Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!


Thursday, October 31, 2002

 
Hypocrisy!

Sorry and all that, but it's been a hell of a busy week. I'd just like to make this point however. Whatever you think about this weblog, remember that there are dozens of far worse morons on the Internet than me. If you single me out for condemnation without first pointing out that I am by no means as ignorant or ill-informed as these other bloggers, you are clearly guilty of the worst kind of hypocrisy. Or something.
1 comments this item posted by the management 10/31/2002 06:59:00 AM

Tuesday, October 29, 2002

 
Free, as a bird

I'm a profound believer in free speech. I believe that everyone should be able to speak their mind, unencumbered by fear of persecution, the intimidation of social ostracism or the slow poison of indoctrination. I think it's fundamental to the progress of humanity that ideas should be tested out through public debate, with each person giving his own views. And I think it's vital to human flourishing that we should be able to express our being without regard to constraints or social norms.

I'm also a profound beliver in human flight. I believe that everyone should be able to fly like Superman, unencumbered by the surly bonds of gravity, swooping and wheeling in the updrafts and downdrafts, soaring through the air at the greatest of speeds, causing no pollution, each in a cubic mile of free space, breathing the high free air and exulting in weightless splendour.

Of the two, I think that human flight is somewhat more likely to be a reality during my lifetime.

This is a real belief; I happen to think that "free speech", in the sense in which most people use the term, is about as possible for people living in any social group larger than two people (which is to say, "people"; I have no idea what great apes of the species homo sapiens might be like if living a non-social existence, but I'm pretty sure they wouldn't be very much like human beings), as Superman's flight. The version of free speech which I'm exulting in the first paragraph above is a condensed and most likely parodic version of what John Stuart Mill attempts to advocate in On Liberty. It's certainly, and pretty near provably through direct lineage, the ideal to which the First Amendment of the United States Constitution is appealing. And it's a much, much stronger concept than the vast majority of people who invoke it believe. Mill understood, as vast numbers of people don't (mainly because they are interested in pushing tendentious and legalistic theories of political morality), that laws passed by governments are about the ninetieth most important restriction on our freedom of speech. He also understood that the most savage restriction on people's freedom to say what they want is the simple social urge to conformity; people don't like to say things which they know people will disagree with. I get but scant pleasure from doing so myself.
0 comments this item posted by the management 10/29/2002 08:57:00 AM

Thursday, October 24, 2002

 
Dial 419 for fun

Along with shrill accusations of anti-Semitism and fan mail, the major component of my email inbox these days is Nigerian "419" advance fee fraud letters. I get about one every couple of days; some day I may be bored enough to add up all the ill-gotten gains I've been offered a share of over the last year and compare it to Nigerian GDP. But for the time, being, let's note that according to the 419 coalition, over $5 billion had been extracted from hapless mugs by 1996, and according to Howard Jeter, by 2000, Americans alone were losing $2 billion a year to "white collar crime syndicates based in Nigeria". Pretty big business.

Let's also note, however, that I think that both of those estimates are bullshit. Unless industrial economics works completely differently in the criminal world from the way in which I learned it by reading Tirole (and Steven Levitt seems pretty convinced that it doesn't), the observed facts of the 419 fraud industry are not consistent with its being hugely profitable, or for that matter profitable at all.

What am I talking about? Well, let's look at it this way. If 419 really were taking in $2bn (from Americans alone!), it would be an incredibly profitable criminal industry. Two billion dollars a year roughly two-thirds of the size of the UK heroin market measured by turnover, and one would have imagined that white-collar fraud was a higher-margin and less capital-intensive industry than heroin smuggling. It's not true that sending spam emails is "basically costless"; the logistics costs of more usual spam are quite a significant component of the spammer's cost base, particularly as one needs to invest in a continual software development expense to keep pace with developments in anti-spam technology. But even so, I don't see how sending 419 emails can be more costly than manufacturing and smuggling heroin.

So what do we know about profitable criminal industries? Well, we know that they tend toward monopoly, or at least oligopoly. But, we can be absolutely sure that the 419 email scam industry is not dominated by a monopolist. How?

Basically, think about the number of Nigerian fraud emails you receive in a year. Does their credibility grow with repetition? I insinuated something along these lines when I suggested comparing the total amounts in a year's worth of 419 email to Nigerian GDP. The fact that these scam letters are so common makes it much more likely that any individual one will be ignored.

This is an "externality". Each spammer is considering the potential guesstimated return to himself from his own 419 operation, but ignoring the cost he imposes on other spammers by marginally decreasing the credibility of 419 spam in general. If 419 were the work of a monopoly, or of a small number of gangs, this cost would be internalised; the monopolist would prefer to have fewer, more effective scam letters. The proliferation of advance fee fraud letters from Nigeria looks much more to me like the output of a competitive industry characterised by small producers.

But even if we accept that 419 fraud is a cottage industry rather than the work of organised gangs, it might still be profitable. The French wine trade is made up of lots of small producers, and that's pretty profitable (though nowhere near as profitable as the Californian industry, dominated by fewer but larger producers). I don't even accept that this is the case.

Why not? Well, basically, the language. There are plenty of Nigerians who can write coherent, elegant English prose. Apparently, the 419 industry isn't profitable enough for them to get involved. Not only that, but it isn't worth anyone's while to invest the capital in producing a convincing-sounding form letter for use by the spammers. This doesn't fit the profile of a profitable industry to me. People make capital investments in profitable industries.

So what's going on here? Well, my guess is that the figure of "$6bn by 1996" is a lot more likely than the figure of "$2bn/year by 2000". In the early 1990s, before email, the vehicle of distribution for 419 scams was the fax machine. Sending faxes is a lot more expensive than sending emails. Since retail use of fax machines is less widespread than retail use of email, most of the targets were businesses rather than individuals. Businesses tend to have larger sums of money in their bank accounts to be emptied than private individuals (people who didn't read the first link about "419s"; this is what happens after you give the guy your account details). So we're looking here at a business with large unit sums and significant overheads; that looks a lot more like the kind of business in which you might get organised gangs operating.

But then email hit the market, and with it, 419 scammery fell within the price range of the common man (or at least, the common man who could write some semblance of English). At about the same time, the Nigerian economy suffered the entirely predictable consequences of its IMF programme, and a large number of middle-class people, with diploma-level English literacy, became unemployed, with some fraction of them entering the criminal class. They started adapting the 419 scam for their own ends; because there were so many of them, the old fax-using gangs couldn't keep a lid on them, and now the profitability of the 419 industry is gutted.

In all honesty, my guess is that the real "419 scam" is these days perpretrated on gullible Nigerians. I'm pretty sure that there are people selling lists of email addresses (and perhaps even poorly written form letters) to greedy but none-too-bright Nigerian chancers, presumably using the fantastic claims of wealth generation implied by the 419 coalition and Jeter by way of bait. As far as one can tell, most 419 scammers aren't very bright, and many of them don't even seem to know what to do with responses when they get them (don't appear to have follow up letters written, don't have bank accounts in which to deposit the stolen cash etc). To me, this just looks like a kind of pop culture multilevel marketing scheme, which may explain why it doesn't seem to have caught on anywhere else in the world. Maybe one in a thousand gets lucky and finds a mug, but I don't think so.
0 comments this item posted by the management 10/24/2002 08:40:00 AM
 
Bad tree with bad roots, never bore no good fruits

James Lileks, whose "Gallery of Regrettable Food" has amused us all at one time or another, apparently has a line in unthinking political commentary. Fair enough; I certainly wouldn't want to risk the blowback from saying that people should be castigated for that. But today, he's thrown down a challenge, and that's something I can never resist.

If it is Islamic terrorism, it will be delightful to watch the root-causers explain this one

As far as I can tell, "root-causers" refers to people whose reaction to the news that someone is trying to kill them does not include immediately shutting off all thought about why that might be the case. Since I'm not stupid, or even usually suicidal, I suppose that means that I'm a root-causer, and James Lileks will be delighted to watch me explain it. Which is good, because I was delighted with his collection of recipes for cooking with 7-Up from the 1950s, so it's sort of an opportunity to do something in return.

Here goes, the "root cause" explanation of the Washington sniper shootings, if they turn out to be Islamic terrorism, and if they turn out to be the work of the guy mentioned in the news reports. If not, I calculate that I am approximately 603rd in line among webloggers to make an apology.

The US Army, like the British Army and most other armies, does a reprehensibly bad job of looking after its people. It recruits them, largely from broken homes, keeps them on low wages for a short while, all the while making it unconscionably difficult for them to get or stay married, and then dumps them back on the labour market with surprisingly few marketable skills to show for several years of their life. It has various programs to deal with this problem, but, judging by the results, those programs are badly administered. As Norman Dixon pointed out in his classic "On the Psychology of Military Incompetence", western armies systematically attract people with psychological problems with respect to violence, provide them with a means of coping with these problems while they are in service and often reinforce personality traits through training which can prove to be disastrous when these people are put under stress.

The American economy is very bad at providing steady jobs for black men with low educational qualifications. The American economy has many strengths, but this is not one of them.

American culture strongly stigmatises young male unemployment, and makes young unemployed people feel ashamed of themselves. People who feel shame often develop a psychological self-defence mechanism which involves blaming others for their predicament.

The Muslim religion has almost exclusively nonwhite figureheads, and as a result has a magnetic effect on black Americans who have developed a grudge against what they see as a white-dominated synstem which has pushed them to the bottom of the heap.

Because of this, particularly at a time when the national mood is more than slightly conducive to paranoia, a black man with psychological problems and a military background decided to follow the figurehead of Osama Bin Laden and murder people in order to support the cause of Islamic terrorism.

There are the root causes. Delighted?

You may note that the vast majority of these root causes have nothing to do with anything outside America.

1 comments this item posted by the management 10/24/2002 05:59:00 AM

Monday, October 21, 2002

 
Foreign Policy

Updates to the official foreign policy of D-squared Digest coming in ...

