Chimps beat humans at game theory

In Chimpanzee choice rates in competitive games match equilibrium game theory predictions, a paper in Nature by Colin Camerer and colleagues, researchers document the astounding performance of chimpanzees in classic game-theory experiments -- a performance that's substantially superior to humans who play the same games:

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Piketty's inherited-wealth dystopia: private capital millionaires multiply

Thomas Piketty's much-discussed economics bestseller Capital in the Twenty First Century prophesies a future where inherited wealth dominates the world, because the rate of return on capital outstrips the rate of growth in the economy, meaning the money your ancestors earned will always outstrip what you could earn. A new Boston Consulting Group report confirms Piketty's hypothesis, concluding that the share of wealth due to capital increased by 14% last year

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London property bubble entombs a thousand digger-machines

London's property bubble has got people energetically expanding their property, digging out sub-basements -- and the insane bubblenomics of London housebuilding are such that it's cheaper to just bury the digger and abandon it than to retrieve it. London's accumulating a substrate of entombed earthmoving machinery.

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Picketty vs politics: where does the rate of profit come from?

Suresh Naidu analyzes Thomas Piketty's groundbreaking economics book Capital in the 21st Century (previously), disagreeing with one of Piketty's core assumptions: that the rate of profit is a given, not the product of things like trade union law, global treaties, and other political decisions. This is wonkier than last night's post about Piketty, but a lot more interesting, in my view.

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Piketty's methods: parsing wealth inequality data and its critique

I've been writing about Thomas Piketty's magisterial economics bestseller Capital in the Twenty First Century for some time now (previously), and have been taking a close interest in criticisms of his work, especially the Financial Times's critique of his methods and his long, detailed response. I freely admit that I lack the stats and economics background to make sense of this highly technical part of the debate, but I think that Wonkblog's analysis looks sound, as does the More or Less play-by-play (MP3).

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Privacy vs network effects

Respected cryptographer and security researcher Ross Anderson has a fascinating new paper, Privacy versus government surveillance: where network effects meet public choice [PDF], which explores the "privacy economics" of mass surveillance, pointing out the largely overlooked impact of "network effects" on the reality of who spies, who is spied upon, and under what circumstances.

My first big point is that all the three factors which lead to monopoly – network effects, low marginal costs and technical lock-in – are present and growing in the national-intelligence nexus itself. The Snowden papers show that neutrals like Sweden and India are heavily involved in information sharing with the NSA, even though they have tried for years to pretend otherwise. A non-aligned country such as India used to be happy to buy warplanes from Russia; nowadays it still does, but it shares intelligence with the NSA rather then the FSB. If you have a choice of joining a big spy network like America's or a small one like Russia's then it's like choosing whether to write software for the PC or the Mac back in the 1990s. It may be partly an ideological choice, but the economics can often be stronger than the ideology.

Second, modern warfare, like the software industry, has seen the bulk of its costs turn from variable costs into fixed costs. In medieval times, warfare was almost entirely a matter of manpower, and society was organised appropriately; as well as rent or produce, tenants owed their feudal lord forty days’ service in peacetime, and sixty days during a war. Barons held their land from the king in return for an oath of fealty, and a duty to provide a certain size of force on demand; priests and scholars paid a tax in lieu of service, so that a mercenary could be hired in their place. But advancing technology brought steady industrialisation. When the UK and the USA attacked Germany in 1944, we did not send millions of men to Europe, as in the first world war, but a combat force of a couple of hundred thousand troops – though with thousands of tanks and backed by larger numbers of men in support roles in tens of thousands of aircraft and ships. Nowadays the transition from labour to capital has gone still further: to kill a foreign leader, we could get a drone fire a missile that costs $30,000. But that's backed by colossal investment – the firms whose data are tapped by PRISM have a combined market capitalisation of over $1 trillion.

Third is the technical lock-in, which operates at a number of levels. First, there are lock-in effects in the underlying industries, where (for example) Cisco dominates the router market: those countries that have tried to build US-free information infrastructures (China) or even just government information infrastructures (Russia, Germany) find it’s expensive. China went to the trouble of sponsoring an indigenous vendor, Huawei, but it’s unclear how much separation that buys them because of the common code shared by router vendors: a vulnerability discovered in one firm’s products may affect another. Thus the UK government lets BT buy Huawei routers for all but its network’s most sensitive parts (the backbone and the lawful-intercept functions). Second, technical lock-in affects the equipment used by the intelligence agencies themselves, and is in fact promoted by the agencies via ETSI standards for functions such as lawful intercept.

Just as these three factors led to the IBM network dominating the mainframe age, the Intel/Microsoft network dominating the PC age, and Facebook dominating the social networking scene, so they push strongly towards global surveillance becoming a single connected ecosystem.

Privacy versus government surveillance: where network effects meet public choice (via Schneier)

(Image: Friendwheel, Steve Jurvetson, CC-BY)

London property bubble examined

Tim Harford, my favourite skeptical and eminently readable economist, asks the question: Is London experiencing a housing bubble? He is hesitant to be definitive on this, but makes a very good case for the idea that London housing prices are inflated and heading for a crash.

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Economics of apologies

Ben Ho is a behavioral economist who studies apologies. He presents an economic theory of apologies that predicts when apologies will change the outcome of disputes, and proposes policies to increase the frequency and sincerity of apologies. The best evidence for economics-driven apology policies are the laws that make doctors' apologies inadmissible in court; Ho cites research that claims that this leads to more physicians' apologies, which reduces patient grief and anger, and cuts down on malpractice suits.

