If this post is true (I suppose that they can tag isotopes of mercury and be reasonably sure of where it came from (?)) then it seems that the "we need a carbon tax to control global energy use" crowd needn't fight the carbon doubters anymore. Pretty much everyone agrees that atmospheric mercury is anthropocentric and potentially harmful to people. So we'll just get the Chinese to sign the ______ Protocol (please pick a pleasant location for the conference--maybe the tropics in winter). I'm sure they will.
Oh. Wait. Maybe they won't. Maybe the strategic/geopolitical dimension of carbon taxation is something that 99.9% of environmental economists are either oblivious or choose to ignore because it isn't in the model.
Note: the French still come out looking good here. Nuke plants still don't emit Hg.
Thursday, February 28, 2008
Monday, February 25, 2008
The Academy as Business
From Stanley Fish's article in the Times:
But in the academy there is no product except knowledge, and that may take decades to develop, if it develops at all. The concept of market share is inapposite; efficiency is not a goal; and there is no inventory to put on the shelves. Instead the norms are endless deliberations, explorations that may go nowhere, problems that only five people in the world even understand, lifetime employment that is not taken away even when nothing is achieved, expensively labor-intensive practices and no bottom line. What is an outsider to make of that?
http://fish.blogs.nytimes.com/2008/02/24/wanted-someone-who-knows-nothing-about-the-job/?8dpc
But in the academy there is no product except knowledge, and that may take decades to develop, if it develops at all. The concept of market share is inapposite; efficiency is not a goal; and there is no inventory to put on the shelves. Instead the norms are endless deliberations, explorations that may go nowhere, problems that only five people in the world even understand, lifetime employment that is not taken away even when nothing is achieved, expensively labor-intensive practices and no bottom line. What is an outsider to make of that?
http://fish.blogs.nytimes.com/2008/02/24/wanted-someone-who-knows-nothing-about-the-job/?8dpc
Monday, February 11, 2008
Book Review: A Demon of Our Own Design
Richard Bookstaber has been in some interesting places that have given him a sage perspective on financial markets and innovation: he watched the 1987 market crash from Morgan Stanley; joined Salomon Brothers for the high-flying early 1990s and stayed until the arb trading unit was shut down after the Citigroup merger; watched his fellow MIT grads (and Salomon colleagues) blow up LTCM from a front-row seat; and then he managed to work for "hedge funds" before Congress knew what they were. All those qualifications led Congress to ask him to testify about the currrent mortgage/credit mess last fall. Since he has spent a career trying to figure out what portfolios of derivatives mean in the real world, he seems like a good choice. He has no less than three basic observations about financial markets today.
1) Liqudity is the defining characteristic of financial markets and provides a pertinent contrast to other aset markets. Liquidity allows leverage, which has abetted recent financial crises. Traders leverage assets because they can and because they need to to make small-return bets worthwhile. But liquidity can disappear in a crisis, squeezing those in leveraged positions.
2) Financial derivatives are good insofar as they allow risk to be borne by those more willing to bear it. However, exotic derivatives create additional layers of complexity in financial markets. In concert with tight coupling resulting from leverage, this complexity can lead to instability. Bookstaber suggests that a less sophisticated market structure might be more robust in times of crisis--like a cockroach, which has a very coarsely evolved survival strategy.
3) Accounting practices are antiquated and cosntructed with illiquid markets in mind. Without sufficient statistics for the types of exposure, strategies, and positions that financial firms face, standard accounting practices are not useful in assessing risk. It should come as little wonder that firms like Enron and Tyco were able to manipulate accounting concepts in the context of far more dynamic strategies.
Bookstaber's background as a risk manager lends some interesting context to the above observations. Citing Knightian uncertainty, he emphasizes unknown risks as the primary blind spot of markets, in subtle contrast to Taleb's fat tail risks. While unforthcoming on how to deal with unknown risks (just as Taleb is coy about living with fat tails), this observation should catch the attention of any quantitative trader. The narrative is generally very good, but does lag in places. He is less windy than Taleb, but also takes time to relate personal stories, some of which are illuminating. On the whole an interesting read, and Wendy deserves credit for finding it.
1) Liqudity is the defining characteristic of financial markets and provides a pertinent contrast to other aset markets. Liquidity allows leverage, which has abetted recent financial crises. Traders leverage assets because they can and because they need to to make small-return bets worthwhile. But liquidity can disappear in a crisis, squeezing those in leveraged positions.
2) Financial derivatives are good insofar as they allow risk to be borne by those more willing to bear it. However, exotic derivatives create additional layers of complexity in financial markets. In concert with tight coupling resulting from leverage, this complexity can lead to instability. Bookstaber suggests that a less sophisticated market structure might be more robust in times of crisis--like a cockroach, which has a very coarsely evolved survival strategy.
3) Accounting practices are antiquated and cosntructed with illiquid markets in mind. Without sufficient statistics for the types of exposure, strategies, and positions that financial firms face, standard accounting practices are not useful in assessing risk. It should come as little wonder that firms like Enron and Tyco were able to manipulate accounting concepts in the context of far more dynamic strategies.