First, a clarification on the issue of the State of Israel. Since giving Thomas Friedman that award for saying something silly about divestment (which got me a lot of criticism on weblogs I don't read), I've been worrying that people might see me as an anti-Semite of some sort. If people were disposed in that direction, I get the uneasy feeling that they might take my description of Michael Hardt's hair as an "Isro" in something other than the spirit of fun in which it was intended. I don't think there are any other racial slurs on this weblog at the moment, unless you count my reference to Ann Coulter as "Bog Irish rather than Mick Irish", but even so, some clarification of my Middle East policy would appear to be in order.

Basically, I regard the Palestinian Authority, or whatever it's called, as the moral equivalent of the IRA. In other words:

  • I think they have a genuine grievance and a genuine right to have their claims taken seriously
  • I think that their grievance, and their case, is by no means as strong as their more vocal supporters think it is
  • I think that the population that they claim to represent is being made the victim of unacceptable governmental repression and are the chief victims of an unconscionable political situation
  • I think that their chosen method of warfare is cowardly and disgusting, and not to be tolerated or apologised for
  • I deeply doubt that they really represent the people they claim to represent
  • They are, on balance, the villains of the piece, but the cause that they support in their villainous manner is at bottom, just.

You will have to take my word for this since it predates my appearance on the Internet, but I was never, unlike a lot of the British Left (Paul McCartney, I'm looking at you. And John Lennon too), an apologist for the IRA. I always thought that it was possible to believe in the case for a united Ireland without simultaneously thinking that the Protestant Ulstermen should be driven into the sea, or that it was ever acceptable to put bombs in shopping centres. However, the time comes when one realises that if what you care about is stopping the senseless killing, you have to hold your nose and negotiate with people who you regard as slightly worse than serial killers, and accept that they quite likely think the same about you. Like the Israelis, the Protestant Irish have a sincerely held belief, which is not at all unreasonable to hold given the evidence, that the people they were until recently forced to deal with at Stormont fundamentally want to eradicate them from the face of their homeland. But still they negotiated. I think that what this brings home to me is that a) what a bloody shame it is that there does not appear to be any Palestinian equivalent of John Hume and b) that when you extend this analogy to judge the Israeli forces by the standards of the RUC and the B-Specials during the worst periods of the Troubles, they still appear to have behaved bloody badly. Actually, in all honesty, I do understand why sensible English people supported the IRA despite knowing about the carnage; most of the people lined up against them were so transparently arguing in bad faith, which is also the case these days ...

Now, on to war ...

A further development in my Iraq policy as well. I am now, after comments from Brad DeLong and others, revising my opinion of the murderousness of the sanctions policy and concluding that it might not be as terrible as a number of quite possibly interested parties have portrayed it. On the other hand, I am also convinced by Max Sawicky's argument that Iraq is likely to be the first excursion of an American policy of empire-building in the Middle East, which is likely to be disastrous under any possible performance metric.

But, I retain my original belief that improvement in Iraq is politically impossible unless there is some sort of shooting war in the area culminating in the removal of Saddam Hussein. I don't set much score by "national-building", and don't really believe that what the Gulf needs is more US client states, and I never believed any of the scare stories related to the "WMD" acronym which is currently doing such sterling duty in picking out weblog authors who don't have a fucking clue what they're talking about. I just think that Saddam needs to go, because it's just one of those Damned Things which Has To Happen. I'm a fatalist, not a moralist.

So, how can we square these beliefs a) that something has to be done and b) that if something is done, it will be a disastrous imperial adventure by George Bush. Here's how, and it's so simple it's beautiful:

The official policy of D-Squared Digest with respect to Iraq is now that we support a policy of containment until after the 2004 Presidential elections, and after that, we will support immediate war with Iraq if and only if someone other than George W Bush is elected

I could dress that up by going "WHEREAS" a lot and turning it into a manifesto, but I've never really had any problems with thinking of new ways to call anyone who disagrees with me an idiot, so it seems a bit pointless to bother. Basically, the idea is that I'll support a war just so long as that idiot currently in charge has nothing whatever to do with it. Thinking about it, I don't want to sign up to a different figurehead for the Perle/Wolfowitz Axis of Idiocy, so maybe I should just tell the truth and shame the devil; I'll only support a war if it's the Democrats fighting it. I would like to find some warblogger with a decent argument against this view; strikes me that I can accept all the arguments about containment, inspection, risk, etc, etc and still hold the statement in bold italics just above. Nobody believes that Saddam will have nukes by 2004 ....

0 comments this item posted by the management 10/21/2002 10:28:00 AM

Friday, October 18, 2002

 
Friday random links

The latest issue of the Post-Autistic Economics Review is out, including at long last an article which at least attempts to get to grips with the movement's rather distasteful name. Always worth checking out the PAE crowd, even if some of them are about a yard too far up their own arses.

Some monkey in the increasingly godawful Slate is of the opinion that America has the highest productivity growth in the world because it's more innovative in technology than Japan, and chooses to illustrate this with examples from the fields of personal electronics and the auto industry ... Good God, this nutter is apparently an "undersecretary of commerce in the Clinton administration" and a "fellow of the Brookings Institution". Is there another Brookings Institution in the town of Brookings, South Dakota or somewhere, selling "fellowships" for $10 in the back pages of The Economist?

And good luck to the Irish, who vote on the Nice Treaty this weekend, and who shouldn't be blindsided by the likes of Polly Toynbee, who is here pushing the line that Nice is all about being friendly to the Poles, Romanians, etc, and has nothing to do with making the EU even more profoundly antidemocratic than it already is. I have a horse in this race; since Antinomianism is much less prevalent in the UK than in Europe, I face the risk of actually living under stupid laws passed by Europeans who sensibly never intended to enforce them.

This is about right in my experience, and should be good for a chuckle for Americans who don't like Europe.
0 comments this item posted by the management 10/18/2002 09:09:00 AM
 
God doesn't work for the Yankee dollar; God doesn't plant bombs for Hezbollah

OK, time for a few more book reviews. First up, "Butterfly Economics" by Paul Ormerod. This is all about Ormerod presenting his alternative version of how economic modelling should be done, and how to correct some of the more egregious errors of conventional neoclassical theory by relaxing the key assumption that agents are independent of each other. Ormerod illustrates most of his arguments by reference to a simple model of the behaviour of ants making their decisions over which of two food sources to visit. So why isn't it called "ant economics"? Presumably because either Ormerod or his editor wanted to sell the book to the James Gleick pop chaos theory crowd, and wanted to use the "butterfly flaps its wings in Venezuela and causes a storm in Stockholm" metaphor as a shorthand, despite the fact that butterflies aren't discussed in the book as being relevant to economic modelling; ants are. Which gives you some idea of how much care and attention has been lavished on this book; pretty close to bugger-all.

I have to confess that I don't know what Ormerod's overarching prescription for the reform of economics is, because on page 157 he refers to Piero Sraffa as "an old Stalinist", and sad to say, the book did not survive the outburst of rage this occasioned in me1. Which is certainly a weakness of this review, but I daresay I wouldn't have been so impassioned if I wasn't already in a bad mood because of the horrendously annoying tone of the previous 156 pages. Ormerod is of the school of writers which believes that you can leaven a dull passage by shoe-horning in a semi-related joke, after the manner of some Church of England vicars. And his jokes tend to be pretty weak; saying that someone's book is so boring it might make you go to sleep is about the level. It reads like it's been collected together from a really annoying column in the FT, but since Ormerod doesn't actually have an annoying column, I can only assume he was kind of auditioning for one. The "ants model" is quite appealing, but you can pick that up by reading the first 15 pages in a bookshop (D-Squared Digest! Reviews You Can Use!).

Also ... an oldie but a goodie. Some people in the comments section have been pleasant enough to say some nice things about the style of writing used on this weblog. Or at least, I say that they have, and the comments aren't working so you can't prove they haven't. Anyway, if you like this prose style, you will like "The King's English" by Kingsley Amis. The pop-didactive tone used on D-Squared Digest, and a fair proportion of the actual jokes, have been copied more or less completely from Amis' workbook, except that I take much less care over my sentences, resulting in horrendous elongated run-on sentences like this one, and I use words like "basically" far too much because I'm typing this as an unrevised first draft and this is how I talk. It's not a proper style guide a la Fowler or Strunk & White; it's basically an alphabetised collection of Kingsley's personal prejudices relating to linguistic matters, many of which tend to degenerate into cheap shots at unrelated hobby-horses and targets of opportunity. Check it out, although don't blame me if your written output for the rest of your life starts to resemble a pale imitation of a studiedly facetious and overeducated patrician.

I listen to music! On the D-Squared Digest stereo at the moment are some of the finest moments of English Funk. This strange musical subgenre should be carefully distinguished from "Britfunk" which was funk and soul music produced by Black Britons in the 1970s and 80s (probably the most famous example being Cameo's "Word Up" or, at a stretch, "You Sexy Thing" by Hot Chocolate; "Hot Chocolate" is probably the winner in anyone's contest for Band Names You Simply Couldn't Get Away With These Days).

Nope, by "English Funk", I'm referring to a strange musical subgenre which stands in the same relation to funk as the Finnish Tango does to the tango. (For those unfamiliar with the Finnish tango, here's the official history; basically, the Finns, for reasons best known to themselves, are still overcome by the worldwide tango craze of the 1920s, and are not put off in their enthusiasm by the fact that as a nation they are a) known for emotional reticence and b) more or less innocent of anything one might call natural rhythm. The resulting sound and dance has a distinctly military feel to its movements; it's extremely precise and sort of jerky. The Finns greatly prefer it to the Argentine version, which is no longer really to their taste). English funk is simularly disconcerting; you're sitting there listening to a piece of music with funk instrumentation and some semblance of a funk production, but it isn't in the least bit funky.

