Author Archives: Richard Tsukamasa Green

Corporate Sovereignty

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At the Lowy Interpreter Sam Roggeveen speculates about the possibility of a company (particularly Apple) buying a country.

There has been at least on fictional treatment of a corporation taking over a country in John Brunner’s wonderful 1968 novel Stand on Zanzibar. It is based in 2010 and the corporation is transparently based on General Electric, and the country based on what would become Benin. Like much science fiction, it tends to tell us a great deal from what change it didn’t anticipate. In particular it didn’t anticipate how corporations (at least in the US) would change, and why the idea of a corporation taking over a country is less plausible than it once was.

It made sense in the 1960s to think of Corporations as great sprawling organisations that could possibly marshall the array of skills involved in running a country. Companies did have wide ranges of businesses and were more relaxed. But attitudes changed in the 1980s – maximizing return on capital meant that companies would shrink down to core products with the greatest returns, and jettisoning or spinning off other projects. In many ways I suspect this had alot to do with the movement from internally fostered management to a floating class of specialists in exploiting the principal agent problem in corporate governance. Shuffling projects between companies and identities meant an apparent increase in return on capital became the basis for bonuses – even though in aggregate there was no improvement.

Nowadays only a few companies still dominated by the shareholdings of a few (like Microsoft, News Ltd or Google) are prepared to fritter away money on unprofitable side projects. Even zaibatsu are less keen to expand the range of what they do now, and the chaebol were forcibly shrunk in the late 90s.

So we end up with a company like Apple, with a handful of very successful products that make a great deal of money it can’t do anything with. It has no other divisions to cross subsidize subsidize, or research to undertake (the company’s success has always been in packaging end products and not developing technology. They either cop the tax when they repatriate the money and pay larger dividends, or they let it sit in a bank account. They certainly wouldn’t pursue something outside their core – unless there was a tax dodge in it.

To be sure, owning a country would free the company from tax obligations were they to incorporate there and pay dividends there. But do they pay them in Apple dollars, get another country to let them use their currency or make sure the country they buy already has an easily currency? Think about what would be needed to support a new currency. They’d either start taxing, issuing debt, or make Apple dollars backable by Apple products – all of which seem foolish and still unlikely to make it a tradable currency (assuming shareholders want to buy things other than consumer electronics). But whom would let them use their currency, and countries that already have hard currencies are likely to be too large.

And of course, if shareholders remain in other countries, they’d be reliant on their resident states continuing to recognise Appledonia as a sovereign state in a way that prevents them taxing those same dividends. Maybe they’d also pay to join the WTO?

Ideas that might not matter: Inefficient technological path dependence

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Part one of a intermittent series on interesting ideas that might not be useful.

Today I’m talking about path dependence that leaves us with second rate technology.

The hypothesis is very simple, but very interesting. A society has a problem, and a number of technologies become possible solutions. One of these technologies makes a little more progress than the others – it could be because this technology makes the first step a little easier or just through complete randomness – but this progress meas that it becomes the focus of attention. Funding, the efforts of innovators and entrepreneurs and other resources start flowing towards it because it looks like the best bet. This leads to even more progress which attracts even more. The competitors are neglected and forgotten.

But unbeknown to all, one of these technologies had a brighter future or another has come along too late. If only there had been a little bit of early success it would have been developed into a much better technology than its more favoured rival. By the time this is realised, its far too late to swap over because we’re already locked into the other. The individual incentives to change are far weaker than the collective benefit would be. Because of an effectively random event in the past, we end up in a poorer future.

A very interesting idea and very intuitive (path dependence in general is clearly true) and with large ramifications. But is it useful?

The overwhelming problem is that counterfactuals are  hard to find. We can’t (yet) look at alternate universes to see whether the technologies we pursued are inferior to those we didn’t. That makes it hard to confirm the hypothesis on the vast majority of candidates. This also makes it hard to avoid making similar mistakes. There may be innumerable better paths we could have taken, but without some way to recognise what they were, the idea is fairly pointless.

What do we do with the hypothesis then?

There have been efforts to identify cases based on real analysis. Unfortunately most treatments of the idea are content to stop at just two, both of which are far from convincing.

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If our models are correct, then people are smarter than we realised!

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Whilst making pies yesterday I happened to recall a sentence I read 7 or so years ago, which suddenly struck me as very silly. So I just looked it up to make sure I hadn’t imagined it.

I didn’t.

Here’s the whole paragraph.