Bookstaber's background as a risk manager lends some interesting context to the above observations. Citing Knightian uncertainty, he emphasizes unknown risks as the primary blind spot of markets, in subtle contrast to Taleb's fat tail risks. While unforthcoming on how to deal with unknown risks (just as Taleb is coy about living with fat tails), this observation should catch the attention of any quantitative trader. The narrative is generally very good, but does lag in places. He is less windy than Taleb, but also takes time to relate personal stories, some of which are illuminating. On the whole an interesting read, and Wendy deserves credit for finding it.
Friday, February 8, 2008
What will liberals read?
Those readers who have a strong affinity for The New York Times might want to read this. It appears as though Schumpeter was right when he said, “Technology is not kind. It does not wait. It does not say please. It slams into existing systems… And often destroys them." Indeed. It is most likely to destroy those least equipped to adapt to it, even if they are staid and respected institutions that have henceforth generated something nearing $1b per year.
The best line in this by far is, "Now, normally, beating up on someone like this isn't very much fun. But we are talking about a profession that specializes in passing judgment, often snide, on everyone else. And so, onward..." How apropos in the case of the NYT.
And more...
The best line in this by far is, "Now, normally, beating up on someone like this isn't very much fun. But we are talking about a profession that specializes in passing judgment, often snide, on everyone else. And so, onward..." How apropos in the case of the NYT.
And more...
Thursday, February 7, 2008
Book Review: More Sex Is Safer Sex
Steven Landsburg’s contribution to the recent flood of pop economics books, More Sex Is Safer Sex, focuses attention on the concept of spillovers and endorses a strong application of cost-benefit analysis. Like other recent books in the genre (Stephen Levitt’s Freakonomics, Ian Ayres’ Supercrunchers, or Robert Frank’s The Economic Naturalist) it is quick reading, and while the reader may or may not agree with all Landsburg offers, he must surely agree that it is thought-provoking and entertaining. Drawing on material from his years as a columnist for Slate, Landsburg delivers a collection of antecdotes with poignant economic insights. This material would be very useful to anyone seeking to enliven an introductory economics class or a cocktail party.
The book begins with the titular chapter, claiming that if the pool of prospective sexual partners is larger, then all participants are less likely to contract an STD. Recreational sex is welfare-enhancing, and aside from the spillover of infection, Landsburg hypothesizes that more people would participate in it. In order to lure otherwise bashful prospective partners from the sidelines and increase the size of the pool, Landsburg suggests that used condoms should be exchangeable for a reward (this is because even at zero cost, a less than socially optimal number of condoms would be used). Thus more people have sex, reducing the chances of infection. But wait, doesn't condom use reduce the risk of infection? Presumably wider-spread condom use would also mitigate the risk of infection just as surely as lerger numbers of uninfected partners. It's also not clear to me that sexual pairings are random. In any event, sexual relationships are evidently a scale-free network, so it's not clear that adding a whole lot of nodes is the way to attack the problem of infection. It seems that attacking the hubs is the way to do it. Landsburg has clearly achieved his goal, since I had to understand his argument in order to come up with that.
Landsburg continues to sling economics curveballs throughout the book. A few examples give the spirit.
The book begins with the titular chapter, claiming that if the pool of prospective sexual partners is larger, then all participants are less likely to contract an STD. Recreational sex is welfare-enhancing, and aside from the spillover of infection, Landsburg hypothesizes that more people would participate in it. In order to lure otherwise bashful prospective partners from the sidelines and increase the size of the pool, Landsburg suggests that used condoms should be exchangeable for a reward (this is because even at zero cost, a less than socially optimal number of condoms would be used). Thus more people have sex, reducing the chances of infection. But wait, doesn't condom use reduce the risk of infection? Presumably wider-spread condom use would also mitigate the risk of infection just as surely as lerger numbers of uninfected partners. It's also not clear to me that sexual pairings are random. In any event, sexual relationships are evidently a scale-free network, so it's not clear that adding a whole lot of nodes is the way to attack the problem of infection. It seems that attacking the hubs is the way to do it. Landsburg has clearly achieved his goal, since I had to understand his argument in order to come up with that.
Landsburg continues to sling economics curveballs throughout the book. A few examples give the spirit.
- Underpopulation (not overpopulation) is the world's most pressing problem since people solve problems. With more of them, more problems will be solved. (Steve, did you know that only stupid people are breeding?)
- Juries should be paid for correct verdicts and fined for incorrect ones. SURPRISE! The legal system doesn't get the incentives right.
- As a miser, Scrooge was actually among the most generous of people by producing valuable goods and services but not consuming any--at least, until the end of The Christmas Carol. (This smells like pecuniary externalties to me.)
- People (except tycoons with potnetially endowment-changing contributions) should donate to a single charity rather than to multiple charities. Corrollary: Maimonides' Rule is a crock.
- Patents should be purchased by the government and held in the public domain. This rewards innovation and allows public use of knowledge.
All in all, it's a worthy collection of thoughts, logic, contrarianism, and jokes. Landsburg deserves a lot of credit for owning up to the internal conflicts between his fee market training (Chicago) and proclivity and his enthusiasm for selected government interventions (like the condom bounty) in economic life. One sidenote that comes up three or four times during the book: Landsburg has a hardon for Robert Frank of Cornell. Apparently the claim to be the top dog in pop economics is valuable. A cage match sounds like a good idea.
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