The most general and the most pervasive way I make sense of the world is through economics. Concepts inspired by the great economic thinkers and philosophers applied to business and life. Here are their stories and my stories......
See also my blog Eye2theLongRun

The last two years have been filled with talk of "stimulus spending" as a means for climbing out of recession - as most people's instincts suggest to them, putting out the fire with gasoline is typically not a good idea. The following is a good summary of the flaws in the argument so beloved of the followers of its originator Keynes.

By Mark W. Hendrickson


Most Americans don't believe that the way for Washington to address its gargantuan debt is to increase deficit spending and go deeper into debt.

Nobel laureates Joseph Stiglitz and Paul Krugman disagree. Stiglitz, for example, in an interview televised on Feb. 17, denigrated "deficit fetishism" and assured listeners that more "stimulus" spending now would augment American prosperity, both short-term and long-term.

There are several major defects in Professor Stiglitz' analysis.

» Read More

Basically, It's Over: A parable about how one nation came to financial ruin.

By Charles Munger (in Slate Magazine)

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation.

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Almost all of this analysis applies in one form or another to N.Z. - a bit of care is required in applying the second half of the article to the local economy however.

Bernanke and the Beast

By N. GREGORY MANKIW
Published: January 16, 2010
IS galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple.

Let’s start with first principles.

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The following is an extract from a blog run by Michelle MacPhearson - super entrepreneur in the social media marketing area. This entry concerns outsourcing and describes how one service works. It's a great commentary on how things are changing.... (this posting does not represent an endorsement or otherwise - have not used the service yet).

"Odesk

Odesk is a marketplace where people from all over the world list their skills and resumes and folks like you can hire them. You’ll can negotiate pay, search contractors, list jobs you have available, etc. Good for both short term and long term work.

What I really like about Odesk is that they ask all contractors to install a little piece of software on their coputers that takes screenshots of what they’re doing at random intervals. You then get access to those screenshots. You can quickly see if they’re actually working on your project, and you can see that they’re doing it correctly. I’ve found Odesk workers to be pleasant and motivated, and I think the screenshots that are taken keep them on task. Odesk folks have consistently performed tasks very quickly. It’s the first place I stop when I need a new contractor, and I think you’ll enjoy the service as much as I do."

This from the great Steve Landsburg... note especially the reason Pigou and others missed the critical point Coase makes.... it was because they were obsessed with fault, blame and revenge!!! The N.Z. screams of "polluter should pay" in recent times make precisely this mistake - a far too naive view of just who is imposing costs on whom.

December 29, 2009

Ronald Coase In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

» Read More

In their paper examining "movements" analogous to the current climate change movement, the authors show the common traits of 26 other like movements. They also identify key areas where the process and advocacy of such movements depart from rationality and science. A final para identifies individuals who have move from one movement to another - as each has been shown to involve false claims and more juicy pol8itical targets have beckonned.

Here is the abstract.

We summarize evidence showing that the global warming alarm movement has more of the character of a political movement than that of a scientific controversy. We then make forecasts of the effects and outcomes of this movement using a structured analysis of analogous situations—a method that has been shown to produce accurate forecasts for conflict situations. This paper summarizes the current status of this “structured analogies project.”

We searched the literature and asked diverse experts to identify phenomena that could be characterized as alarms warning of future disasters that were endorsed by scientists, politicians, and the media, and that were accompanied by calls for strong action. The search yielded 71 possible analogies. We examined objective accounts to screen the possible analogies and found
that 26 met all criteria. We coded each for forecasting procedures used, the accuracy of the forecasts, the types of actions called for, and the effects of actions implemented.

Our preliminary findings are that analogous alarms were presented as “scientific,” but none were based on scientific forecasting procedures. Every alarming forecast proved to be false; the predicted adverse effects either did not occur or were minor. Costly government policies remained in place long after the predicted disasters failed to materialize. The government policies failed to prevent ill effects.

The findings appear to be insensitive to which analogies are included. The structured analogies approach suggests that the current global warming alarm is simply the latest example of a common social phenomenon: an alarm based on unscientific forecasts of a calamity. We
conclude that the global warming alarm will fade, but not before much additional harm is done by governments and individuals making inferior decisions on the basis of unscientific forecasts.

While the implications of goings on at the University of East Anglia have implications for the debates about climate change, what they say about what may be happening to science more generally are even more disturbing.

From WSJ (Dec 4)....

