum exhibits should be tested by someone who is intelligent and inquisitive and willing to ask questions, but has very little knowledge of the topic. Anything that they need explained, like '4F', should be explained somewhere.

*You could also get a 4F qualification by being mentally or 'morally' unfit for service. But those kind of 4F's would probably not be at a college.

Possessions and Permanence

I have a hoodie that I have been wearing since sixth grade.  It recently occurred to me that this hoodie has been in my continuous possession for far longer than anything else I own.  Everything else I have is either fairly new or has spent several years sitting in a closet or bookshelf while I was away somewhere else.

I am very cold-tolerant, so I rarely require cold-weather gear.  I use the hoodie as my winter coat unless conditions are extremely cold and wet.  I wore it all through Europe while I was studying abroad.

When I first got it, it was like a cloak on me and it was black.  Over the years, it has gotten smaller, more faded, and more worn out.  During this past cold snap, it finally started to fail in its job of keeping me warm enough.  I am now wearing a larger, newer, thicker one that I had hanging in my closet and forgot about until recently.  But I will not throw away the old one.

The hoodie is older than most of the cells in my body.  The average time for cells to be completely replaced is about seven years, but there is a lot of variation.  There are a few nerve cells that stay around a long time, but aside from them, almost every bit of my actual flesh has been replaced at least once in the time that I have been wearing the old hoodie.  It is the only physical constant in my life, my only material link to the past.

Of course, there are a lof of old toys and books and mementos from my childhood that my parents have in their house.  But those things have not lived with me.  They are like archaeological relics, fossilized remains sitting in a museum.  The hoodie is something that has always been with me and has always been used.

Think about your possessions.  What do you have that is like this hoodie?  What thing of yours has been in constant use for the longest time?  My uncle has an old sports car that he treasures, driving it on most weekends.  But for most people, there may be nothing like this.  All of the things that they use in their daily life come and go very easily, a fog of disposable possessions to be replaced without much thought, just as our body replaces its cells in a constant cycle of renewal.

Brand America

The Economist has an analysis of Obama's first year, which includes this interesting fact

How much does this matter? Simon Anholt, an analyst, heroically estimates the value of the "Obama effect" on America's global brand at $2.1 trillion. Each year, Mr Anholt commissions a poll of 20,000-40,000 people to find out how much they admire various countries' people, culture, exports, governance, human-rights record and so on. He finds that admiration in one area often translates (illogically) into admiration in others. When George Bush was president, foreigners expressed less positive views of American goods, services and even the landscape. Under Mr Obama, he finds, America is once again the most admired country in the world (having slipped to seventh place in 2008). Using the same tools that consultants use to value brands such as Coca-Cola or Sony, he guesses that the value of "Brand America" has risen from $9.7 trillion to $11.8 trillion. Writing in Foreign Policy magazine, Mr Anholt calls this "a pretty good first year".

I don't know how reliable this research is, but I assume that it is fairly good.  We also don't know if it is due to Obama presenting a better than average image, or because Bush was presenting a worse than average image.  I am more interested in what this says about our country as a whole.

The value of 'Brand America' is about the same as the value of our entire national debt.  So even ignoring all of our other assets, the goodwill of our country could cover everything we owe.  I know that it is impossible to monetize this immediately.  It is the kind of thing that only has long-term payoffs.  But the debt also mainly has long-term costs.

Even though I think our government and debt should be a lot smaller, I realize that it is not a huge crisis.  It will not destroy the country.  We have seen higher debt levels in the past, and other countries have dealt with higher debt levels.  I would prefer that we cut spending now, but what will happen is that the debt will force us to cut spending in the future.

My Economics Teaching

I have a fairly unique way of teaching my class.  From my syllabus:

You will have a standing homework assignment in this class. You must come into each and every class with a question about economics to ask me. It can be a question about current events, historical events, or material in the textbook.

I spend at least 80% of the class time answering these questions.  It works very well; I have gotten excellent evaluations using this method and I am happy with how much they learn in the process.

I also have a way of ensuring that I always have excellent class notes available for students who are out sick:

If you bring a laptop into class and have it open, you must email me your class notes by 8:00 am the next day.  Failure to do this will result on a loss of your laptop privileges.

You may also earn points from taking notes in class. I will give one point to the person who emails me the best set of notes before 8:00 am of the day after class.

I had six sets of class notes to choose from for the last class.  Most of them were very good.  They give me the additional benefit of seeing how well I am communicating with the class.  If several people get it wrong, that means I did not explain something well.

