California still does not have a budget. The Republicans have taken a vow not to raise taxes. To pass a budget will require a few Republican votes, but whoever wavers will be severely punished by the Republicans. The Republicans are holding out to get existing rules trashed, put on permanent spending caps, and cut spending. Governor Arnold has a "compromise," which is bad, but the Republicans strongly reject it, holding out for a complete capitulation. Arnold also proposes to put almost all state workers on minimum wage. This brilliant idea is put on hold by a court challenge.
Schumpeter is of interest here:
Schumpeter, Joseph A. 1954. "The Economic Crisis of the Tax State." International Economic Papers, 4; reprinted in Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism, ed. Richard Swedberg (Princeton: Princeton University Press): pp. 99-140.
101: "The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- all this and more is written in its fiscal history. ... The public finances are one of the best starting points for an investigation of society."
Sunday, August 31, 2008
Theological Question
Didn't Pat Robertson explain that Hurricane was God's punishment for abortion and/or homosexuality? Would Gustav similarly be a reprimand for the sins of the Republicans?
Saturday, August 30, 2008
Stock Buybacks Again
I have written a couple times about the irrationality of stock buybacks from the standpoint of corporations using their money to manipulate stocks in expectation of higher bonuses. Today's Wall Street Journal offers another take on the subject. Besides providing a sense of the magnitude of stock buybacks, the article concentrates on the personal irrationality of corporate management, rather than the systemic irrationality of the capitalist system. In particular, the article suggests that corporations often squander money by purchasing stocks that turn out to be overpriced.
The article also offers examples of corporations purchasing unrelated corporations to make a quick buck, rather than developing their own productive capacities. My favorite example here was Exxon's entry into the typewriter business, suggesting that the management may be so inept that stock buybacks might not be so bad.
Zweig, Jason. 2008. "With Buybacks, Look Before You Leap: Repurchases Routinely Give Shares a Lift, But the Effect Could Be Ephemeral." Wall Street Journal (30 August): p. B 1
http://online.wsj.com/article/SB122005273251785043.html?mod=todays_us_money_and_investing
"Stocks regularly jump up 3% to 6% on the announcement of a buyback."
"Benjamin Graham pointed out a paradox: The better a company's executives are at managing its businesses, the worse they are likely to be at managing its cash."
"Three decades ago, with oil skyrocketing and profits gushing in, energy companies squandered billions of dollars on one bone-headed diversification after another. Mobil bought Montgomery Ward, the dying retailer. Arco acquired Anaconda Copper just before metal prices collapsed. Exxon even got the bright idea of manufacturing typewriters."
"So far in 2008, ConocoPhillips has spent $5 billion buying back stock; Chevron, $3.6 billion. From the end of 2004 through this June 30, says analyst Howard Silverblatt of Standard & Poor's, Exxon Mobil has soaked up an astounding $102.2 billion worth of its own shares."
"All told, the companies in the Standard & Poor's 500-stock index have bought back shares valued at more than a half-trillion dollars' worth of their shares in the past year."
"Every three months, Duke University economist John Graham surveys hundreds of chief financial officers. During the week of March 13, 2000, the absolute peak of the market bubble, 82% of finance chiefs said their shares were cheap, with only 3.4% saying their stock was "overvalued." More recently, buybacks hit their all-time quarterly high of $171.9 billion in September 2007, just before the Dow crested at 14000."
"Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share."
The article also offers examples of corporations purchasing unrelated corporations to make a quick buck, rather than developing their own productive capacities. My favorite example here was Exxon's entry into the typewriter business, suggesting that the management may be so inept that stock buybacks might not be so bad.
Zweig, Jason. 2008. "With Buybacks, Look Before You Leap: Repurchases Routinely Give Shares a Lift, But the Effect Could Be Ephemeral." Wall Street Journal (30 August): p. B 1
http://online.wsj.com/article/SB122005273251785043.html?mod=todays_us_money_and_investing
"Stocks regularly jump up 3% to 6% on the announcement of a buyback."
"Benjamin Graham pointed out a paradox: The better a company's executives are at managing its businesses, the worse they are likely to be at managing its cash."
"Three decades ago, with oil skyrocketing and profits gushing in, energy companies squandered billions of dollars on one bone-headed diversification after another. Mobil bought Montgomery Ward, the dying retailer. Arco acquired Anaconda Copper just before metal prices collapsed. Exxon even got the bright idea of manufacturing typewriters."