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The business/markets case for limits to copyright

You'll remember Derek Khanna as the Republican House staffer who got fired for writing a paper that used careful objective research to argue for scaling back copyright. Now, Khanna is a volunteer fellow at R Street, where he's expanded on his early work with a paper called Guarding Against Abuse: Restoring Constitutional Copyright [PDF], which tackles the question of copyright terms from a market-economics approach, citing everyone from Hayek to Posner to the American Conservative Union.

There are lots of critiques of copyright term and scope from the left, but this is not a left-right issue. Khanna is a rigorous thinker, a clear writer, and someone who shows that whether you're coming at the question from a business/markets perspective or one of free speech and social benefit, limits on copyright make objective sense.

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Piketty, Capital, and the World Wars: does government policy make a difference in wealth concentration?

I'm halfway through Thomas Piketty's magisterial Capital in the Twenty First Century, a vital, incredibly influential, brilliantly researched history of wealth concentration stretching back through several centuries and spanning the globe. Even Piketty's critics can't fault his methodologies, though there are critiques of his conclusions -- which propose that unregulated capitalism will produce a hereditary class of the super-rich -- on both the right and the left.

Here's a sharp critique from the left, published in American Prospect by Robert Kuttner. Kuttner takes issue with Piketty's conclusion that government intervention between WWI and WWII and after WWII had no real effect on the distribution of wealth; according to Kuttner, the shocks to hereditary wealth from WWI created a series of policies intended to restore old money fortunes, triggering a global depression. By contrast, the post-WWII period saw a series of pro-labor interventions driven by a strong trade union movement, and an ensuing flattening out of wealth distribution and a degree of unprecedented social mobility.

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Having leisure time is now a marker for poverty, not riches

In Post-Industrious Society: Why Work Time will not Disappear for our Grandchildren, researchers from Oxford's Centre for Time Use Research argue that there has been a radical shift in the relationship between leisure, work and income. Where once leisure time was a mark of affluence, now it is a marker for poverty. The richer you are, the more likely you are to work long hours; while the poorer you are, the fewer hours you are likely to work every week.

The researchers theorise multiple causes for this. Poor people are more likely to be underemployed and unable to get the work-hours they want (and need) to support themselves. Rich people are likely to work in jobs that disproportionately advance and reward workers who put in overtime, so a 10% increase in hours worked generates more than 10% in expected career-gains.

They also claim that rich workers are more likely to be satisfied with their jobs, but I'm skeptical of this -- I think that relative to unskilled workers doing at-will 0-hours temp work whose every move is constrained and scripted by their employers, this is probably true, but I don't think that the white-collar world is producing a lot of people who think that their work is meaningful and rewarding.

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Private equity, an infection that is eating the world

In an amazing and terrifying essay called How to get beyond the parasite economy, Eric Garland describes how private equity infects industry after industry, sucking all productive capacity out of it through complex and fraudulent financial engineering, and abandoning the drained husk as it moves onto its next meal. Garland uses the case of Guitar Center as his example of this process in action, describing how Bain Capital bought and gutted Guitar Center, turning it into a financially complex, debt-riddled zombie that exists to float high-risk junk bonds to fill out the portfolios of the hyper-rich, without any connection to the real world of guitars, amplifiers and musicians.

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Big Data has big problems

Writing in the Financial Times, Tim Harford (The Undercover Economist Strikes Back, Adapt, etc) offers a nuanced, but ultimately damning critique of Big Data and its promises. Harford's point is that Big Data's premise is that sampling bias can be overcome by simply sampling everything, but the actual data-sets that make up Big Data are anything but comprehensive, and are even more prone to the statistical errors that haunt regular analytic science.

What's more, much of Big Data is "theory free" -- the correlation is observable and repeatable, so it is assumed to be real, even if you don't know why it exists -- but theory-free conclusions are brittle: "If you have no idea what is behind a correlation, you have no idea what might cause that correlation to break down." Harford builds on recent critiques of Google Flu (the poster child for Big Data) and goes further. This is your must-read for today.

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Podcast: Collective Action - the Magnificent Seven anti-troll business-model

Here's a reading (MP3) of a my November, 2013 Locus column, Collective Action, in which I propose an Internet-enabled "Magnificent Seven" business model for foiling corruption, especially copyright- and patent-trolling. In this model, victims of extortionists find each other on the Internet and pledge to divert a year's worth of "license fees" to a collective defense fund that will be used to invalidate a patent or prove that a controversial copyright has lapsed. The name comes from the classic film The Magnificent Seven (based, in turn, on Akira Kurosawa's Seven Samurai) in which villagers decide one year to take the money they'd normally give to the bandits, and turn it over to mercenaries who kill the bandits.

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Worker co-ops: business without bosses

Worker-owned co-ops are a mainstay of crappy economies, and are thriving around the world. Worker-owned co-ops have better productivity than regular businesses, pay higher wages, and offer better benefits packages. As Shaila Dewan points out in the NYT, they're also easier to accomplish than hikes in the minimum wage or fairer tax-codes. On the other hand, this may be an argument against them, since they may diffuse energy that could make a bigger impact on ordinary workers' lives if it were devoted to systemic fixes.

Still, the worker-owned co-op movement is doing very well, and some co-ops are even using their profits to kickstart other co-ops around the world -- helping fund the worker buyout of a profitable Chicago window-factory that was suddenly closed by its investors because it wasn't profitable enough. The workers took in money from the Latinamerican Working World fund, bought the factory's equipment, and moved it themselves into a new facility. Now they're their own bosses, running a worker-owned window company called New Era Windows.

It's unimaginable heresy in today's world to suggest that doing things is as important as owning things, and that this entitles the people who do stuff to a say in the disposition of the businesses they make possible. But there was a time, not so long ago, when this was a mainstream idea.

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