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Mark Blyth, a delightfully sweary Scottish economist, talks for about an hour to Googlers about the stupidity of austerity as a means of recovering from recession, describing it in colorful, easy-to-grasp language. This is brilliant, accessible and important economics:
Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we recognize austerity for what it is, and what it costs us.
Here's a press-release describing a paywalled paper in Science magazine, written by a pair of University of Bonn Economists. They conducted an experiment that showed how markets diffused responsibility for actions that ended up violating individual moral codes, so that people did things in market contexts that they had previously described as immoral when done individually.
"To study immoral outcomes, we studied whether people are willing to harm a third party in exchange to receiving money. Harming others in an intentional and unjustified way is typically considered unethical," says Prof. Falk. The animals involved in the study were so-called "surplus mice", raised in laboratories outside Germany. These mice are no longer needed for research purposes. Without the experiment, they would have all been killed. As a consequence of the study many hundreds of young mice that would otherwise all have died were saved. If a subject decided to save a mouse, the experimenters bought the animal. The saved mice are perfectly healthy and live under best possible lab conditions and medical care.
A subgroup of subjects decided between life and money in a non-market decision context (individual condition). This condition allows for eliciting moral standards held by individuals. The condition was compared to two market conditions in which either only one buyer and one seller (bilateral market) or a larger number of buyers and sellers (multilateral market) could trade with each other. If a market offer was accepted a trade was completed, resulting in the death of a mouse. Compared to the individual condition, a significantly higher number of subjects were willing to accept the killing of a mouse in both market conditions. This is the main result of the study. Thus markets result in an erosion of moral values. "In markets, people face several mechanisms that may lower their feelings of guilt and responsibility," explains Nora Szech. In market situations, people focus on competition and profits rather than on moral concerns. Guilt can be shared with other traders. In addition, people see that others violate moral norms as well.
"If I don't buy or sell, someone else will."
Here's a 2-minute preview of "The Spirit Level," a documentary based on the the bestselling book about the way that income equality is better for society, and how 30 years of economic policy has made everything much, much worse. The doc is funded by a successful Kickstarter, but they're still looking for pre-orders.
Three men have been convicted of forging £1 coins. The London Police Detective Inspector even got all quippy about the sentencing ("These three men are organised criminals who were intent on undermining the UK monetary system. There is nothing fake about the reality they must now face of life behind bars." -- yes, yes, very clever DI South) but what fascinates me about the story is that it can somehow be profitable to forge £1 coins.
I got passed a fake pound shortly after I first moved to the UK, almost ten years go; it was a foil-wrapped plastic slug. Not realizing it was fake, I tried to buy something with it at a corner shop and the cashier pressed it edge-on on his counter and the foil split open, revealing the green plastic disc inside.
From the sound of this article, these fakes were solid metal, which, I think, would make them more expensive than the fake I got. When you add the costs of the materials, the wages for the manufacturing process, warehousing, the discount for counterfeit cash, etc, it's hard to believe that this was worth anyone's while.
On the other hand, it's probably easier to go on counterfeiting when you're passing very small denominations as most people (me included) won't bother going to the cops over a mere pound; and it's much harder to remember where a given pound coin came from than a £20 note.
The court heard Fisher, of Rags Lane in Goffs Oak, Hertfordshire, Sullivan, of Bancroft Chase in Hornchurch, east London, and Abbott were arrested during an undercover police operation in Essex last May.
Police found a storage container with 1.6 million metal discs inside and fake coins equivalent to £20,000.
Fake coins equivalent to a further £30,000 were found in a nearby car.
Here's a totally amazing and fascinating story about hyperinflation crashing the economy of Blizzard's massively multiplayer online RPG Diablo 3. Blizzard blew its economic strategy for Diablo 3 by making the "sinks" (places where gold is taken out of the economy) unattractive, adding in real-money-for-stuff trades, and then letting a bug run wild. Before you knew it, players were loading up virtual wheelbarrows full of virtual gold to buy virtual bread:
This was demonstrated when, in a message board entry prefaced by stating “Sell Equipment before Patch 1.0.5 Hits!” (a patch is a piece of software added to an operational program or application as bugs are found, changes desired, or ways of improving performance discovered), a player warned that,
Blizzard just announced that the drop rates for [certain] items are going to be doubled … if you haven’t already, you should consider converting your current gear to cash … since real $ [are] the best hedge against gold devaluation[.]