"So far in 2008, ConocoPhillips has spent $5 billion buying back stock; Chevron, $3.6 billion. From the end of 2004 through this June 30, says analyst Howard Silverblatt of Standard & Poor's, Exxon Mobil has soaked up an astounding $102.2 billion worth of its own shares."
"All told, the companies in the Standard & Poor's 500-stock index have bought back shares valued at more than a half-trillion dollars' worth of their shares in the past year."
"Every three months, Duke University economist John Graham surveys hundreds of chief financial officers. During the week of March 13, 2000, the absolute peak of the market bubble, 82% of finance chiefs said their shares were cheap, with only 3.4% saying their stock was "overvalued." More recently, buybacks hit their all-time quarterly high of $171.9 billion in September 2007, just before the Dow crested at 14000."
"Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share."
Friday, August 29, 2008
Happy Birthday: You May Have His Axe, But I Have His Ball Peen Hammer
Happy Birthday, Charlie Parker! I borrow the following from Garrison Keillor:
It's the birthday of jazz saxophonist Charlie Parker, born in Kansas City, Kansas (1920). He is considered one of the half-dozen greatest jazz musicians, right up there with Duke Ellington and Louis Armstrong. Early in his career, he received the nickname of "Yardbird," and he became known as "Bird."
Before Parker, jazz meant swing, melodies played at dance tempos by musicians in big orchestras who never got to take solos for very long. Late at night, after their big band jobs were over, Parker, Dizzy Gillespie, and other black musicians kept on playing, improvising long lines at blazing speed. Parker used a lot of flatted fifths, and jazz players used the word "bebop" to sing a flatted fifth, but Parker didn't like to use the word for the way he played. "Let's not call it bebop," he said. "Let's just call it music."
As a teenager, Parker became addicted to morphine while hospitalized after a car accident. He later became addicted to heroin, which contributed to his death at 34. The official cause was listed as pneumonia and a bleeding ulcer. The coroner made a mistake in estimating Parker's age to be between 50 and 60.
Parker said, "I realized by using the high notes of the chords as a melodic line, and by the right harmonic progression, I could play what I heard inside me. That's when I was born."
It's the birthday of jazz saxophonist Charlie Parker, born in Kansas City, Kansas (1920). He is considered one of the half-dozen greatest jazz musicians, right up there with Duke Ellington and Louis Armstrong. Early in his career, he received the nickname of "Yardbird," and he became known as "Bird."
Before Parker, jazz meant swing, melodies played at dance tempos by musicians in big orchestras who never got to take solos for very long. Late at night, after their big band jobs were over, Parker, Dizzy Gillespie, and other black musicians kept on playing, improvising long lines at blazing speed. Parker used a lot of flatted fifths, and jazz players used the word "bebop" to sing a flatted fifth, but Parker didn't like to use the word for the way he played. "Let's not call it bebop," he said. "Let's just call it music."
As a teenager, Parker became addicted to morphine while hospitalized after a car accident. He later became addicted to heroin, which contributed to his death at 34. The official cause was listed as pneumonia and a bleeding ulcer. The coroner made a mistake in estimating Parker's age to be between 50 and 60.
Parker said, "I realized by using the high notes of the chords as a melodic line, and by the right harmonic progression, I could play what I heard inside me. That's when I was born."
The EU: A Slow Learner
The EU is preparing make even more costly mistakes in its carbon emissions reduction program. Reuters reports that draft legislation will increase offsets to fully a fourth of (paper) reductions. If past experience is a guide, this means that the true cap has just been lifted again, and that billions more euros will be made in profits at the ultimate expense of consumers. (The difference between the increase in revenues companies get by charging more for carbon-intensive products and the cost of manufacturing an offset is the source of rents divvied up by buyers, sellers and financial packagers of offsets.) Will the US legislation we enact next year be equally corrupt and ineffectual?
Auto Da Fé
Who will get burned by the conjuncture of rising fuel prices and household debt deflation? The Frankfurter Allgemeine Zeitung reports that some corporate paper issued by GM is now trading at 50% of face.
The Beauty of Markets and Markets of Beauty
In looking through William Stanley Jevons' Principles of Economics, mostly a collection of unpublished fragments, Jevons concluded a section on negative value with a fascinating story from Herodotus on auctions in the Babylonian marriage market. The story speaks for itself and requires no commentary on my part.
137: "According to Herodotus the Babylonians managed to find husbands for all their young women. They collected together whatever maidens might be of marriageable years and sold them by auction, beginning with those esteemed the most beautiful. They gradually proceeded downwards in the scale of comeliness until some damsel equidistant between beauty and plainness had to be given away gratis. Then the plain and the ugly and the deformed were brought out by degrees, and the bidding went on; but in the other way, the premiums obtained for beauty being spent as dowries for the less favoured. All the women found husbands, and all the husbands found what they desired."