"Surely there must have been serious men and women in the hard sciences who at some point worried that their colleagues in the global warming movement were putting at risk the credibility of everyone in science. The nature of that risk has been twofold: First, that the claims of the climate scientists might buckle beneath the weight of their breathtaking complexity. Second, that the crudeness of modern politics, once in motion, would trample the traditions and culture of science to achieve its own policy goals. With the scandal at the East Anglia Climate Research Unit, both have happened at once.

I don't think most scientists appreciate what has hit them. This isn't only about the credibility of global warming. For years, global warming and its advocates have been the public face of hard science. Most people could not name three other subjects they would associate with the work of serious scientists. This was it. The public was told repeatedly that something called "the scientific community" had affirmed the science beneath this inquiry.
Global warming enlisted the collective reputation of science. Because "science" said so, all the world was about to undertake a vast reordering of human behavior at almost unimaginable financial cost. Not every day does the work of scientists lead to galactic events simply called Kyoto or Copenhagen. At least not since the Manhattan Project.

What is happening at East Anglia is an epochal event. As the hard sciences—physics, biology, chemistry, electrical engineering—came to dominate intellectual life in the last century, some academics in the humanities devised the theory of postmodernism, which liberated them from their colleagues in the sciences. Postmodernism, a self-consciously "unprovable" theory, replaced formal structures with subjectivity. With the revelations of East Anglia, this slippery and variable intellectual world has crossed into the hard sciences.

This has harsh implications for the credibility of science generally. Hard science, alongside medicine, was one of the few things left accorded automatic stature and respect by most untrained lay persons. But the average person reading accounts of the East Anglia emails will conclude that hard science has become just another faction, as politicized and "messy" as, say, gender studies.

The East Anglians' mistreatment of scientists who challenged global warming's claims—plotting to shut them up and shut down their ability to publish—evokes the attempt to silence Galileo. The exchanges between Penn State's Michael Mann and East Anglia CRU director Phil Jones sound like Father Firenzuola, the Commissary-General of the Inquisition.

For three centuries Galileo has symbolized dissent in science. In our time, most scientists outside this circle have kept silent as their climatologist fellows, helped by the cardinals of the press, mocked and ostracized scientists who questioned this grand theory of global doom.

Beneath this dispute is a relatively new, very postmodern environmental idea known as "the precautionary principle." As defined by one official version: "When an activity raises threats of harm to the environment or human health, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically." The global-warming establishment says we know "enough" to impose new rules on the world's use of carbon fuels. The dissenters say this demotes science's traditional standards of evidence.

The U.S. Environmental Protection Agency's dramatic Endangerment Finding in April that greenhouse gas emissions qualify as an air pollutant—with implications for a vast new regulatory regime—used what the agency called a precautionary approach. The EPA admitted "varying degrees of uncertainty across many of these scientific issues." Again, this puts hard science in the new position of saying, close enough is good enough. One hopes civil engineers never build bridges under this theory.

If the new ethos is that "close-enough" science is now sufficient to achieve political goals, serious scientists should be under no illusion that politicians will press-gang them into service for future agendas. Everyone working in science, no matter their politics, has an stake in cleaning up the mess revealed by the East Anglia emails. Science is on the credibility bubble. If it pops, centuries of what we understand to be the role of science go with it.

Write to henninger@wsj.com

From Larry Hite......

“We don’t really trade silver…we don’t trade the S&P…we trade the differences. We really are risk managers. We take on risks, try to exploit them and we leave when they turn against us. That is what we get paid for. Basically we are in the risk transfer business. We take on what people want to sell, sell what people want to buy and hope to make a profit. The reason why one goes to a portfolio is because there are real limits to perfect knowledge. I’ll give you an example. Say you knew which commodity, stock or currency would appreciate the most in the following year, and you knew exactly what its price would be. We did this experiment looking backwards in fact in our database. The question of when you take a position is how are you going to trade the line…how much of a position are you going to leverage. Now, if you have perfect knowledge, would you leverage 5 to 1, would you leverage 10 to 1, 2 to 1? Well it turns out that if you leverage more than 3 to 1 that you are a loser. Because we found that if you did 3 to 1 you would have, even with perfect knowledge, you could go down a third. So that, the only perfect knowledge you could have, would be if you knew every wiggle on the line. Then you would know exactly how much to leverage. But you don’t.”

The following is Greg Mankiw's posting of the summary of this paper from Harvard. The significance of the conclusions - while perhaps suspected and in some ways obvious - are difficult to over state.

"We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions."