Archive for May, 2009

Down in the comments of an earlier music post I dug up a seminal BBC documentary about Richard Feynman.  I must have seen it when it first came out.  I recommend you plug your computer into the TV, sit down and watch it with any children, grandchildren, nephews, nieces or godchildren; there may be no greater gift.  A few minutes in he says this:

When you are thinking about something that you don’t understand you have a terrible, uncomfortable feeling called ‘confusion’. It’s a very difficult and unhappy business.  So, most of the time you are rather unhappy, actually, with this confusion.  You can’t penetrate this thing.  Now, is the confusion… is it because we are all some kind of apes that are kind of stupid working against this? Trying to figure out to put the two sticks together to reach the banana and we can’t quite make it? …the idea ? And I get that feeling all the time: that I am an ape trying to put two sticks together.  So I always feel stupid. Once in a while, though, everything — the sticks — go together on me and I reach the banana.”

Last Journey of a Genius

When it came to deciding on a business card for the blog, there must have been some spooky action operating at a distance, for this is what we came up with.

Knackered Hack

Long-time readers will remember my own grappling with bananas only to find that, as usual, I was thwarted. Parce que…

it is not a banana

banana photo credit -eko-

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There should be a rule that if Professor Robert Shiller is speaking in public within a hundred miles of you, you must make tracks to hear him. A statistical analysis of my own movements over the past 12 months might show that I’m already following this rule. However, with just the two data points, you should not bet the farm on it…though many have done worse (I know: I’m related to some of them). When they reform Parliament, they should sneak that rule in there for our politicians, and then apply it more broadly to the population at large. Once you’ve read Shiller’s new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (US edition), with Nobel Laureate George Akerlof, you’ll know why.

I’ve more or less finished Animal Spirits, and the purpose of my Monday trip to Policy Exchange was to hear Shiller discuss the book and his new pamphlet for the hosts: a proposal that the UK adopt an inflation-indexed unit of account, like Chile’s Unidad de Fomento, as a means to cure the population of money illusion. I felt blessed to be invited.

Animal Spirits is surely essential reading for any student of our broken times. And The Case for a Basket, which you can download for free, has a good chance of becoming government policy; when I last saw Shiller in London in the autumn, he’d been in to see Gordon Brown, Alastair Darling and Lord Mandelson, if I recall correctly. Meanwhile, as the leading centre-right think-tank, I understand that Policy Exchange will be the leading source of ideas for any future Tory administration, assuming they can keep their moats clean, as it were.

But I could not help wondering if Shiller’s audience was taking all this behavioural economics stuff in, or whether he was just another speaker on the Westminster agenda to be consumed: knowledge of his ideas being a necessary source of signalling to others in polite conversation. Shiller’s argument that our animal spirits have been dangerously discounted by economic thinking surely makes him a heretic in this milieu; the reformation he foretells has barely started. There are a lot of PPE graduates out there, and a greater concentration within 100 yards of Parliament.  Would they not need to go back to school, or be reprogrammed?

But I digress.

To imagine how the “basket” would work, you have to understand it is a unit of account, a measurement of value that would not alter with inflation. Or deflation, for that matter. If you had your house to sell, and wanted to make sure you got what you paid for it a year later, you would offer it at the same basket level. You would avoid having to perform a complex accounting calculation that, on a day-to-day basis, is beyond most of us, including our elected representatives. We prefer to think in nominal prices rather than real terms. So we get easily persuaded that houses are a sure winner when we should all know there ain’t no thing as sure winners. Shiller shows US house prices actually closely track inflation over the longest time. A basket system would be especially useful for fixing ongoing contracts, like legal fees or alimony payments; the “basket” ensures that a figure agreed today will buy the same amount of goods and services in the future for the recipient.

Shiller maintains that the Chilean system — introduced in Chile in 1967, but only really taking off in the 1980s — has worked successfully, despite local complaints about its long-term viability, and could prove just as useful in low-inflation economies like the UK and US.

What I find attractive about it is that it is a simple solution to a complex set of pernicious social behaviours. According to Shiller, all that the government needs to do is supply its institutional credibility to a calculation and then create a website. Electronic payments systems would enable any number of assets and commodities to be listed in baskets and payment settled via a real-time currency calculation. In effect it stops you being defrauded by history.

The idea of Animal Spirits, meanwhile, is not new. Shiller points out that the phrase was used by John Maynard Keynes. But in their book, Shiller and Akerlof seek to increase the emphasis on non-rational factors which modern economics has tended to ignore. Money Illusion plays a key role. But they also emphasise issues like trust, bad faith, and corruption. And there is a wonderful qualification of the power of capitalism, with perhaps more than a gentle poke at our more optimistic libertarian friends:

…the bounty of capitalism has at least one downside. It does not automatically produce what people really need; it produces what they think they need, and are willing to pay for. If they are willing to pay for real medicine, it will produce real medicine. But if they are willing to pay for snake oil, it will produce snake oil.