I think it was James Brown who claimed, with good evidence, that white drummers fundamentally couldn't play shuffles; they started off OK, but after about a minute you listen to them and they're playing the rhythm of an oompah band. I also seem to remember this criticism was levelled in particular at Ringo Starr, but it's a reasonably good description of the rhythm section of Ian Dury and the Blockheads. They start off like the Average White Band (oompah oompah), but by the first chorus they've given up any pretence of playing black American music and settled down for a right old knees-up, in which project they're joined by a jaunty keyboard player. The rhythm guitarist and the horn section make a decent attempt at dragging the band back in the direction of Detroit rather than Dagenham, but there's only so much you can do when you're outnumbered. But this sounds like I'm slagging them off and I'm not; I'm a sucker for a good music-hall tune, and Dury himself is a poet. He's got a fantastically dirty exaggerated London accent -- actually, of course, he's Essex, but who's counting? -- and a surprisingly deft lyrical touch which allows him to get away with absolutely outrageously filthy innuendi that, in less sensitive hands (missus) would just turn into rugby songs. "Reasons to be Cheerful", the greatest hits compilation (marketed in the US as "Sex and Drugs and Rock and Roll") is the one I'm listening to at the moment; I think I would be pretty scared of anyone who owned more than three Ian Dury albums, but less than one is probably too few.

With a similarly unfunky funky vibe, but a rather more serious tone and fewer Max Miller references, is the source of the headline quote above, the album "Mind Bomb" by The The, a bunch of earnest 80s types of approximately the same vintage of myself. It's got The Smiths' Johnny Marr on it (as far as I can tell, there was some sort of tax dodge in the 1980s which involved having Johnny Marr on your records), so a fair old number of Smiths completists will be pleased that it's been reissued along with the rest of the The The (note capitalisation) back catalogue. In the UK, that is; I suspect that you Yanks can go whistle. I bought it for the single "The Beat(en) Generation", an absolutely fabulous track about everything and nothing which to my mind demonstrates what a good band the Smiths would have been if they'd been a band rather than a vehicle for Morrissey's ego. Elsewhere on the album it's all pretty leadenfooted English nonfunk stuff, with more an electronic sound than the Dury album, but recognisably coming out of the same place, and always deeply intelligent. Matt Johnson can't sing for toffee, obviously (the 1990s album of Hank Williams songs, "Hanky Panky", which is also top stuff, proved that he didn't learn), but in the right sort of environment (dark) and with a few glasses of whisky in the back of the neck, his half-spoken croon is really quite affecting. If you're not ashamed to be British (which, arguably, you probably should be), you'll enjoy it.

All the above provided without the usual whoring Amazon links, because I'm keeping it real and thinking about the kids.




1The facts of the matter are; in his youth, Sraffa was a fan (and a friend) of Antonio Gramsci, and Gramsci was a Stalinist by most peoples' lights. But Sraffa fell out with the Gramsci crowd quite early on in his career at Cambridge, and it was very hard to work out what his politics were by the time "Production of Commodities By Means Of Commodities" was published. He was certainly never active in supporting Stalin, because he almost never said anything in public at all.

In semi-related news, Sraffa was one of the few people who Ludwig Wittgenstein considered an intellectual equal, and there's decent evidence that a lot of the ideas of later Wittgenstein are heavily influenced by him.
1 comments this item posted by the management 10/18/2002 03:42:00 AM

Wednesday, October 16, 2002

 
Two Cheers for This Year's Nobel Prize

Well three cheers for Daniel Kahneman, for he has won the Nobel prize, and he is by all accounts a very fine bloke. Vernon Smith shared the prize; about him I know nothing. But Kahneman's paper with Tversky pretty much kick-started the behavioral finance revolution, bringing the experimental psychology literature into the economics of expectations formation. But only two cheers for the contribution he's made to economics, for reasons that I will endeavour to explain.

For those people who read this blog without the benefit of an economics degree, fuck off and don't come back until you've got one. In fact get a PhD. I'm certainly not going to waste my time talking to people who only have an undergraduate degree ... sorry, I appear to be channeling the Monetary Analysis department of the Bank of England there. Anyway, for the benefit of people who aren't up to speed on why Kahneman's work matters, here's a potted history of expectations in economics.

Expectations in economics matter because the whole point of an economic model is that people change their behaviour based on the interaction between their own preferences and the environment that they find themselves in. Lots of economics models are "static", in that they basically abstract away from the fact that actions happen over time; these are "one-period" models and are popular because their mathematical simplicity means that they can be taught to even the stupidest undergraduate students and thus serve as a means by which one can get across the basic economic insights. The problem arises, of course, when the undergraduate students get elected to be President of the United States. But anyway, one-period, static models (like, say, the supply and demand curves) are the mainstay of economics.

But you can't do much in the way of real-world applications with a one-period model. You have to find some way of taking into account the fact that people base their actions not just on what's happening now, but also what they expect to happen in the near future. To take a concrete example, consider the price of a share of Amalgamated Widgets, an imaginary company which fortunately happens to have just filed its accounts for the last twelve months and to have earnings per share of exactly one dollar. How much would you pay for a share of AW?

Obviously, that's going to depend on your expectation of what it's going to do in the future. In fact, Paul Samuelson demonstrated that, under innocent-looking assumptions, your valuation of AW is equal to your expectation of its cash earnings for every period from now to the end of time, with each future period discounted at the appropriate rate of interest. This ought to be true whether you're planning to hold onto the stock forever or to flip it in the next five minutes, because the price you can sell it for in five minutes' time depends on what someone *else* think's it's worth, and so on and so on. Since *someone*'s going to be holding the stock forever, *everyone* involved with its price, even the shortest-term trader, has to be concerned with long term earnings. Samuelson referred to this as the "Law of Iterated Expectations"; my expectation of your expectation of what AW is worth, is the same as my expectation of what AW is worth, which is the same as the properly discounted value of what I expect AW to earn. No matter how many times we "iterate" the expectations by adding more and more middlemen, it all comes down to this.

So what would my expectations be, then? Well, the simplest way to model them is to assume that I have myopic expectations; I assume that all future periods will be exactly the same as this one. Then, next period, when I turn out to be wrong, I update my assumption that everything will be the same as the new period.

The myopic expectations model (known in forecasting circles as "the naive forecast") is such a traqnsparent and stupid way of thinking about the future that it's embarrassing how difficult it is to come up with a method that works better in practice. Lots and lots of professional models, the kind of services that you pay thousands of dollars for, underperform either the pure myopic model, or the myopic model with respect to growth rates. Which is a comfort of sorts to academic economists, who would otherwise probably be moved to tears and suicide by the differential between professorial salaries and the kind of sums that a charmer with a bow tie can pull down in the prediction industry.

Somewhat more sophisticated, we have the "adaptive expectations" model, whereby I have some idea of what would be a normal earnings number for AW, and I update that in a sort of Bayesian fashion with every earnings announcement. Adaptive expectations never really took off in finance theory, but they were very big as the engine of a lot of Keynesian macro models in the early 1970s, shortly before the "revolution" which brought us ...

Rational expectations! Beloved of a million and one young and ambitious graduate students with spots, straggly beards and a head for calculus, and loudly derided by a million and two youngish journalists with tweed jackets, hazy left wing politics and a two hundred word screed to write before lunchtime. The rational expectations model and its close cousin, the "efficient markets theory" are actually based on a perfectly sensible intuition; that the mistakes people make are likely to cancel each other out, so when you're talking about a large population, you should assume that they do cancel each other out. The trouble comes when actually existing rational expectations guys forget the derivation of the theory and start applying "efficient markets" concepts to real life problems as if it was a conclusive argument that the market is always right.

Of course, the big problem with rational expectations models is that when the rubber met the road, in empirical testing, they performed disastrously (by which I mean, really really disastrously). They started off with a few successes; Patrick Minford's model at the University of Liverpool seemed to be predicting the early 1980s recession pretty well. But after a few years, it was noticed that Minford's model predicted recessions more or less all the time, and thus occasionally did very well in the same way in which a stopped clock is occasionally right. This was the problem with rational-expectations models from a mathematical point of view; they tend to have "positive feedback" characteristics which make them sink into certain preferred solutions, leading to forecasting performance which, in the words of Steve Nickell, "was enough to make you weep if you cared about that sort of thing". How bad was it, Virginia? I'll tell you how bad. Robert Lucas, who won a Nobel Prize himself for inventing rational expectations models, has more or less given up on them. Yup, these models were bad enough to make an economist admit he was wrong. (We should note at this point that it is my personal view that "rational expectations" as a principle of economic modelling was never really given a fair go. The limitations in the mathematical form of the models actually used were so severe that they would have cocked up in exactly this way more or less whatever the economic intution they were modelling. But here we are departing from the broad historical sweep).

So then, we reach Kahneman and Tversky (in case you're interested, Tversky unfortunately died, and hence isn't eligible for the Nobel which is not awarded posthumously1). While the empirical battle over rational expectations was dragging out to a bloody end, they came in with a theoretical contribution to the debate. This basically involved taking some of the results from experimental psychology about how people formed expectations and made decisions (fixation on key levels, loss aversion, concerns for distributive equity, etc), and used them as the basis for making a case that people did, in fact, make systematic errors of judgement, and it was not safe to make the assumption that errors would cancel each other out. Rational expectations in macro was dead, and the "behavioural finance" crowd have been chipping away at efficient markets ever since.

So, certainly a hurray from me as a heterodox economist. Rational expectations was a bad theory, and it is good that it no longer rules the roost, and Kahneman certainly did his bit. But only two cheers, because in my view, economics is never really going to get to grips with time and uncertainty as long as it is stuck in a paradigm under which the response to the failure of the last approach is to start tinkering with the way in which we model expectations.