137: "According to Herodotus the Babylonians managed to find husbands for all their young women. They collected together whatever maidens might be of marriageable years and sold them by auction, beginning with those esteemed the most beautiful. They gradually proceeded downwards in the scale of comeliness until some damsel equidistant between beauty and plainness had to be given away gratis. Then the plain and the ugly and the deformed were brought out by degrees, and the bidding went on; but in the other way, the premiums obtained for beauty being spent as dowries for the less favoured. All the women found husbands, and all the husbands found what they desired."
Thursday, August 28, 2008
They're called the 'Unholy Trinity' – the IMF, the World Bank and the WTO. Part One.
Introduction.
The IMF and the World Bank were originally established in 1944 at the Bretton Woods conference between allied forces (essentially the US and Britain). It was a response to a wide range of international economic problems in relation to global trade that were experienced at the time and in the preceding decades. The most notable examples of such difficulties were exchange rate instability, ‘hot’ money flowing in and out of nations unpredictably, and the lack of a mechanism to adjust the balance of payments problems of countries, post-World War II debt and the need for the reconstruction and development of economies across the globe.
The IMF was designed to put in place a stable exchange rates regime with some scope for revaluation and convertibility of currencies when required. Short-term liquidity crises were to be managed by lending money to nations that experienced a temporary balance of payments crisis or by providing some form of orderly devaluation of the affected nation’s currency in times of more persistent BOP problems. It was hoped that these two latter processes would allow nations to reduce their deficits without resorting to protectionism or by experiencing deflation.
The International Bank for Reconstruction and Development (the World Bank) had the purpose of financing projects and infrastructure development in the war-torn European nations as well as to assist the industrialisation of post-colonial societies.
Under Bretton Woods the US dollar became the global reserve currency. This meant, amongst other things, that while every other national currency could devalue against the dollar, the US dollar could be devalued only against gold.
John Maynard Keynes and other negotiators at Bretton Woods had originally advocated a global reserve currency that was not, in fact, to be linked to any particular national currency. But the US held the hegemonic power at the time of these negotiations and its leaders designed the system to serve their priorities [1]. They wanted an up-dated gold standard to facilitate the liberalization of global trade and they wanted financial power concentrated in Washington and New York. US ‘negotiators’ won the day and lost the cause by doing so.
Because of the economic asymmetry between he United States and the rest of the world it soon began to experience a persistent balance of payments deficit. This situation arose under Bretton Woods because without the persistent US capital outflows the world experienced (for a number of reasons) a liquidity shortage. “In the early postwar years, the capital outflow consisted largely of foreign aid. By the end of the 1950s, private long-term investment abroad (mainly direct investment) exceeded military expenditures abroad and other official transfers (Eichengreen 199 1).” [2]
That Bretton Woods system crumbled after 1968 and ended with the closing by President Richard Nixon of the gold window on 15 August 1971. Prior to that at least one US presidential administration had used the nation’s economic hegemony to intervene and disrupt the operations of the Bretton Woods institutions. [3]
By the early 1970s the free market had become largely a historical relic in any case. “It [had] been transformed by three systemic forces over the [previous] 40 years: accelerating concentration of industry and banking, increasing intervention of government into the “private sector”, and…the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies.”[4]
For more on the background and history of the Bretton Woods system see: The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo.
END OF PART ONE
[1] Keynes’ Achilles’ heel was his lack of political sense, according to his biographer Robert Skidelsky. “He never studied the sources of power nor how society is affected by social stratification or the forces of social control.’. Page 494 ‘John Maynard Keynes, Fighting for Freedom, 1937 – 1946’ by Robert Skidelsky.
[2] The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo, professor of economics at Rutgers University.
www.nber.org/chapters/c6867.pdf
[3] Documents show that the Nixon administration engaged in an invisible economic blockade against the Allende government in Chile, intervening at the World Bank, IDB, and Export-Import bank to curtail or terminate credits and loans to Chile before Allende had been in office for a month. See: Department of State, Memorandum for Henry Kissinger on Chile, December 4, 1970:
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB8/ch20-01.htm
[4] ‘Global Reach – The Power of the Multinational Corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback.
The IMF and the World Bank were originally established in 1944 at the Bretton Woods conference between allied forces (essentially the US and Britain). It was a response to a wide range of international economic problems in relation to global trade that were experienced at the time and in the preceding decades. The most notable examples of such difficulties were exchange rate instability, ‘hot’ money flowing in and out of nations unpredictably, and the lack of a mechanism to adjust the balance of payments problems of countries, post-World War II debt and the need for the reconstruction and development of economies across the globe.
The IMF was designed to put in place a stable exchange rates regime with some scope for revaluation and convertibility of currencies when required. Short-term liquidity crises were to be managed by lending money to nations that experienced a temporary balance of payments crisis or by providing some form of orderly devaluation of the affected nation’s currency in times of more persistent BOP problems. It was hoped that these two latter processes would allow nations to reduce their deficits without resorting to protectionism or by experiencing deflation.
The International Bank for Reconstruction and Development (the World Bank) had the purpose of financing projects and infrastructure development in the war-torn European nations as well as to assist the industrialisation of post-colonial societies.
Under Bretton Woods the US dollar became the global reserve currency. This meant, amongst other things, that while every other national currency could devalue against the dollar, the US dollar could be devalued only against gold.
John Maynard Keynes and other negotiators at Bretton Woods had originally advocated a global reserve currency that was not, in fact, to be linked to any particular national currency. But the US held the hegemonic power at the time of these negotiations and its leaders designed the system to serve their priorities [1]. They wanted an up-dated gold standard to facilitate the liberalization of global trade and they wanted financial power concentrated in Washington and New York. US ‘negotiators’ won the day and lost the cause by doing so.
Because of the economic asymmetry between he United States and the rest of the world it soon began to experience a persistent balance of payments deficit. This situation arose under Bretton Woods because without the persistent US capital outflows the world experienced (for a number of reasons) a liquidity shortage. “In the early postwar years, the capital outflow consisted largely of foreign aid. By the end of the 1950s, private long-term investment abroad (mainly direct investment) exceeded military expenditures abroad and other official transfers (Eichengreen 199 1).” [2]
That Bretton Woods system crumbled after 1968 and ended with the closing by President Richard Nixon of the gold window on 15 August 1971. Prior to that at least one US presidential administration had used the nation’s economic hegemony to intervene and disrupt the operations of the Bretton Woods institutions. [3]
By the early 1970s the free market had become largely a historical relic in any case. “It [had] been transformed by three systemic forces over the [previous] 40 years: accelerating concentration of industry and banking, increasing intervention of government into the “private sector”, and…the spectacular rise of the intracorporate (nonmarket) economy of the global oligopolies.”[4]
For more on the background and history of the Bretton Woods system see: The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo.
END OF PART ONE
[1] Keynes’ Achilles’ heel was his lack of political sense, according to his biographer Robert Skidelsky. “He never studied the sources of power nor how society is affected by social stratification or the forces of social control.’. Page 494 ‘John Maynard Keynes, Fighting for Freedom, 1937 – 1946’ by Robert Skidelsky.
[2] The Bretton International Monetary System: A Historical Overview, by Michael D. Bordo, professor of economics at Rutgers University.
www.nber.org/chapters/c6867.pdf
[3] Documents show that the Nixon administration engaged in an invisible economic blockade against the Allende government in Chile, intervening at the World Bank, IDB, and Export-Import bank to curtail or terminate credits and loans to Chile before Allende had been in office for a month. See: Department of State, Memorandum for Henry Kissinger on Chile, December 4, 1970:
http://www.gwu.edu/~nsarchiv/NSAEBB/NSAEBB8/ch20-01.htm
[4] ‘Global Reach – The Power of the Multinational Corporations’ by Richard J Barnet & Ronald E Muller. Simon and Schuster1974. SBN 671-22104-3 Paperback.
Wednesday, August 27, 2008
Rubonomics for the People
Like many of you, I was a bit dismayed when Obama turned to Robert Rubin and his coterie for economic advice. I now admit that I was mistaken. According to Tuesday's Wall Street Journal, Citicorp has been paying Robert Rubin $17 million a year for a part-time job with no responsibility. Judging by the company's performance, the expectations placed on him might not be particularly high.
My full-time teaching job leaves me little spare time, but I think I could put aside a few hours each week in return for $17 million. I would be willing to take a pay cut in return for cutting back a few extra hours.
If you're like me, and think that you would want an opportunity like that, I would hope that Pres. Obama would enact policies that would give everybody an opportunity like Robert Rubin. With this in mind, I will put myself an unofficial adviser to the Obama campaign, suggesting the slogan: Rubinomics for the People.
Go Barak!
My full-time teaching job leaves me little spare time, but I think I could put aside a few hours each week in return for $17 million. I would be willing to take a pay cut in return for cutting back a few extra hours.