If historical cases of hyperinflation — real, and now virtual — have one thing in common, it is the instinct among its victims to blame the symptoms rather than the disease. The Austrian economist Hans Sennholz noted that during the German hyperinflation, “intrigue and artifice” were believed to be at work. Similarly, a handful of Diablo 3 players, frustrated about the decimation of their purchasing power, expressed increasing suspicion of manipulation and conspiracy theories.
[W]hy [are] certain items priced [s]o astronomically high? Many of them are not even that good yet cost 100’s of millions of gold. … I have about 45,000,000 gold saved up [and] check every few days to see if I can get any upgrades that are worth the gold, but … everything is vastly overpriced … clearly controlled by the gold sellers.
In case you missed it, I wrote a book about this.
A Virtual Weimar: Hyperinflation in a Video Game World (Thanks, Tom Keller!)
Bruce Sterling's speech from NEXT Berlin is a blast of cold air on the themes of startup life, disruption, and global collapse. Bruce excoriates the startup world for its complicity with the conspiracy of the global investor class to vastly increase the wealth of a tiny minority, and describes the role that "design fiction" has in changing this.
A new paper called Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff by Thomas Herndon, Michael Ash, and Robert Pollin from UMass Amherst tries and fails to replicate the classic work on austerity, Carmen Reinhart and Kenneth Rogoff's 2010 Growth in a Time of Debt.
Reinhart-Rogoff is the main research cited in favor of cutting public services and spending in bad economic times. It's a big part of why the local library is shutting down, why they're kicking people out of public housing, shutting down arts programs, slashing education and public transit, and laying off public employees. It purports to show that countries with high debt-to-GDP ratios of 90 percent or more are a "threat to sustainable economic growth."
In the new Amherst paper, the authors reexamine Reinhart-Rogoff's original data and conclude that the numbers don't add up. They show that Reinhart-Rogoff cherry-picked which years of high-debt GDP they measure, that they put their thumbs on the scales with "unconventional weighting" and made a "coding error" that "entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark." This last error -- literally the wrong formula in a spreadsheet cell -- badly skews the outcome.
Here's the tl;dr: "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]."
Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn't disclose which years they excluded or why.
Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.
Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that the U.K. is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.
In case that didn't make sense, let's look at an example. The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.
Now maybe you don't want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don't discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems. [Mike Konczal/Next New Deal]
Tim Wu sez, "I wrote something quick in the New Yorker about America's big blind spot when it comes to big business -- if its not a monopoly, its no problem, so highly concentrated industries can get away with whatever they want."
This blind spot is of particular significance during an age when oligopolies, not monopolies, rule. Consider Barry Lynn’s 2011 book, “Cornered,” which carefully detailed the rising concentration and consolidation of nearly every American industry since the nineteen-eighties. He found that dominance by two or three firms “is not the exception in the United States, but increasingly the rule.” Consumers, easily misled by product labelling, often don’t even notice that products like sunglasses, pet food, or numerous others come from just a few giants. For example, while drugstores seem to offer unlimited choices in toothpaste, just two firms, Procter & Gamble and Colgate-Palmolive, control more than eighty per cent of the market (including seemingly independent brands like Tom’s of Maine).
The press confuses oligopoly and monopoly with some regularity. The Atlantic ran a recent infographic titled “The Return of the Monopoly,” describing rising concentration in airlines, grocery sales, music, and other industries. With the exception of Intel in computer chips, none of the industries described, however, was actually a monopoly—all were oligopolies. So while The Atlantic is right about what’s happening, it sounds the wrong alarm. We know how to fight monopolies, but few seem riled at “The Return of the Oligopoly.”
Things were not always thus. Back in the mid-century, the Justice Department went after oligopolistic cartels in the tobacco industry and Hollywood with the same vigor it chased Standard Oil, the quintessential monopoly trust. In the late nineteen-seventies, another high point of enforcement, oligopolies were investigated by the Federal Trade Commission, and during that era Richard Posner, then a professor at Stanford Law School, went as far as to argue that when firms maintain the same prices, even without a smoke-filled-room agreement, they ought to be considered members of a price-fixing conspiracy. (By this logic, the Delta and US Airways shuttles between New York and Washington, D.C., would probably be price-fixers, since their prices do vary by how far in advance you buy, but are always identical.)
Here's a quote on "Elite Panic" from Rebecca Solnit, It's an idea I'm fascinated by, particularly the notion that if you believe that people are fundamentally a mob waiting to rise up and loot but for the security state, you will build a security state that turns people into a mob of would-be looters.
The term "elite panic" was coined by Caron Chess and Lee Clarke of Rutgers. From the beginning of the field in the 1950s to the present, the major sociologists of disaster -- Charles Fritz, Enrico Quarantelli, Kathleen Tierney, and Lee Clarke -- proceeding in the most cautious, methodical, and clearly attempting-to-be-politically-neutral way of social scientists, arrived via their research at this enormous confidence in human nature and deep critique of institutional authority. It’s quite remarkable.