To start with, consider the mathematical structure of the models we've been talking about (if you aren't familiar with the mathematical structure, just adopt a thoughtful facial expression). Although the concept of future time is present through the expectations operator, they're actually static models. "Taking expectations" is not really a way of modelling the future; it's a way of avoiding modelling the future by flattening it down into the present, only treating it at all through its effect on today's expectations. Kahneman's work doesn't actually change this fundamental characteristic; behavioral models of expectations are still, structurally, one-period models being forced to do the work of genuine dynamic modelling.

The real work that needs to be done is in attacking the fundamental assumptions of "expectations" modelling in economics. I mentioned above that Samuelson's assumptions underlying the Law of Iterated Expectations were "innocent-looking", which they are, but they're actually extremely restrictive. Importantly (and this is a topic I've harped on about before), they're only valid for expectations of *ergodic* processes.

What the hell is an "ergodic process" when it's at home?

Ergodicity is a statistical property. A data generating process is "ergodic" if the data that it generates is "well-behaved" in the sense that you can take a sample of it and that sample will be in some way representative of the whole. Imagine a random number generator, spewing out numbers, and yourself sitting in front of it, writing the numbers down. After 1000 numbers, you calculate the mean of the observations. If the random number generator is driven by an ergodic process, you now have a decent estimate of what the mean will be after 10,000 observations. With ergodic stochastic processes, collecting more data gets you a better and better estimate of what the underlying parameters of the process are, as the "noise" cancels itself out in some statistically well-defined way.

But imagine if you were in front of the machine, and you kept on collecting more and more data, but the average after 1000 numbers was completely different from the average after 10,000, which was nothing like the average after 100,000 and so on. Imagine further that it *never* settled down, no matter how much data you collected. That would be a strongly nonergodic process; over time periods of around a week to a month, lots of weather data appears to be nonergodic, which is why medium term weather forecasting is so difficult. It's clear here that to talk about "expectations" of the future states of a nonergodic system are meaningless; people might have opinions about the future, but there aren't the solid linkages between these views and the actual data which one would need to call them "expectations". Certainly, there isn't enough to support the trick used by economists in using the expectations operator to make dynamic processes static so that they can be modelled tractably.

So what? Well, so this:

Most processes which are characterised by positive feedback are nonergodic

Most economic processes of interest are subject to significant, destabilising positive feedback


It's a real problem, and in my opinion, Paul Davidson ought to be looking at something like a Nobel Prize for being one of the few economists to take it seriously. (He won't get it, of course, because this is way out of the mainstream of academic economics, where it is still considered the mark of a clever young man to say that "chaos theory never amounted to much"). Kahneman's work is important, but in order to be a constructive contribution to some future correct theory of economics, it needs to be thought of as a description of human decision making and behaviour forming, not as a way of rescuing the broken models of expectations economics. So a hearty "Hip hip" from me, but I'll be keeping the champagne on ice for the meantime ...




1In fact, you can be awarded the Nobel Prize posthumously if you pop your clogs between the time it is announced and the actual awards ceremony.
0 comments this item posted by the management 10/16/2002 10:07:00 AM
 
Scenes from the decline and fall of this weblog ...

Yep, now I'm reduced to throwing hit 'n' run insults at short exceprts out of context from newspaper columns. Might as well go for the gusto by using the most hackneyed device on the web and awarding a "King Stupid" award to Thomas Friedman of the New York Times for this gem

How is it that Egypt imprisons the leading democracy advocate in the Arab world, after a phony trial, and not a single student group in America calls for divestiture from Egypt? (I'm not calling for it, but the silence is telling.) How is it that Syria occupies Lebanon for 25 years, chokes the life out of its democracy, and not a single student group calls for divestiture from Syria? How is it that Saudi Arabia denies its women the most basic human rights, and bans any other religion from being practiced publicly on its soil, and not a single student group calls for divestiture from Saudi Arabia?

I would guess that the reason that there is no campaign for divestiture from Syria is that it doesn't have a stock exchange.

There are a few Syrian companies quoted on the bourse in Doha, but they're not exactly mainstream investments. The Egyptian stock exchange is absolutely tiny; I seem to remember that Fleming-CIIC Securities (part of the JP Morgan Chase group) is the only international broker operating there (edit: Google says I'm wrong and that HSBC and ABN Amro have a presence. But google also tells me that the market capitalisation of Egypt is only $30bn), and although the Saudi stock market is capitalised at around $40bn, investment into it by foreigners is tightly regulated; basically, the only way you can buy into it is through a country fund managed by a Saudi bank and listed in London. Unlike Israel, which boasts a number of companies with New York listings and two S&P500 constituents, investment in the three countries mentioned is pretty hard-core emerging markets stuff, not really the widows-and-orphans territory of your typical university endowment.

In fact, on the basis of the above research, I would hazard a guess (and perhaps award a small prize to anyone who can gainsay me with proof), that the major American university endowments have no investments at all in Egypt, Syria or Saudi Arabia, making it rather fucking pointless to campaign for them to "divest".

It is considered traditional at this point to fulminate about the kind of individual who makes this sort of pig-ignorant blanket assertion without bothering to spend five minutes on google to check the facts, but I'm scared of the blowback from that one.

edit Apparently I thought this post was so great that I posted it eight times. I don't know how that happened, but I think normality has now been restored.
0 comments this item posted by the management 10/16/2002 12:58:00 AM

Tuesday, October 15, 2002

 
Why are Americans so fat?

A fairly provocative question, prompted by this having a go at the citizens of that great nation for piling on the pounds, and suggesting that the government tax them for their sin. A quick glance at the title of this weblog reveals that I am hardly a disinterested party to this issue, but there you go. I considered having a go at the latest fad diet (which, pop culture types will be interested to know, was last popular in 1973-4, around the time of the last serious bear market; deep speaks to deep here, as they say, and you don't have to be a hardcore evolutionary psychologist to note a connection between financial wealth and the emotional relationship with food). But beer is apparently a carbohydrate, so fuck that.

Anyway, the question of why Americans are so fat is one which everyone and his fat wife have had a go at answering. And, surprisingly enough, everyone has come up with the same answer, viz:

Americans are so fat because of some moral failing particular to Americans today, and they would not be so fat if more people agreed with my political views.

I'm paraphrasing, obviously. But it would certainly be bad news for people like these if peddlers of political platitudes had to sign up to the same code of rigorous scientific analysis that these people are meant to follow in making claims about losing weight. In fact, it's pretty easy to understand why Americans are getting fatter, if you just take account of a few unarguable facts about work, leisure and productivity. You can even do it all without leaving the marginalist paradigm, so those people who are put off by heterodox economics can keep reading.

First of all, let's think about the activity of eating. First, we can note that it is mainly a leisure-time activity, and it's an action of consumption rather than production in economic terms. Very few people get paid for eating, and eating food is a processing which has only one output, which nobody is in the business of selling except that conceptual artist whose name I forget. So, let's draw up a list of substitutes for eating food; other activities which people carry out for pleasure. We have things like:

  • Conversation
  • Reading
  • Sunbathing
  • Sexual intercourse
  • Listening to music
  • etc.


Basically, various other physical and intellectual pleasures. Now, let's look at a couple of other stylised facts.

Consider this as a stylised fact. for instance; the average leisure time of the average American has not increased at all over the last hundred years. Arguably, it's shrunk. Now that might have happened for any of a million reasons, but let's for the moment treat it simply as a social fact. Time, as the newspapers tell us, is a scarce resource.

But, it's a scarce resource which is in fixed supply. Although the onward rush of technology has made us unimaginably richer in material terms over the last hundred years, we are still only supplied with twenty-four hours in a day, only about eight of which we can really count as being available for use in leisure activities. If you ever think that there's something funny about those chained-GDP examples which puport to prove that the bottom 1% of current workers enjoy a better standard of living than the millionaires of 1780, then this is part of the reason why; if it had occurred to him to do so, David Ricardo could have buggered off and spent the day playing golf whenever the whim took him, and you can't.

Now, let's look at the substitutes for eating listed above. Straight off, we notice that most of them are highly demanding in time, and that the input of time is more or less invariant in order to get a unit of pleasure out of them. A favourite example of Brad DeLong's of how technology has improved our life is that these days, the poorest of persons in America can easily listen to the world's greatest virtuoso playing the violin at the touch of a button. Which is true; but another interesting way to look at it is that it takes us exactly as long to listen to a symphony as it took Emperor Franz Joseph, and there's nothing at all that technology can do to help us with that. Our acts of sexual intercourse take as long as they did for Napoleon (I have no figures on this), it takes as long to have a conversation as it took Doctor Johnson, and the last improvement in our ability to read books (Dr Bruno Furst's Speed-Reading System) was about fifty years ago.

But ... one area where things have improved mightily over the last hundred years is our ability to eat food. Food takes roughly the same time to eat however yummy it is, and the industrialisation of agriculture, whatever it's done to the environment, has certainly massively increased the amount of food-related pleasure which the average man can extract out of a minute. And given this massive increase in the pleasure productivity of food-eating, is it any wonder that the American population has responded by choosing to spend less time in the comparatively less efficient pursuits of having sex and reading, and more time on stuffing their faces? It's the simple result of a rational optimisation calculation; to become uglier, stupider and fatter is simply where the comparitive advantage has shifted to.

So, courage, my American friends. If you can fill the unforgiving minute, with sixty seconds worth of sugar and lard ...
1 comments this item posted by the management 10/15/2002 09:59:00 AM

Monday, October 14, 2002

 
Sowin' the seeds, the politics of greed

Yes, another entirely original title made up purely by myself ...

One of the finest phrases Margaret Thatcher came up with1, she came up with in the context of the 1988 Budget, the lynchpin of which was a sudden, slashing cut in the top rate of income tax from 60% to 40%. An earlier budget had cut the top rate from 83% (ask yer grandad) to 60%, but the 1988 cut was the most breathtaking, because it came in the context of a budget which offered almost literally bugger all for everyone else. Obviously, this kind of chutzpah takes some selling, and the phrase all over the Tory media that summer (budgets used to be in the Spring in the UK, ask grandad again) was the resonant accusation that anyone who complained about massive tax cuts for the rich combined with swinging reductions in benefits and social spending, was guilty of ...