If you're like me, and think that you would want an opportunity like that, I would hope that Pres. Obama would enact policies that would give everybody an opportunity like Robert Rubin. With this in mind, I will put myself an unofficial adviser to the Obama campaign, suggesting the slogan: Rubinomics for the People.
Go Barak!
Tuesday, August 26, 2008
The Father of Rent Seeking Retires
I have just learned that the "father of rent seeking," 86-year-old Gordon Tullock, professor of economics and law at George Mason, suddenly decided a couple of weeks ago to retire, and has done so, moving to Arizona to live with his sister. Many readers and contributors to this blog probably do not think much of Tullock, given his quite strongly pro-free market orientation. However, he has been one of the more interesting characters in economics in recent years, who has arguably not received his proper due. In particular, James Buchanan received the Nobel Prize about 20 years ago for discovering/inventing public choice theory, with his 1960 book, _The Calculus of Consent_, being the source for this that was cited. There was a minor problem: Gordon Tullock was coauthor of that book and did not share the prize, although he was the founder and longtime editor of the journal Public Choice. (Rumor has it that the Nobel Committee had Richard Musgrave in mind to share it with Buchanan, but never gave it to him, and he is now dead, with Tullock somehow not even on their radar screen. Probably all three should have shared it, although many here probably think that neither Buchanan nor Tullock deserve(d) it).
Tullock may still get the prize, and has been high on some betting pools in recent years. He would get it for his discovery/invention of the concept of "rent seeking," although Anne Krueger invented the term some years later. Concern with corruption might lead to an award for this idea, that interest groups get governments to create artificial monopolies that create scarcity rents that can often get taken by those interest groups, often through bribery or corruption. Tullock's original paper on the matter was "The welfare costs of tariffs, monopolies, and theft," Western Economic Journal (now Economic Inquiry), 1967, 5: 224-232. I also note that some think he will not get the prize because he is very curmudgeonly, long showing his respect for somebody by insulting them. If he did not think much of someone, he simply ignores them.
Tullock may still get the prize, and has been high on some betting pools in recent years. He would get it for his discovery/invention of the concept of "rent seeking," although Anne Krueger invented the term some years later. Concern with corruption might lead to an award for this idea, that interest groups get governments to create artificial monopolies that create scarcity rents that can often get taken by those interest groups, often through bribery or corruption. Tullock's original paper on the matter was "The welfare costs of tariffs, monopolies, and theft," Western Economic Journal (now Economic Inquiry), 1967, 5: 224-232. I also note that some think he will not get the prize because he is very curmudgeonly, long showing his respect for somebody by insulting them. If he did not think much of someone, he simply ignores them.
The Mirage of Economic Efficiency
Almost 70 years ago, George Stigler introduced the concept of flexibility. A business might be highly efficient, but it may not have the flexibility to meet changing conditions. Stigler's point is largely ignored. I would prefer that other parts of his work were ignored, but I do not have much say in such matters.
Stigler, George. 1939. "Production and Distribution in the Short Run." Journal of Political Economy, 47 (June): pp. 304-27.
Stigler' point is fairly simple. Nuclear power plants are often used to explain what he meant. Assume, for the sake of argument only, that a nuclear power plant can produce electricity much cheaper than other forms of generation (by the way, I do not believe this assumption is correct). The problem is that demand shifts. The capacity to produce for peak demand might not be needed 90% of the time, making it an economical.
A coal fueled plant might be far less efficient, but it can be brought online relatively quickly when it is needed. Even though the engineering efficiency of the coal-fired plant might be low, it might be appropriate for handling peak loads.
Uncertainty makes Stigler's theory even more compelling. A biological example from my book, The Perverse Economy, might be appropriate.
"Biologists of all stripes acknowledge an amazing ability of various plants and animals to adapt to specialized niches. For example, scientists have recently discovered a new species, wholly unrelated to any previously known species, which survives on the lips of one particular type of lobster (Morris 1995). Although this form of evolution is remarkable, it also leaves the creatures vulnerable to even a slight change in the environment. The same specialization that made these creatures so dependent on the success of a relatively small group of lobsters makes them less adaptable to relatively small changes in the global environment. For example, this particular group of lobsters may decline or migrate to a less desirable location, threatening the existence of their tiny lip dwellers."
In the Perverse Economy, I used another example, regarding a glue shortage -- not glue in general, but a particular kind of glue. A computer chip is a silicon wafer, which is useless without the capacity to send and receive signals from a circuit board. A plastic package allows the chip to make the connection between the chip and the board. The industry uses specialized epoxy glue for fabricating these packages.