I have copied the winning set of notes from last class to the end of this post.  It contains economic information of general interest, and also shows how a typical class session goes.  These notes have a few mistakes; I could construct a better record of what I said by adding bits and pieces of good notes that did not win overall, but that would take more time than I feel like spending.

As the year progresses, the questions tend to get more technical, relating to assignments and the textbook, but the first few weeks are always fun:

*****

Class Notes 1/12/10 -

The purpose of the number game we played at the beginning of class was to show students that they should try to disprove their hypotheses rather than find information to agree with them.  By trying to disprove your hypothesis, you learn whether or not it is stable or not.

 

The book discussed the fact that health insurance should be taken away as a benefit of a job.  Would that backfire for low-income families? 

We live in a market of competitive wages;  a company must pay you on the margin of what you bring in/are worth to the company.  If a company takes away the health insurance benefit, then they would have to make up for that part of your salary by simply increasing your paycheck.  They wouldn't want to do that, and if they didn't then workers wouldn't be paid enough.  After a little while, the workers would realize this and leave to go to another company that would benefit them more.  Also, when your employer chooses the insurance company, you are stuck with that provider, giving you no market power.  If your employer doesn't choose your provider for you and you are left to do so with the extra money they pay you since they don't offer that service, then the employee has the market power by choosing his own insurance company. 

 

Can you briefly explain what caused the gas crisis last summer?

1.        Supply shock – disruptions to the supply of oil (ex:  the war in Afghanistan)

2.       Demand for gas goes up in the summer because of people traveling, etc. 

·         We would never have a true shortage if the government didn't interfere with the gas prices, because supply and demand would regulate it. 

·         The government tried to set a price limit of $4/gal. on gas, but that caused many problems.  If the service stations had to pay $5 to get the oil and were only allowed to charge $4 for it, then they couldn't make a profit and their business would suffer.  This is what caused the shortage – the government interference. 

·         Political law cannot stop the law of nature

 

Could the gas price ever really double overnight?

Yes, if supply shock happened all at once (a large battle in Afghanistan, a dust storm in the deserts where the oil rigs are located, etc.).  In the absence of appropriate storage and hedging, yes, this could happen. 

 

Would legalizing marijuana be good for the economy? 

In my opinion yes, it would satisfy supply and demand.  The law will not stop people from getting marijuana as it is.  Right now if you buy drugs you are financing terrorists in Mexico that are trying to sabotage the U.S. government.  And from a medical standpoint it is on pretty much the same level as cigarettes, and is safer on a driving note than is alcohol. 

 

From the homework, should economists use their morals or more rely on numbers? 

Regarding the drug question, the same situation was just framed differently, and some reactions were changed by the differences in wording.  This teaches people to escape from framing bias.  Economics teaches people how to strip away framing bias and use number to solve problems. 

 

Is buying stocks essentially like gambling?

With a single stock yes, because you cannot predict the market's future.  In order to beat everyone, you must be smarter than everyone else and only a few of the top stock market experts are that smart.  A difference is that, in the long-term, an individual usually wins with stocks;  however, with casinos the house, not the individual, typically wins.  Buying several stocks (as in a mutual fund) is safer than buying just one stock because it increases diversification. 

 

Can you explain the efficient market hypothesis?

The previous answer pretty much explains it.  You can't beat the market unless you are smarter than the market.  To do that you must know something no one else does or just get extremely lucky.  The Challenger incident shows this well;  within an hour the stock for the company that produced the faulty O-ring went down tremendously, while the other companies involved in the making of the space shuttle stayed constant.  This pointed out the company at fault months before the government could accurately identify the guilty party. 

 

 Which is worse:  inflation or unemployment? 

Ideally you want a little of both in an economy.  You want an equal mix of the two, and this is an example of a trade-off.  When one is significantly higher than the other, you must adjust the two to try to balance them out.  Ideally, inflation will be about 2% and unemployment will be about 5%.

Is it possible to get in trouble by playing the market?

Yes, this is insider trading.  It's illegal to use insider information to get ahead in the stock market.    

 

If you knew your company was going to tank, how long would you have to wait to get rid of your stocks before it would not be considered insider trading?

Until it went public;  by public I mean a letter to all of the stockholders. 

 

Are there caps concerning the amount of trading within a company? 

Yes, and this is to monitor the insider trading and to prevent it altogether. 

 

Isn't insider trading the reason Martha Stewart went to jail?