"THE POLITICS OF ENVY"

An absolutely marvellous phrase, it probably did a hell of a lot to persuade a generation of red-braced, spectacle-wearing yuppies that right wing politics were cool. It absolutely neutralises any attempt to portray the greedy party as being greedy, because it turns the charge right round 180 degrees, with a smarmy insinuation that people get involved with left wing politics because they're horribly and unattractively jealous of the rich, but they are too intellectually or personally inadequate to become rich themselves. Which is actually probably true of a lot of members of left wing political parties, which is why it was such a great piece of propaganda. Anyway, the left has had an inferiority complex about this phrase for the best part of fifteen years now, so I'm here to help us take it back.

Consider for the moment, the dockworkers of the ILWU, who were on strike until recently, and who earn around $100,000 a year for doing a job that basically involves attaching a hook to a container and giving the thumbs-up to a bloke in a crane.

Now of course, when you read a sentence like the one above in a media account, how you react to it depends on who you are. If you're Nathan Newman, you start immediately pointing out that it's a lock-out, not a strike, and giving us lots of extremely useful chapter and verse on the Taft-Hartley Act. If you're the ILWU, you start pointing out at length, what a skilled, complicated and dangerous job being a longshoreman is. And if you're Max Sawicky, you start interrogating those numbers a bit, and finding out that the sum of $100K is an utterly misleading, high-balled estimate, completely unrepresentative of the average dockworker's take-home pay and provided by management to an uncritical media.

But if you're me, you just think:

"Fucking good on them! When one thinks of all the arseholes pulling down a hundred thousand for doing next to nothing, why shouldn't someone get the same for hauling crates and occasionally half-inching the contents? They must have a bloody good union, good luck to them!"

The same goes for the London Underground platform staff, who get paid more than trained nurses (because they've got a good union), the Royal Mail postmen, who are the highest paid manual workers in Europe (because they've got a good union) and the Air France pilots, who regularly bring half of Europe's holiday traffic to a juddering halt (because they've got a good union). They may not be *worth* what they're getting, but the plain facts of the matter is that they're *getting* what they're getting, so who are we/you/anyone to start moralising over the contents of another man's pocketbook? Union members have higher salaries than those which would prevail if there were no union, and they often act like cartels through the closed shop, but if you are honestly of the opinion that this is the greatest injustice at work in our land, then there's something wrong with you. This is the only consistent view to take; anything else is purely and simply the politics of envy.

I think my view is shared generally; among the normal people I occasionally talk to, I really don't get any seething feeling of injustice at the fact that union men drew a lucky ticket. Even from women and black people, who often have a pretty damn good reason to object to some of the less reputable practices of some of the less reputable unions. This is true for the same reason that it was always a silly idea for the left to get all worked up about "CEO salaries" and about higher rates of income tax; the vast majority of people (that class of people which is sensible enough not to join political parties) is just not as venial, jealous and simply fucked-up with negative emotion, as that small segment of it which takes an active interest in party politics. The politics of envy, at base, involves projecting one's own lowered sense of self-esteem onto a public which, by and large, doesn't share it.

This is a useful analysis, because I think it can also be used to explain another phenomenon which mystifies people other than myself; the widespread popularity of subsidised university education, and the widespread unpopularity of measures aimed at making students go into debt. There is a line of argument under which it is argued that, because graduates earn so much more than non-graduates, to subsidise education out of general taxation is regressive; it's a "reverse Robin Hood" tax which takes money from carpenters and plumbers and hands it to merchant bankers.

On the other hand, once one stops looking at this through the lens of the politics of envy, it makes more sense. Young person gone to university and earning a big salary? Good luck to 'em. Why should they be saddled with a big debt? It's absolutely horrible being massively in debt, particularly if your repayment bill is very large in relation to your current disposable income (whatever its possible relationship to your lifetime earnings). Who would want to saddle a young person with that kind of burden, just at the time when they ought to be enjoying themselves? Not anybody I know, whatever their income. People fundamentally don't care about paying a couple of extra quid on income tax in order to subsidise an idyllic three years' idleness and alcoholism, so long as they have a reasonably fair expectation that it's handed out equitably and so long as they get to grumble good-naturedly at its public expression. The state sponsorship of university eduation is a subsidy to happiness. And as such, it (along with a close cousin, generous unemployment benefits) could only be opposed by someone who was at bottom, appealing to the politics of envy.




1Or possibly Nigel Lawson.

1 comments this item posted by the management 10/14/2002 10:46:00 AM

Friday, October 11, 2002

 
Banging My Head Against Linear Economics

As I've written elsewhere recently, banging your head against a wall is a hobby which has probably got a bad rep as a sort of shorthand for the acme of pointlessness. After all, you strengthen your head and neck by doing so, and a well-placed headbutt can be a fearsome weapon (for the interested, here's a guide). And sometimes the wall breaks, which is cool ... However, repeatedly smacking your head against a brick wall is not a recommended method of conditioning for any school of martial arts of which I am aware, and, although I will stand up for the intellectual equivalent, anything which makes you want to physically beat yourself unconscious is most likely to be avoided.

All of which pointless rambling is meant to a) demonstrate that this weblog jumped the shark weeks ago, and b) introduce a few comments on an idea of Jason McCullough's that I've been meaning to put down for a while.

Jason runs the perfectly fine weblog "Hronkomatic", which would be in my link list if I could be bothered maintaining one. It's in the MaxSpeak list, so you're only two clicks away from it (by the way, here's the new linking policy; if Sawicky links to you, I don't need to, and if he doesn't, I probably don't want to. I'm sure this is massively unfair; special cases can make their plea in the comments section or something). In order to save you the pain of trying to get to grips with his archives, I've reproduced the post below:
Thursday, September 26, 2002

I've been seriously considering the half-assed suggestion I made a while back to completely eliminate taxes and fund the government entirely through bonds. The obvious problems with this are issues of cost distribution (would the poor necessarily end up paying more than the rich under an all-bond system, though?), effects on the net level of investment, and the tendency of this system to east the constraints on government spending (which is a good thing or a bad thing, depending on your bent). So, here's an estimate of how it'd change investment.

According to this, the MPC for the U.S. is about .85. The change in consumption by entirely eliminating taxes should, therefore, be MPC * G while the change in investment is (1-MPC) * G - G = -MPC * G. Investment would drop by 177 billion, or 20%. Unfortunately, I'm using the APC here to estimate the MPC, because I can't find an estimate of the MPC for the life of me. You'd assume it should be lower than the APC, though.

Is there someway for the government to incentivize investment to make up this shortfall, without taxes? Another interesting possibility: rational expectations implies consumption and investment should, over the long run (the level of investment should be determined by the desired future level of income), be completely unchanged; would total consumption (government spending included) and investment return to their previous levels?

I'm toying with this theory because it completely eliminates the tactic of conservatives limiting the size of government with deficits; they'd have to actually argue against spending on the merits.

It's quite a jolly idea in its own way. The obvious objection being, who's going to buy these bloody bonds if you've abolished the taxes that are meant to pay them back, but apparently according to Jason, he's aware of that. The idea is to give us a temporary holiday from taxes, which is something I'm in favour of; let future generations pick up some of their share since they're the ones who will get most of the benefit from the current technological revolution. But I don't want to get into the specifics of this scheme, mainly because I don't want to steal Jason's thunder. I'm interested in the calculation in the middle.

Jason clearly knows his Keynesian multiplier maths, but this extreme case shows up some serious deficiencies in the model. We actually get an apology for having used the Average Propensity to Consume instead of the "theoretically correct" Marginal Propensity. Now riddle me this:

Is the removal of the entire system of taxation a "marginal" change?

Is it hell. It's a massive, huge, earth-shattering change. The MPC is the amount which you would consume out of a marginal extra dollar. If someone gives you a sum of money equal to 40% of your income, would your behaviour be proportionately the same as if they gave you a dollar? Of course not. So where did Jason go wrong?

The ugly and tragic secret is that he didn't go wrong at all. Of all the operationally usable models of neoclassical eocnomics, there's not a one of them in which it is not assumed that marginal rates of preference are constant. The possibility of diminishing MPC with respect to wealth or income is certainly acknolwedged in theoretical discussion, but these models aren't used in any "live" applications because they aren't tractable given the mathematical toolkit of most economists. In fact, as Steve Keen points out in the book I reviewed here a while ago (hmmm, must do some more book reviews), you can't even derive anything so simple as a conventional downward-sloping demand curve without assuming conditions which imply a constant MPC.

This is a really, really nasty flaw in economics as she is done. Most economic things are of a nature to be best modelled in a non-linear fashion. Linear modelling works as a local approximation at best. But most things that you might be interested in modelling in economics aren't small incremental changes; they're big changes in important things. Linear approximations are, very probably, very wrong indeed.

But when you point this out to the general mass of academic economists, as Paul Davidson has been doing for years, you get treated as a harmless loony. If you try to teach economists the sort of mathematics they might need to correct these massive holes in the models, as Barkley Rosser has been trying to do for a while, your general reward is exclusion from the mainstream of academia, plus snotty articles from the likes of Paul Krugman accusing you of having "Santa Fe syndrome" and of using sophisticated mathematics "precisely because they seem to absolve intellectuals from the need to understand the models that underpin orthodox views"1.

It's like banging your head against a brick wall ....