During the 1990s, a single Sumitomo Corporation plant manufactured the majority of the world's supply of the epoxy resin. About 60% of all memory modules depended on the product of this particular factory, when in July 1993 a fire destroyed this factory.
Ordinarily, an event like a fire in a glue factory not be of very much interest except for the people close to the event, but this fire ravaged the chip market. Dealers had been paying about $33 for a megabyte of memory before the fire. By the end of the month, the same memory commanded $95. The industry feared that prices would go even higher.
Bill Clinton's trade policy with Haiti illustrates a similar danger. Clinton forced Haiti open up its agricultural markets. Heavily subsidized US rice destroyed Haiti's capacity to produce rice. In terms of conventional economic theory, some economists might have seen Clinton's policy as efficient, following the laws of conventional economics (subsidies are ignored in this logic, especially the heavy water subsidies given to California rice growers). Relatively unproductive rice farmers would give up that activity to participate in the modernization of Haiti, presumably in some sweatshop.
Unfortunately, when agricultural prices began to soar, Haiti was unable to quickly resuscitate its previous capacity to grow rice. Food riots soon followed.
The recent sawdust shock is relevant here. Here is what the Wall Street Journal reported about sawdust:
"The price of sawdust has soared since 2006, up from about $25 a ton to more than $100 in some markets. Blame the housing slump: Fewer new homes mean fewer trees cut for use in construction, which leads to less sawdust and other wood waste, driving up the price."
"Farms use sawdust and wood shavings as cozy and clean bedding for horses and chickens. Particle-board makers devour it by the boxcar to fashion a cheap building material. Auto-parts manufacturers blend a finely pulverized sawdust called "wood flour" with plastic polymers to make a lightweight material to cover steering wheels and dashboards."
"Wineries use oak sawdust as a flavoring agent for some wines. Perdue Farms, which raises broiler chickens, goes through seven million cubic feet of wood shavings a year. Oil-rig operators in Wyoming and Colorado pour sawdust into the caverns they find deep inside rock formations as they hunt for pools of petroleum. Sawdust gives drill bits something to grind through."
"The housing slump has devastated sawmill production across the country."
Millman, Joel. 2008. "Sawdust Shock: A Shortage Looms As Economy Slows." Wall Street Journal (3 March): p. A 1.http://online.wsj.com/article/SB120451039119406735.html
Stigler, George. 1939. "Production and Distribution in the Short Run." Journal of Political Economy, 47 (June): pp. 304-27.
Stigler' point is fairly simple. Nuclear power plants are often used to explain what he meant. Assume, for the sake of argument only, that a nuclear power plant can produce electricity much cheaper than other forms of generation (by the way, I do not believe this assumption is correct). The problem is that demand shifts. The capacity to produce for peak demand might not be needed 90% of the time, making it an economical.
A coal fueled plant might be far less efficient, but it can be brought online relatively quickly when it is needed. Even though the engineering efficiency of the coal-fired plant might be low, it might be appropriate for handling peak loads.
Uncertainty makes Stigler's theory even more compelling. A biological example from my book, The Perverse Economy, might be appropriate.
"Biologists of all stripes acknowledge an amazing ability of various plants and animals to adapt to specialized niches. For example, scientists have recently discovered a new species, wholly unrelated to any previously known species, which survives on the lips of one particular type of lobster (Morris 1995). Although this form of evolution is remarkable, it also leaves the creatures vulnerable to even a slight change in the environment. The same specialization that made these creatures so dependent on the success of a relatively small group of lobsters makes them less adaptable to relatively small changes in the global environment. For example, this particular group of lobsters may decline or migrate to a less desirable location, threatening the existence of their tiny lip dwellers."
In the Perverse Economy, I used another example, regarding a glue shortage -- not glue in general, but a particular kind of glue. A computer chip is a silicon wafer, which is useless without the capacity to send and receive signals from a circuit board. A plastic package allows the chip to make the connection between the chip and the board. The industry uses specialized epoxy glue for fabricating these packages.
During the 1990s, a single Sumitomo Corporation plant manufactured the majority of the world's supply of the epoxy resin. About 60% of all memory modules depended on the product of this particular factory, when in July 1993 a fire destroyed this factory.
Ordinarily, an event like a fire in a glue factory not be of very much interest except for the people close to the event, but this fire ravaged the chip market. Dealers had been paying about $33 for a megabyte of memory before the fire. By the end of the month, the same memory commanded $95. The industry feared that prices would go even higher.