Yes, that was insider trading. 

 

Can you explain dividends? 

They are what you get back from an investment;  your share of the yearly profits of a stock;  a known constant stream of payments you receive. 

 

Is it possible to make your living by just trading stocks all day? 

It is mostly rich, retired people who make their money off of dividends.  Also, the people you see on Wall Street, who obsessively follow the news feed to keep up with the market, make their money from stocks, too.  But even these people don't make more than the average person.  The few that do are very smart and quick. 

 

What are they all yelling on the floor of the major stock exchange in New York? 

Trading things, like how much one is selling stock for and how much another is willing to buy at.  It's like several different auctions going on all at once. 

 

When was money first printed in the U.S.? 

Before we were even the U.S.A.  Each of the 13 colonies printed their own money.  Most printed too much and caused huge inflation, which obviously caused many problems.  When the U.S. formed our Constitution she had to back the printed money with the gold standard (gold stored in reserve) to ensure stability.  We quit using the gold standard around the Great Depression. 

 

So can we just print as much money as we want? 

Yes, but it is backed by our reputation.  Our reputation is actually morally sound.  There are only about 12 countries that are less corrupt than us. 

 

 

What happens if an entire country defaults on all its debt? 

All of the money goes from that country.  An example is Argentina.  Argentina defaulted on its debt, and all of the Argentinean savings bonds became worthless. 

 

Why is Dubai having problems with defaulting? 

Dubai had a property boom, building all kinds of new hotels, and even building an artificial island shaped like a palm tree.  Also, it is located in a fairly corrupt part of the world.  The government helped out some, and Dubai is only partially defaulting. 

 

Why are credit card interest rates so high (like 18% or 20%) while car and home insurance rates are much lower (like 5%)?

Because of the risk involved.  The credit card has to be able to pay for the people who never pay their money back.  They have to charge that high of an interest rate so they don't lose money from people who default on their credit card payments.  When it comes to car or homeowner's insurance, they have something they can gain if you default.  If you don't pay your car insurance for a few months, the insurance company will simply come and take your car from you.  The same principle stands for homeowner's insurance. 

 

Are the interest rates we pay related to our credit score? 

Yes, and it's because of your level of trustworthiness.  If you are a young person just starting out, you will be stuck in the lowest category of "trust" because you haven't proven yourself to be responsible.  If you pay of your credit cards on time and constantly have good standing with the company, then you will build a good credit score and, in turn, be eligible for lower interest rates. 

Honest Appraisal

Here is a blogger who honestly argues that it would be better to torture people, especially juveniles, than put them in jail.  He has a point.  A quick round of torture would probably be less mentally and physically damaging than what actually happens to incarcerated people.  It would also be cheaper, simpler, and more honest.  It would also be more salient, and maybe a more effective deterrent.

Ideally, an effective punishment is one that people hate and fear, but that does not cause them a lot of actual long-term damage.  Depending on the severity of the torture and the amount of jail time, I would certainly rather be tortured then spend time in jail.  Of course, this may be evidence that torture would not have as much of a deterrent effect as the current system, at least for people with a long-term perspective.

Inefficient Subcontracting

Here is a quick thought on self-reliance versus a demand for others to do things.

Economizing Fail

Economist Robert Gordon, of Northwestern University, says he drives out of his way to go to a grocery store where prices are cheaper than at the nearby Whole Foods, even though it takes him an extra half hour to save no more than $5.

from this article

Robert Gordon is a good economist.  But his actions here are foolish.  Clearly he has failed to account for the cost of gasoline and the depreciation of his car, not to mention the value of his time.

Some time ago, I calculated that it costs me about 25 cents to drive a mile.  This takes into account the price of gas and my car's gas mileage, but also, more importantly, the expected number of miles my car will last and the total lifetime cost of ownership of that car.

Note that I have a cheap and fuel-efficient car.  The average car costs much more per mile.  The standard reimbursement rate for miles driven is about 50 cents a mile.

But that may be a bit much, so let's use the 25 cents a mile.  This means that, whenever you drive somewhere that is ten miles away, it costs you five dollars. (20 miles divided by 4)  The article says it takes him a half hour to go to the other store.  This probably means that the other store is about ten miles further.  So he has used up just as much money as he has saved.

And of course, the time of a good economist is valuable.  He could have been using that 30 minutes to write a book or article.  Or he could have used it on leisure.  Either way, he is not being smart.  And neither are you, if you drive miles out of your way to save a few dollars on something.