Shiller is a curious student indeed. He reads old newspapers in his quest to understand mood and capture the narratives that transmit bad economic ideas. In Monday’s talk he regaled us with a newspaper column from the 1880s deploring the a collapsed property boom in Los Angeles. The columnist boldly asserted that never again would people be so stupid. To be fair, for nearly a century that was correct. So how do these animal spirits get going? This is what he and Akerlof say:-

Why do new kinds of corrupt or bad-faith behavior arise from time to time? Part of the answer is that there are variations through time in the perceived penalties for such behavior. Memories of major government crackdowns against corruption fade over time. In a time of widespread corrupt activity, many people may get the impression that it is easy to get away with it. Everyone else is doing it, it seems to them, and no one seems to be getting punished. To some extent, lowering one’s adherence to principles at such times is a perfectly rational thing to do. Lower principles at certain times may also reflect a social osmosis, as information about the probability of punishment for certain kinds of crimes spreads through a net of personal acquaintances, as Raaj Sah has documented. Such a process may be part of the confidence multiplier, as corruption feeds back into more corruption.

The variation through time in the extent of corruption of bad faith is also to some extent a reflection of the fresh opportunities that arise as new financial inventions of one sort or another appear, or as financial regulations allow innovations to be implemented. These innovations may not be understood initially by the public. This variation occurs because of cultural changes unrelated to fear of punishment or to changes in technology. These changes are clearly within the realm of pure animal spirits. Culture changes over time to facilitate or hinder aggressively competitive or predatory activities. Because these cultural changes are difficult to quantify, and fall outside the field of economics, they are rarely connected by economists to economic fluctuations. They should be.

Shiller and Akerlof continue with examples of how widespread flouting of 1920s US prohibition led to a more generalized disrespect for the rule of law. Then in the depression years things shifted again. By 1941,  bridge was the most popular card game in America, encouraging, as it does, cooperation, while also not being played for money. By contrast, the early years of this century have been characterised by the rise of Texas hold’em, bluffing, and the poker face, both literally and metaphorically.

You don’t have to look far for these animal spirits. If Shiller is now more likely to be the first voice the Tories turn to on matters to do with housing markets, this will be an improvement on a previous foray which enlisted the Honorable Kirstie Allsopp, presenter of property porn TV programme Location, Location, Location. I’ve often wondered why the kindling of animal spirits by one of our public service broadcasters had not long ago been scrutinized by a House of Commons select committee or two. But recent evidence shows the same spirits had taken hold there also.

Now if it were real animal spirits we needed to calm, Louis Armstrong would be our man. In the 1938 film Going Places, Armstrong plays Gabe whose music is the only thing that will settle the unrideable horse Jeepers Creepers.  Yes, you know where this is heading. Tell me I’m wrong, but it sounds like he too is asking “where did you get those PPEers?” How they hypnotize!

And did you Twitterers note how Duke upbraids Maxie? “Why don’t you stop thinkin’ up snappy sayings and start concentrating on business…”

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I don’t know much about Lévy flights, and I don’t know much about Artie Shaw.  While I don’t have any Artie Shaw recordings (yet) he is a little bit of a hero of mine.

The standard biographical narrative of Shaw was that his performing career — which experienced some of the highest peaks in 20th century commercial musical achievement — was punctuated by periods of creative and physical exhaustion, including revulsion toward his popular success.  So, not many similarities to the Knackered Hack’s experience, except the downside elements, I admit.

In one of his later periods of retreat, it seems that Shaw was preoccupied with studying high-level mathematics.  I wonder if his creativity could perhaps be defined by the concept of Lévy flights?  Now, if you think I’m talking Jackson Pollocks here, you might indeed be right. For the distribution of paint by the very same may have been following some form of fractal pattern:-

There are two revolutionary aspects to Pollock’s application of paint and both have potential to introduce chaos. The first is his motion around the canvas. In contrast to traditional brush-canvas contact techniques, where the artist’s motions are limited to hand and arm movements, Pollock used his whole body to introduce a wide range of length scales into his painting motion. In doing so, Pollock’s dashes around the canvas possibly followed Levy flights: a special distribution of movements, first investigated by Paul Levy in 1936, which has recently been used to describe the statistics of chaotic systems.

I understand there is a risk of seeing heavy-tailed distributions everywhere, particularly to my untrained eye.  But with the creative arts — the clustering of success — it does seem to follow.

I wonder too if it explains, at a very banal level, the frequency of my blog posting, about which I know a few of you are concerned.  To illustrate the two extremes of recent Knackered Hack experience, some Artie Shaw to entertain you.  In the meantime, I will be trying to produce a cluster of posts.  Shaw fans can correct me, but the first piece below reflected the essence of the man, while the second was what people liked him for.  The titles will amuse Mandelbrotian students of markets.  And Shaw’s exuberant swing music flourished in the depression.

At the end of this one, Artie Shaw and sidekicks explore bounded rationality and sum up the perennial challenge for all businesses.

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