Bill Clinton's trade policy with Haiti illustrates a similar danger. Clinton forced Haiti open up its agricultural markets. Heavily subsidized US rice destroyed Haiti's capacity to produce rice. In terms of conventional economic theory, some economists might have seen Clinton's policy as efficient, following the laws of conventional economics (subsidies are ignored in this logic, especially the heavy water subsidies given to California rice growers). Relatively unproductive rice farmers would give up that activity to participate in the modernization of Haiti, presumably in some sweatshop.
Unfortunately, when agricultural prices began to soar, Haiti was unable to quickly resuscitate its previous capacity to grow rice. Food riots soon followed.
The recent sawdust shock is relevant here. Here is what the Wall Street Journal reported about sawdust:
"The price of sawdust has soared since 2006, up from about $25 a ton to more than $100 in some markets. Blame the housing slump: Fewer new homes mean fewer trees cut for use in construction, which leads to less sawdust and other wood waste, driving up the price."
"Farms use sawdust and wood shavings as cozy and clean bedding for horses and chickens. Particle-board makers devour it by the boxcar to fashion a cheap building material. Auto-parts manufacturers blend a finely pulverized sawdust called "wood flour" with plastic polymers to make a lightweight material to cover steering wheels and dashboards."
"Wineries use oak sawdust as a flavoring agent for some wines. Perdue Farms, which raises broiler chickens, goes through seven million cubic feet of wood shavings a year. Oil-rig operators in Wyoming and Colorado pour sawdust into the caverns they find deep inside rock formations as they hunt for pools of petroleum. Sawdust gives drill bits something to grind through."
"The housing slump has devastated sawmill production across the country."
Millman, Joel. 2008. "Sawdust Shock: A Shortage Looms As Economy Slows." Wall Street Journal (3 March): p. A 1.http://online.wsj.com/article/SB120451039119406735.html
Monday, August 25, 2008
Henri Cartan, RIP
Henri Cartan, the grand old man of French mathematics, has died at 104. He was the founder and leader of the "Bourbaki" movement in the 1930s, a group that tried to redo mathematics as a totally formalized and axiomatized system, following deep intellectual traditions in France of hyper-rationalism that go back to Descartes, if not all the way to Thomas Aquinas, and which in French socio-economics was associated with the social engineering idealism of Saint-Simon and the dirigiste tradition of French indicative central planning. The group operated, at least initially, anonymously, signing their papers with the name of a dead French general, Nicholas Bourbaki. They hoped to clarify mathematics and remove from it any mysticism or fuzzy thinking.
One of Cartan's most assiduous students in the immediate post-WW II period was the late Gerard Debreu, the more mathematical and austere half of Arrow and Debreu, who famously proved the existence of competitive general equilibrium in 1954, both of them eventually receiving the Nobel Prize in economics. Debreu was probably the most articulate and influential spokesman for axiomatizing economic theory, something now very much out of favor for many reasons. Indeed, as Roy Weintraub has noted in his book, _How Economics Became a Mathematical Science_, the trends of uses of math in economics tend to repeat trends in math itself, with the Bourbakist approach having fallen out of fashion within math itself some time ago. Simulation and many other approaches have picked up, and we see this in economics with agent-based modeling and more emphasis on empirics and induction from that now.
Even though Cartan and his allies dominated French mathematics for decades, two of the most interesting mathematicians to come out of France, Rene Thom, the founder of catastrophe theory, and Benoit Mandelbrot, the inventor/discoverer of fractals, were both very bad at proving theorems and following the Bourbakist approach. Indeed their great success, including with influence on economics, was perhaps a sign of the limits of Bourbakism more generally.
One of Cartan's most assiduous students in the immediate post-WW II period was the late Gerard Debreu, the more mathematical and austere half of Arrow and Debreu, who famously proved the existence of competitive general equilibrium in 1954, both of them eventually receiving the Nobel Prize in economics. Debreu was probably the most articulate and influential spokesman for axiomatizing economic theory, something now very much out of favor for many reasons. Indeed, as Roy Weintraub has noted in his book, _How Economics Became a Mathematical Science_, the trends of uses of math in economics tend to repeat trends in math itself, with the Bourbakist approach having fallen out of fashion within math itself some time ago. Simulation and many other approaches have picked up, and we see this in economics with agent-based modeling and more emphasis on empirics and induction from that now.
Even though Cartan and his allies dominated French mathematics for decades, two of the most interesting mathematicians to come out of France, Rene Thom, the founder of catastrophe theory, and Benoit Mandelbrot, the inventor/discoverer of fractals, were both very bad at proving theorems and following the Bourbakist approach. Indeed their great success, including with influence on economics, was perhaps a sign of the limits of Bourbakism more generally.