1This is quite a long article, but worth reading all the way through for the mixture of good sense and overpowering blinkered arrogance which is Krugman's signature. Particularly funny is the bit where he accuses John K Galbraith of not understanding mathematics, because it led on to this piece where he accused James K Galbraith of also not being able to hack the math, and as a result got his head handed to him in this debate. The point being that Galbraith pere was an old-school institutionalist, but Galbraith fils is a scary linear algebra whizz. It is not impossible that Krugman confused the two.
0 comments this item posted by the management 10/11/2002 09:19:00 AM
 
Move over son, the professionals are here

Evolutionary psychology week lasted all of two days ... I will put up my own argument about Randy Thornhill's theory of rape, and a few others, pretty soon. But I've just rediscovered this article by Val Dusek, which is the best thing I've read on the whole debate. It also reminded me what a perfect shit Stephen Pinker looks when you know a little bit of the background to some of the things he says about Margaret Mead. Print out and read on the train home, that's my advice.

edit God damn that article's good. I'm amazed to discover the extent to which I'd subconsciously plagiarised it.

edit again Damn me, it's good. I think I'll excerpt a non-representative chunk here, because it sort of buries a point which is, I think, profoundly important:
What Dennett would have to counter is Lewontin and Sober's argument that when selection coefficients of genes are context-dependent and selection acts on gene complexes, the artificially constructed selection coefficients of genes do not play a causal role. (Sober and Lewontin, 1984). It is true that if one claims that what is selected are not genes but replicators as the later Dawkins does, then whole genomes, incorporating all the contextual effects of genes on each other, might be the object of selection. This would preserve the restriction of selection to the genic level, but it would give up the atomization of modular traits with which evolutionary psychologists work.

Massively important, given that now we have the results of the Human Genome Project in, we *know* that most inherited human behavioural traits will have to have been selected through gene-complexes rather than individual genes. I have not yet seen the EP defence of their core doctrine that traits are modular in the face of this new development; I'd appreciate any pointers to the literature if there are good arguments that the doctrine either can be preserved, or is not actually necessary to the theory.
0 comments this item posted by the management 10/11/2002 03:55:00 AM

Thursday, October 10, 2002

 
Tits on a Peacock

Evolutionary Psychology week continues ... I'd note in this context that I don't have a complete knock-down argument against evolutionary psychology, mainly because if I did, it would also presumably be a knock-down argument against ethology, which would be damn close to a knock-down argument against evolution. More or less everyone agrees that behaviour can be subject to natural selection, and that's all you need to believe in before you're committed to *some* sort of belief in *some* kinds of explanation of psychological phenomena as evolved responses. What I'm most concerned with arguing against is "Neo-Darwinian Sociology", a close cousin of evolutionary psychology, and one which has repeatedly interbred with its less reputable cousin, with predictable results1.

In honest fact, using the phrase "Neo-Darwinian Sociology" is actually an act of extreme politeness on my part, because the more concise phrase would be "Social Darwinism", the age-old and known horrible theory without a shit-eating, disingenuous and self-consciously pious denunciation of which, no pop EP book is complete. (Matt Ridley, I'm looking at you. Daniel Dennet, you can wipe that smile off your face too). It's kind of like the paramilitary wing of evolutionary psychology; the default position of a serious ethologist when confronted with the possibility of earning a quick two hundred quid for 400 words on some current issue in the Sunday papers (Richard Dawkins, I'm looking at you, and pointing at you). Basically, in so far as these pieces have any message which doesn't consist of laughing at people more intelligent than the author for believing in God, the message boils down to:

  • Psychology of individuals is sociology; there is nothing to be understood about social phenomena other than individual behaviour. (The main argument for this proposition is that sociology is carried out by sociologists. The secondary argument is that some sociologists vote for left-wing political parties. Don't ask me, I'm only here for the beer)
  • Genetic explanations are the most important kind of explanations. If something could have come about through sexual selection of a gene, then it is overwhelmingly likely did come about in that way. Any other kind of explanation is very much second-best, and is probably about to be proved false by the discovery of a "proper" explanation. (The argument for this is rarely spelt out; as far as I can tell, it is some degenerate version of Occam's Razor)
  • Although just-so stories about hypothesised past development are no more than indicative initial hypotheses when we're doing proper rigorous ethology, they're strong enough that you can draw massive overarching social policy conclusions from them when you're talking to the plebs. (There is no argument for this at all, but I'm guessing it's part of the organisational pathology which gets these things into print)

Push them on any of these points, however, and they immediately retreat to vastly more defensible ground, only talking about specific results, qualifying all their statements and pretending that their sentences should never be (could never possibly have been) taken to imply things which they quite obviously say. Of course, given that we're dealing with Dawkins, Pinker, and arseholes of similar magnitude here, they tend to carry out this retreat with the full pomp and circumstance of a Roman triumphal parade, insulting people's intelligence, taking every opportunity to revive assertions they've walked away from and if at all possible, trying to imply that their interlocutor is either a sociologist or a believer in God. I see that it will take a separate post on the roots of this behaviour in philosophy of science to drain away all my bitterness.

But anyway, that's "Neo-Darwinian Sociology", and I actually believe that I do have a knock-down argument against that, which I will outline in the next-but-one post in this series. For the time being, just note that I think I can support the claims that

a) if it wasn't for their occasional forays into N-DS, the EP crowd would be a very obscure bunch of scientists indeed.

b) NeoDarwinian Sociology is on a much weaker scientific footing than the rest of EP; those parts of EP which have impinged on the public consciousness are in general pieces of research which are distinctly suspect as works of science

and therefore

c) The entire existence of evolutionary psychology as a fact of public life rather than an obscure academic discipline depends on the willingness of some scientists to drop all their scientific standards at crucial moments. (In particular, I find it quite scandalous that Richard Dawkins is quite so unconcerned about the distortions of scientific method which are regularly indulged in by people he regards as his allies. Despite what he thinks, he is Oxford University's Simonyi Professor of the Public Understanding of Science, not the Public Proselytisation of Atheism).

and am also prepared to argue for

d) The fact that it's the evolutionary psychologists who have achieved such prominence through such means is, as they say, no coincidence; the entire method of inquiry of EP tends to inculcate habits of mind which are too quick to latch onto hypotheses and call them explanations, and which discourage rigorous system thinking in favour of particular anecdotes. In their professional work, practitioners seem to recognise these dangers and guard against them; in their popular work and their policy advocacy, they drop their guard. As you can tell, I'm working toward a theory of how a book as bad as "Blank Slates" by Stephen Pinker came to be written.

It's in support of d) that I am currently working. As with yesterday's post on symmetry and beauty, I want to provide an example not so much of questions answered wrongly, but of questions never asked in the first place; of theories adopted for a particular case because of the attractive story, but which were not applied to other cases, because they didn't fit the story being told. If I can establish that there are cases when, working near the borders of ethology and sociology but on the scientific side, evolutionary psychologists lost their critical faculties, I think I'll have supported my case that when they move closer to politics, they tend to be even worse. Tomorrow's example is going to be just a freaking doozy (Randy Thornhill's theory of rape), but for the time being, let's take a look at womens' breasts and peacocks' tails.

OK, I didn't get many takers for peacocks' tails. But let's start off with them. There's a fairly common theory about why peacocks have tails; it's not the only one in the literature, but's it's pretty well supported and it is frequently used by the EP crowd when they want to make an analogy to certain kinds of male behaviour. The theory is basically, that the male peacock's tail is so big not in spite of its inconvenience to the bird, but because of that incovenience. The idea is that it's a sexual signalling device; the peacock is signalling "Look at me, I'm so big and strong and genetically ace that I can carry around this huge great fucking ridiculous tail and still live a relatively normal avian life". So, the selfish genes of the peahen latch onto that signal, because they want to hitch a ride on this unstoppable Range Rover of peacock genetic goodness. It's quite a clever little theory; controversial as hell among bird biologists, but certainly not without supporters.

So anyway, a theory like that is too good to waste on peacocks, so it gets brought into service in explaining otherwise damnably stupid behaviour by human males with "peacock" tendencies. Bungee jumping, driving cars quickly, etc, etc. Jared Diamond (in an uncharacteristic slip; a terrible chapter of an otherwise good book called The Rise and Fall of the Third Chimpanzee) claimed that kung fu experts in Indonesia drink paraffin. The idea being presumably, to show off to any females present "HEY, LOOK AT ME! I'M ACTING LIKE AN IDIOT! I MUST HAVE GREAT GENES TO HAVE SURVIVED TO ADULTHOOD, I'M SO FUCKING STUPID! IT'S A MIRACLE I'M NOT EATING THROUGH A STRAW, BUT I'M NOT, SO THERE MUST BE SOMETHING SPECIAL ABOUT ME! COME ON AND GET ME YOU KNOW YOU WANT IT!". Obviously, the questions a) has there ever really been an "evolutionary adaptive environment" in which purposefully endangering your own life for no reason hasn't been a gene that sensible selfish maximisers would want to avoid like the plague? and b) does it not strike people who advance this "hazard theory" as perhaps surprising that much of the very most stupid and show-offish male behaviour in the world is channelled into initiation rituals of exclusively male secret societies of one kind or another? are quibbles and prove that the person asking them is a sociologist and probably believes in God.

Anyway, I sense that my audience is getting bored at this point, so on to the more popular topic of womens' breasts. As everyone knows, men like women with big, prominent breasts because they indicate that the woman upon whom they are located will be really good at feeding a child, thus propagating their genes to the next generation. Unfortunately, the bust size of a woman who has never given birth bears more or less no relationship whatever to the size at the end of pregnancy (breasts of nonlactating women are made mostly of fat, and it takes about eight months to properly shape them up to serve drinks), and this has been the case for a very long time in human evolution. This immediately rules out a lot of the "sub-pop" science commentators who use this kind of cargo-cult science theory of female pulchritude when they want to make some sort of point about sexual harassment in the workplace or the appeal of Pamela Anderson or whatever needs half a col. written about it by two-thirty prompt, but that's hardly a body blow to the EP crowd; most of these people are either editorial writers half-remembering the last pop science book they read, or people like Eric Raymond who are so damnably ignorant on every single subject except computers that it can't be blamed purely on "The Selfish Gene".