Elites tend to believe in a venal, selfish, and essentially monstrous version of human nature, which I sometimes think is their own human nature. I mean, people don't become incredibly wealthy and powerful by being angelic, necessarily. They believe that only their power keeps the rest of us in line and that when it somehow shrinks away, our seething violence will rise to the surface -- that was very clear in Katrina. Timothy Garton Ash and Maureen Dowd and all these other people immediately jumped on the bandwagon and started writing commentaries based on the assumption that the rumors of mass violence during Katrina were true. A lot of people have never understood that the rumors were dispelled and that those things didn't actually happen; it's tragic.
But there's also an elite fear -- going back to the 19th century -- that there will be urban insurrection. It's a valid fear. I see these moments of crisis as moments of popular power and positive social change. The major example in my book is Mexico City, where the '85 earthquake prompted public disaffection with the one-party system and, therefore, the rebirth of civil society.
I've just ordered her book A Paradise Built in Hell: The Extraordinary Communities That Arise in Disaster. This is basically what I was talking about here, when I described the idea I hoped to capture in the prequel to Down and Out in the Magic Kingdom.
A post on ConversionXL sums up a bunch of experiments on pricing and suggests ways of combining them to best effect. All electronic goods can be had for free, so every person who buys an electronic good is essentially entering into a voluntary transaction. Getting pricing right is the best way to convince (rather than coerce) customers to pay, and to frame that payment so that it's as large as possible.
Researches found that sale price markers (with the old price mentioned) were more powerful than mere prices ending with the number nine. In the following split test, the left one won:
9 not so magical after all? Not so fast!
Then they they split tested the winner above with a similar tag, but which had $39 instead of $40:
This had the strongest effect of all.
I’m wondering whether the effect of this price tag could be increased by reducing the font size of $39. Say what?
Marketing professors at Clark University and The University of Connecticut found that consumers perceive sale prices to be a better value when the price is written in a small font rather than a large, bold typeface. In our minds, physical magnitude is related to numerical magnitude.
Such peer-to-peer rental schemes provide handy extra income for owners and can be less costly and more convenient for borrowers. Occasional renting is cheaper than buying something outright or renting from a traditional provider such as a hotel or car-rental firm. The internet makes it cheaper and easier than ever to aggregate supply and demand. Smartphones with maps and satellite positioning can find a nearby room to rent or car to borrow. Online social networks and recommendation systems help establish trust; internet payment systems can handle the billing. All this lets millions of total strangers rent things to each other. The result is known variously as “collaborative consumption”, the “asset-light lifestyle”, the “collaborative economy”, “peer economy”, “access economy” or “sharing economy”.
The flies in the ointment: insurance, liability, and laws that favor incumbent industries.
A great post on Metafilter turned me on to "Twenty Four Standard Causes of Human Misjudgement," a classic 1995 speech by Charlie Munger (much cited, and transcribed here in PDF), in which Munger (a respected investor and partner to Warren Buffet) lays out, in plain language, the cognitive biases and blind-spots that he views as the root of much human misery.
Munger's thinking is greatly influenced by Robert Cialdini's classic popular psychology text Influence, a title that Munger credits with laying out many of the blind spots of both economics and psychology. Munger's thinking is collected in another book: Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger.
I converted the talk to MP3 and listened to it twice today. I think I'll return to it again -- this feels like one of those mind-dumps that contains so much to pore over that it might be a work of years.
Yesterday, I wrote about some Johns Hopkins students who overcame a game theory problem and got an A for the whole class. I called it a non-iterated Prisoner's Dilemma, but as Tim Harford points out, it's more of a Stag Hunt, a game theory category that I hadn't been aware of, and which has fascinating implications for lots of domains, including Internet peering:
In the stag hunt, two hunters must each decide whether to hunt the stag together or hunt rabbits alone. Half a stag is better than a brace of rabbits, but the stag will only be brought down with a combined effort. Rabbits, on the other hand, can be hunted by an individual without any trouble.
There are two rational outcomes to the stag hunt: either both hunters hunt the stag as a team, or each hunts rabbits by himself. Each would prefer to co-operate in hunting the stag, but if the other player’s motives or actions are uncertain, the rabbit hunt is a risk-free alternative.
(Image: [ C ] Lucas Cranach - Stag Hunt of the Elector John Frederick, a Creative Commons Attribution (2.0) image from centralasian's photostream)