How the Gnome of Zurich Got It Wrong
Last week I was at a conference in Zurich, Switzerland, site of the HQs of all those Swiss banks. At Einstein's alma mater, the Swiss Federal University of Technology (ETH) there is a mathematics professor named Paul Embrechts whom I like to think of as being the actual Gnome of Zurich. About a decade ago he succeeded in convincing the leading Swiss banks to use the mathematical entity known as a copula as the basis for measuring risk. They did so, and from them it spread to become the most widely used method in the financial world, displacing the Black-Scholes formula, although one is hard pressed to find a definition of it in any financial economics textbooks. I will say that it is based on a stationary distribution that attempts to take into account more fully covariances among events. It also has the advantage of actually admitting that there are lots more extreme events than does the Gaussian normal that underlies Black-Scholes, which after the 1987 crash most of the practitioners knew was garbage. So, it admits the stylized fact that all asset markets exhibit "fat tails" or kurtosis, those more frequent extreme events.
However, it turns out that the copulas have not proved sufficient to deal with the events of the last year, with most funds and banks and whatnot still getting into trouble. One of the conference participants was an econophysicist colleague of Embrechts, Didier Sornette, who runs an "Observatory of Financial Crises." While he has made some not so accurate public forecasts himself (see my "Econophysics and Economic Complexity," available at http://cob.jmu.edu/rosserjb), Sornette described the problem with the copulas: they do not take into account how herding can happen. So, they can give the right probability that a 10% decline in a market can happen in one day, but will understate the probability that this might happen for three days in a row. This would suggest that Nassim Taleb with his black swans might be right, although anybody trying to follow his "barbell strategy" to make money on really big crashes would probably have lost money over most of the last several years, despite the big crashes that have been going on over the past year.
However, it turns out that the copulas have not proved sufficient to deal with the events of the last year, with most funds and banks and whatnot still getting into trouble. One of the conference participants was an econophysicist colleague of Embrechts, Didier Sornette, who runs an "Observatory of Financial Crises." While he has made some not so accurate public forecasts himself (see my "Econophysics and Economic Complexity," available at http://cob.jmu.edu/rosserjb), Sornette described the problem with the copulas: they do not take into account how herding can happen. So, they can give the right probability that a 10% decline in a market can happen in one day, but will understate the probability that this might happen for three days in a row. This would suggest that Nassim Taleb with his black swans might be right, although anybody trying to follow his "barbell strategy" to make money on really big crashes would probably have lost money over most of the last several years, despite the big crashes that have been going on over the past year.
TWO THINGS
by the Sandwichman
"'Two things,' he said, as we were standing outside the first-class bathroom. 'One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?'
"I didn’t, I said."
"'Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,' Obama said.
"In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, 'counts special locks for our doors and the jails for those who break them -- but not the health of our children, the quality of their education or the joy of their play.'"
"How did we get to this strange pass, where up is down and down is up? How did it happen that the nation’s economic hero is a terminal-cancer patient going through a costly divorce? How is it that Congress talks about stimulating 'the economy' when much that will actually be stimulated is the destruction of things it says it cares about on other days?
"How did the notion of economy become so totally uneconomic?
"The story begins in Ireland in the 1650s..."
"'Two things,' he said, as we were standing outside the first-class bathroom. 'One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?'
"I didn’t, I said."
"'Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,' Obama said.
"In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, 'counts special locks for our doors and the jails for those who break them -- but not the health of our children, the quality of their education or the joy of their play.'"
"How did we get to this strange pass, where up is down and down is up? How did it happen that the nation’s economic hero is a terminal-cancer patient going through a costly divorce? How is it that Congress talks about stimulating 'the economy' when much that will actually be stimulated is the destruction of things it says it cares about on other days?
"How did the notion of economy become so totally uneconomic?
"The story begins in Ireland in the 1650s..."
Saturday, August 23, 2008
Clothing for the 21st Century (the folly of mass production)
With the new clothing of the 21st century human labour will out-compete the machine because:
Human life and wellbeing will be safeguarded
** Ample land, water and other critical resources will be available for essential food production;
** People will not be poisoned by industrial processes;
** There'll be less superfluous consumption and production and therefore more leisure time;
** We'll be more satisfied with our products because we will design and make them;
** The monotony and drudgery of mass production will be reduced;
** Local production will result in the decentralisation of power and wealth in society.
** The imperative to condition us with advertising and 'education' will no longer exist.
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