On the other hand, there are a lot of commentators who know better, who still basically come up with theories of the breast which involve some sort of signalling about fertility (not all; here's a list of theories on this issue, not all of which are vulnerable to the current critique). And here, we come to a conundrum.

If the theory of doing dangerous things in order to show how genetically fit you are is generally applicable, perhaps it could be applied to women as well as men? So, let's think ... what would be an extremely physically demanding and dangerous thing that a woman could do, which would work well to demonstrate her fertility? Well ... perhaps it's a bit off-the-wall, but here's one suggestion ... how about ... giving birth to a baby?!

Think about it. Some women are infertile, and can never give birth. Some women are not physically up to the rigours of childbirth, and this must have been even more true "out on the plains of Africa", to use the hackneyed and racially loaded catchphrase. One way, as a woman, of proving that this isn't true of you, is to actually step up to the plate and walk the talk. So, on this reasoning, men should be really turned on by single mothers ... is that your experience? Furthermore, if we extend this theory to go back to our original question about fashions in bust shapes, we can note that the stresses and strains of feeding the first child will certainly, pre the invention of the brasiere, have taken their toll on a maidenly chest. So, one could construct a convincing argument on evolutionary psychology grounds, that a female human equivalent to the display of the peacock's tail would be a large bust which drooped to somewhere south of the navel area. By putting on the Gossard Wonderbra and its competitor products, women appear to be attempting to signal to men that their fertility is a completely unknown property, and so is their vulnerability to death in parturition.

There is something decidedly funny about a grab-bag of intellectual tools which puports to explain the reason why things are the way they are, but which could simultaneously be used (as above) to explain why they were the way they were even if they were some other way. And there is something funny about a group of people who talk nine yards to Sunday week about the "intellectual rigour" they are bringing to a discipline like sociology, but who never seem to bother to generalise propositions, or to explain why mechanisms work in one case but not another. And there is something extremely funny about the way that a bunch of male commentators have been so quick to jump on board with a theory that, if it were not for the fact that it helps to bolster a number of propositions about sexual morality which they wanted to assert anyway, would be recognised as being about as likely and as useful, as tits on a peacock.



1Yes I know, I know. That was invective. In actual face, most medical opinion appears to be that the marginal risk of deformed offspring from copulation between first cousins is actually pretty negligible. So go for it if that's what you want, but don't tell the judge I told you to.
1 comments this item posted by the management 10/10/2002 10:54:00 AM

Wednesday, October 09, 2002

 
Thy Bloody Awful Symmetry

As well as the whole Michael Hardt/ David Hasselhoff thing below, my mind was turned to thoughts of evolutionary psychology by an article in yesterday's New York Times. Fundamentally, it's exactly the sort of work I was planning on doing; somebody's taking a look at the actual experimental methodology that supports such convenient factoids as "men are more concerned about sexual jealousy, while women worry more about emotional infidelity". It turns out that this "result" is incredibly fragile as to the situation of the experiment; if you sit people down, ask them the question straight out, and give them time to think, then men and women assign themselves correctly to their gender roles, whereas if you catch them off guard in order to get a more "instinctive" response, the differentiation "predicted"by an amazingly tendentious just-so story about cavemen in Africa just doesn't show up. (I'd note in passing that the EP crowd are often in the forefront of moaning about "double-blind trials" when they're on the attack on some other point; the methodology of having an experimenter with an agenda ask a question face to face and then write the answer down himself is about as far from double blind as it gets).

In any case, the main point of the article linked above is to show what total and utter patronising knobheads evolutionary psychologists can be when pulled up on a point of science (read it, honestly, the guy starts comparing himself to Galileo!). But it dovetails quite nicely with a couple of points I'd like to make about some other sacred cows of evolutionary psychology; specifically, some of those claims which the pop science gang like to make about the "genetic" foundations of human beauty.

It's a shame that I'm too mean to cough up for the version of this weblog which would allow me to put up pictures, but there you go ... but you don't have to search far on the web to find someone claiming it to be an established "fact" that facial attractiveness is a function of facial symmetry. Coincidentally, you also don't have to go far on the web to find a picture of Elvis Presley (bloody great asymmetric sneer) or Cindy Crawford (bloody great asymmetric mole on face). So what gives?

Apparently people with symmetric bodies have "good genes". Don't ask me, I'm a stranger here myself. But let's assume for the meantime that in some way, a little glitch in the building of the face of a foetus is evidence of a deep-seated horrible lurgey in the genes which is just waiting to show up as sickle-cell anaemia or low resistance to malaria or something. The question I'm interested in is, how did anyone find out that people with symmetrical faces are the most beautiful people of all?

Note at this stage, that I'm not interested in studies which claim to have shown that symmetrical people have more sex than anyone else. Randy Thornhill claims that this is the case, and it might be the case even though the experiments which claim to demonstrate it come from the same guy who brought you a theory of rape which doesn't work at all as a theory of sexual assault not involving penetration. Personally, I think that Thornhill is all over the place, and I'll explain why in future (there's a clue in this sentence for the impatient), but I want to establish that it doesn't effect my current argument if the symmetrical are shagging wild all over the place. The claim that "beauty" is "whatever gets you laid" is one that the EP crowd is committed to, not me. But this is by the by.

Absent the sex life studies, the evidence for "beauty" being this, that, or the other, has to come from what actual people judge to be beautiful. So, the best method for carrying out this experiment would have to be to get a bunch of people, show them a bunch of photographs of people, and get them to pick out the beautiful ones. Then you count the number of points each photograph gets and have a look at which ones are picked the most often, right?

Wrong.

If you ask people to pick out the photographs from a set which strike them as the most beautiful, you're actually asking them to perform cognitive acts, not one. You're asking your experimental subjects to:

a) notice a picture of a face
b) judge whether it's beautiful or not.

The first of these is not a trivial act, as anyone who's observed a baby younger than about two months will testify. The extent to which you're going to carry out the act of picking a picture for the beautiful pile depends on the extent to which it catches your attention as well as what you actually think of the face. There will be an error in your results from people "misclassifying" faces because they weren't really paying attention to them. There are all sorts of misjudgements that it's possible to make when looking at a two-dimensional image of a three-dimensional object; as the post below demonstrates, I quite seriously misclassified a picture of Michael Hardt's hairstyle as "bouffant" when it wasn't.

So far so good. Now, readers with extremely advanced degrees in econometrics won't be asking ... what do we know about this error? Importantly, is it unbiased -- can we assume for modelling purposes that it can be ignored as something that will in a large enough sample?

I'm arguing, no. One of the things that, broadly construed, evolutionary psychology has usefully done for us is to dig up some important insights into the neuropsychology of visual perception. Particularly, it's been noted (as in, anatomically observed) that there is a mechanism in the brain which is specifically adapted for distinguishing between symmetrical things and non-symmetrical things. I find the "evolutionary psychology" (in actual fact, ethology, the rather more serious parent discipline which looks at behaviour without making tendentious and unsupported claims) argument quite convincing in this regard. The reason we have a symmetry-detector is that very few things in nature are symmetrical except animals, and animals are only symmetric when they're looking straight at you. Since the fact that something is looking at you is almost always a useful thing to know, we have been provided with a very acute sense of whether a thing is exactly symmetrical or not. Symmetry is a property which "jumps out of the page".

So, given that photographs of symmetrical faces are more likely to be noticed, the errors are not going to be evenly distributed. In any study which is asking you to pick out a "noticeable" characteristic the symmetrical pictures are always going to be over-represented, because symmetry is a noticeable property. Furthermore, this property is highly likely to account for the fact that babies tend to look longer at the same photos which adults pick out of a pile as being most attractive, another factoid often advanced as evidence for the beauty=symmetry hypothesis.

I have no particular investment in believing that there is nothing aesthetically attractive about symmetry; I spend a lot of time with a sneer on my face, but that's mainly because I read a lot of right-wing weblogs. But the fact that nobody saw fit to inquire into this possible source of experimental failure tends to suggest to me that people want to believe in the "evolutionary" arguments for reasons other than those of pure science. And when you get people like Todd Shackelford responding to the Northeastern study by just saying ""I guess, to state it plainly, I think the paper is in large part ludicrous .. It's clear to me that they have an agenda they're pushing.", I think I'm on to something.
0 comments this item posted by the management 10/09/2002 09:50:00 AM

Tuesday, October 08, 2002

 
Michael Hardt's Hair: An Apology

It has been brought to my attention that a previous post on this website may have been somewhat unfair and/or not perfectly soundly rooted in fact. Specifically, a number of correspondents have informed me, both through email and through posts on their own weblogs, that Michael Hardt's hair is not really all that bad. Surveying the evidence, which includes a number of photographs not indexed by the google image search, I have come to the conclusion that they are right. Doug Henwood, editor of the periodical (Left Business Observer) in which the original photograph appeared, has suggested that what's happened is that with the "floating head" style of cropping, one loses important perspective cues from below the neck, making the do look more expansive and voluminous than it actually is.

I still don't like Hardt's hair; it's scruffy as hell, and in a few stills of him lecturing, it appears to wilt under lights, and look really bad. But it is not actually a "bouffant" in the pejorative sense; it appears that his hair is merely naturally curly and insufficiently frequently trimmed, causing it to grow away from his head in a natural manner (the hairstyle used to be known as an "Isro" back in more carefree and less PC days). So it would seem that, in retrospect, some form of apology to Prof. Hardt and to his barber would be in order. In particular, my suggestion that such a high-maintenance pompadour would require large amounts of alienated labour and environmentally unsustainable grooming products (which had the effect of suggesting that Hardt was not only vain and effeminate but a hypocrite) was unjustifiable.

Not retracted, however, is the remark made in the first edit to the original Hardt post, claiming that he had "a sort of Hasselhoff thing going on". I still think that this is true and that the publicity still on his website bears it out. Hardt is 42 years old, approximately 15 years beyond the point at which one can get away with that "tousled, boyish" image and maybe eight to ten years older than the expiry date for the denim jacket he is pictured wearing. It's difficult to see where this calculated scruff look is coming from; Hardt doesn't have the excuse of being a child of the sixties, because he was only nine years old when they finished. My worry is that, presumably unknowingly, the professor's sensibility is most tellingly informed by the 1980s' advertisements for Levi's jeans and their denim-clad youthfulness. In other words, he's the American equivalent of our own Jeremy Clarkson.

In semi-related news, the consideration of middle-aged men and their attempts to maintain the trappings of youth, reminds me that about a year ago, I promised to write a few bits on the general topic of "evolutionary psychology", and the time is probably ripe. Watch this space ...

edit: While I'm apologising, I might as well mention that anyone who's read the book "My Goodness" by Joe Queenan will perhaps recognise that I've lifted this "insincere apology as excuse for a few more jibes" gag from there. Since it was basically the only joke in the whole book, anyone who's read that book will be pretty sick of it, so sorry. Thinking about it, this cack-handed plagiarism has the effect of making my posts about Lawrence Lessig look rather hypocritical, so a qualified apology there. Anyone else?
0 comments this item posted by the management 10/08/2002 06:12:00 AM

Thursday, October 03, 2002

 
Politics and the English Language, redux1

From the ideas dept, except I actually care about this one, and it isn't stupid. Like Christopher Hitchens, Noam Chomsky and all the best people, I am "a great admirer of George Orwell". Nine times out of ten, of course, when people tell you that they admire Orwell, what they mean is two things;
  1. they think they've found a way of twisting something he wrote so that it supports their own political views, and
  2. they're proud of the fact that they're the worst kind of pompous, annoying pedantic wanker about "Correct English Usage".
That's exactly how it is with me, anyway. I know just enough about Orwell to patronise American high school students on the Internet for only having read "1984", and have no plans to learn any more.

So anyway, where was I ... oh yeh, I'm a great admirer of George Orwell, and I think that if he were alive today, he would have some pretty trenchant views on the situation in the Middle East, and that, by chance, those views would coincide with my own. Christ, Hitchens makes this look so much more seamless when he does it...

Anyway, I'm a great admirer of George Orwell, and because of this, I really am in despair over the fact that, in more or less exactly the way he described in "Politics and the English Language", the battle of words with regard to the political future of the territory located around 31 30 N, 34 45 E has been so violent that ... well, that more or less the only way to refer to the geographical territory without marking yourself out as favouring one side or the other is by latitude and longitude. But I'm not here to fight that battle, or even to start discussing the massive misuses of language and the plethora of code-words on both sides. I'm here to make one particular suggestion to my own side; non-Israeli, Gentile, left-wing critics of the government of the State of Israel:

Let's just stop using the words "Israeli" and "Zionist" and replace them with "Likudist".

The battle over "it's possible to criticise Israelis without being anti-Semitic" and the battle over "not all Jews are Zionists, you know", has been either lost, or ground out to a bloody standstill, and the territory isn't worth fighting over. "Likudist" has the advantage of a more precise, laser-like focus on Ariel Sharon and his gang, and it isn't easily confused with "all citizens of the State of Israel" and thence on to "The Jews". It might not be strictly accurate in that I don't know which of the policies of the Israelis are specifically identified with Likud, but my guess is that anyone well-informed enough to be able to quibble about that will also be perfectly well aware of the reason why you can't use "Zionist" and "Israeli" in contexts where it would be natural to do so. At least this way it might be possible to gain some respite from what appear to me to be a lot of entirely disingenuous accusations of anti-Semitism, and perhaps to slightly retard the hellward progess of the handbasket carrying the English language.

Anyway, it's just an idea. Give it a try if you think it might make sense. In related news, isn't the Dalai Lama a bastard? He's always going on and on about the bloody Chinese in Tibet. Why does he single them out as being so terrible when there are things just as bad going on in Israel? Bloody Sinophobe.




1What the hell does "redux" mean, anyway? I just picked it up because they use it all the time on "Slate.com" and I thought it looked cool. I don't think I've ever seen it anywhere else.
2 comments this item posted by the management 10/03/2002 05:06:00 AM

Wednesday, October 02, 2002

 
Come as you are, pay as you go

Hello and welcome to "the Brad DeLong comments section defunct debates annex", or as it used to be known, "D-Squared Digest". If you're not a regular of the BDeL site, then the chances are that you're not confused the difference between defined contribution (DC) pension schemes and defined benefit (DB) schemes. But, for contributors to that site, sufferers from head injuries and anyone who has read a Cato pamphlet in the last two weeks (actually thinking about it, that probably constitutes a head injury), here's my best shot at explaining the matter simply.

The problem is simple; you want your employer to keep paying you after you stop working. I'm now going to offer a menu of alternative ways in which this aim can be satisfied:

1) Every month with your pay packet, your employer gives you an "extra" bit of money (perhaps with a different tax treatment to the rest of your wages) which you invest in a portfolio of bonds and equities. The size of the extra bit of money is determined by the amount which an actuary estimates you would need to invest every month to expect a retirement income equal to (say) half your salary on retiring.

This is a 401(k) style scheme

2) The same as 1), but the employer also offers you a deal; they will guarantee that if the investment return on your portfolio turns out to be not quite enough to give you that income on retiring, they will make up the difference. In return for this, they will probably want to take some of the upside if your portfolio does incredibly well. You have considerable legal protection in this matter; they can't lift any assets at all out of the portfolio without your consent, so you'll be in a decent position to negotiate with them when the time comes.

This is not a scheme which resembles anything in actual use, but it has some defined benefit elements.

OK, right now, before we get into anything more realistic, let's note one thing; it is absolutely clear that 2) is less risky than 1). Plan 2) is just plan 1), plus an arrangement with the company which can only decrease the volatilty of investment returns to you. You might think you could do better in terms of expected return under 1), but it cannot be lower risk than 2), because any portfolio you could have under 1), you can have under 2), and the guarantee can't make that portfolio more risky. Also note that you need to think about your risk/reward tradeoff not right now, but at retirement -- as in, if you make a huge killing on dot com stocks in your Plan 1) pension, you're unlikely to live long enough to spend it.

That's why we know that less of the investment risk is borne by employees under a DB plan than a DC

Just to re-emphasise this, the risk that your employer will go bankrupt and not be able to honour the guarantee is not an additional risk under 2), because if this happens,, 2) just collapses into 1). It would be a risk under this plan, not on the menu ...

minus 1) Your employer just goes on paying you after you retire

A "book reserve" pension scheme, popular in some European countries, albeit usually operated on an industry-wide basis rather than company-specific

... but that's not a DB plan. Anyway ....

The problem with 1) and 2) is that you will be restricted in what you can invest in as you get older, because you will want to be taking less risk. Also, your own personal portfolio is unlikely to be large enough to provide optimal diversification, leaving you bearing risks with no corresponding reward (I'm assuming orthodox finance theory here, give me a break). Because of this, your employer will offer you two other menu items:

3) A "pooled" version of 1). Under this scheme, your extra bit of money is pooled with those of all the other employees, and they are managed on a combined basis. If you leave your employer, you get your contributions to the pool, grossed up to reflect the investment performance of the pool.

This is a DC plan

Since the employees are all of different ages, the cashflow profile of the scheme will be the average of the cashflows of the individual plans, so effectively (simplifying somewhat), it can be invested as if it were being invested on behalf of an employee of the average age of the workforce. Hence, a bigger equity allocation than an individual employee would be able to sustain for most of his working life and (probably/hopefully) higher returns. I'm now going to state a proposition that I can prove mathematically, but won't because it's tedious:

For reasonable assumptions and the same level of contribution, 3) is better than 1)

Basically, unless you believe yourself to be a super ace stock picker (or at least, much better than the pool managers), you face a better risk/return tradeoff under 3). This is basically because big risk pools are better than small ones.

But wait, there's another option ...

4) A pooled version of 2), with the contributions pooled and managed in the manner of 3). You get a guarantee of some minimum level of pension, plus, if investment returns do better than the actuary expected, the windfall is shared between the company and you. The pooled fund is overseen by "trustees" who carry out the negotiations with the company on behalf of pool members, and from time to time, you can expect "pay rises" if you're retired, or improvements in the guaranteed level if you haven't, arising from this negotiation process. If you leave the company before retirement, you receive the actuary's assessment of your "fair share" of the assets of the pool, usually calculated on the basis of assumptions about the return on the pool's investment and the split of that return between you and the company.

This, in all its glory, is a typical DB plan

Again it can be clearly seen that if you stay with the company all your life, 4) is strictly less risky than 3), for the same reason that 2) was less risky than 1). If you assume that the two pooled options follow the same investment policy, then it ought to be the case that 4) is strictly to be preferred to 3) in that it offers a better risk/reward tradeoff, so long as the trustees are doing their job in looking after the pool members. Most of the DB scheme horror stories, like the Halliburton one doing the rounds at the moment, are of this man-bites-dog variety, where the trustees of the scheme have cut a bad deal for pensioners.

Things get a bit more tricky and opaque if you don't stay with the company until retirement. In principle, actuarially fair rules for calculating your asset share under 4) could be developed. However, in actual fact, you are exposed to the problem that a) the trustees and actuary are there to look after the pension fund members, not departing members (lawyers: don't quote me on this), and b) the actuary is always going to use an "expected rate of return" on the fund's investments in calculating your share which errs on the side of caution, because his primary duty is to ensure the soundness of the fund. I personally have moved between a number of DB schemes in my life, and have probably caught the thin end of this economic reality as a result.

So the real question about DB versus DC from workers' point of view is; are workers really so mobile these days that the commmonality of interest presumed by the pooled DB scheme is no longer an appropriate assumption? I've yet to see a serious study which concludes that this is anywhere near being the case in general.

So there you have it. Now, back to the trauma ward ...
0 comments this item posted by the management 10/02/2002 09:16:00 AM


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