A final point worth noting on gang wars is that their strategic
aspects are not lost on the participants. Gangs use violence on
their competition’s turf as an explicit strategy for shifting demand
to their own territory. As one former member of the rival gang put
it during a gang war:
See the thing is they [the gang for which we have data] got all these
places to sell, they got the numbers [of sellers], you know. It’s not like we can
really do what they doing. So we gotta try get some kinda advantage, a
business advantage. If we start shooting around there [the other gang's
territory], nobody, and I mean it you dig, nobody gonna step on their turf. But
we gotta be careful, ’cause they can shoot around here too and then we all
f——. But, it’s like we ain’t got a lotta moves we can make, so I see shooting in
their ‘hood as one way to help us.
In fact, in some cases, a gang engages in drive-by shootings on a
rival’s turf, firing into the air. The intention is not to hurt anyone,
but rather to scare potential buyers. It is interesting to note that 
the gang member understands the game-theoretic consequences
of such actions corresponding to retaliation by the rival, in which
case both parties are worse off than if no violence had occurred.  (my emphasis)

Some of you might recognise the paper, given it was popularised in Freakonomics. It’s “An Economic Analysis of a Drug-Selling Gang’s Finances” by Levitt and Venkatesh.

On reflection I might be unfair in calling it silly, but it reflect a strange pathology I think I often see in economics. Economists attempt to understand the consequences of human behaviour, so they build models. Models are necessarily simplified, so we include things like the assumption of rationality, which is then described in terms of optimal behaviour from an individual standpoint. We then use these to try and understand the world.

Except somewhere along the road economists take a detour, and rationality stops being a simplifying assumption, and starts being a way of thinking clever and properly educated people (i.e economists) do. Subsequently when economists observe real life behaviour like the drug gangs, the conclusion isn’t;

Looks like our game theory models are useful for understanding strategic behaviour in drug gangs. Cool.

Rather it is;

Drug dealers understand Game Theory?! Amazing!

Which is a very silly way to go about trying to understand human societies and economies.

I also recall a post on the Freakonomics blog [fn1] in which Levitt remembers fondly a conversation with Milton Friedman early in his career. Levitt had said he was careful to save money on his early salary, and Friedman chided him for being irrational and neglecting to take into account that Levitt’s higher salary in the future would allow him to smooth out his consumption. Here Friedman was clearly drawing on the Permanent Income Hypothesis, his “best scientific work” and one of the cited reasons for his Riksbank prize.

So we have Friedman chiding people for not acting the way his models said they would. A very smart man and a positivist no less!

It is a very strange discipline that is surprised when its models are useful, and cranky at reality when they are not.

 

[fn1] Which I can’t find. I guess they wanted to make sure all memory of the blog prior to the past few years of hissy fits is damned.

 

 

 

Krugman comes down as a Kuhnian

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Responding to Noah Smith, Krugman says the following about the long term effects of the “Macro Wars”.

 On the academic side: look, to a first approximation nobody ever admits being wrong about anything. But my sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals.

He doesn’t use the term, but I usually associate this with Kuhnianism, particularly in the way he describes dogmatism. Scientific progress has never been made changing the minds of adherents.The antagonists are far too dogmatic for that and attached to their theories. One theory only “wins” by convincing the audience, which is the next generation of scientists. That’s how we see knowledge progressing in the physical sciences – despite the naive Positivist sentiment that the scientific mind would be convinced solely by prediction and evidence. Ideally maybe [fn1], but never in practice.

And why on earth would we expect economists of all people to be less dogmatic? This is why I think Steven Grenville’s criteria for success in economic debate is a little flawed. If we insisted that an admission of wrongness was a criteria for success in every field of knowledge, then we’d struggle to find one. Certainly not in regard to plate tectonics or the big bang theory where the losers took their views to the grave. Most likely the same will occur between adherents of string theory and quantum loop gravity.

The only problem is that in macro, the view vindicated by evidence is not promoting a new paradigm, but an old one. Perhaps Kuhn should have also written The Structure of Economic Restorations.

 

[fn1]And by “maybe” I mean no, but that’s a debate for another time.

 

Whorfian Economics

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Via Mark Thoma

Languages differ widely in the ways they partition time. In this paper I test the hypothesis that
languages which grammatically distinguish between present and future events (what linguists call strong-
FTR languages) lead their speakers to take fewer future-oriented actions. First, I show how this prediction
arises naturally when well-documented effects of language on cognition are merged with models of decision
making over time. Then, I show that consistent with this hypothesis, speakers of strong-FTR languages
save less, hold less retirement wealth, smoke more, are more likely to be obese, and suffer worse long-
run health. This is true in every major region of the world and holds even when comparing only
demographically similar individuals born and living in the same country. While not conclusive, the
evidence does not seem to support the most obvious forms of common causation. Implications of these
findings for theories of intertemporal choice are discussed.

Unforunately I read that just before bed, so it bugged me all night. Whorfism – the belief that characteristics of a language alter the neurology, thought or behaviour of its speakers. Whorfism,  the linguistic equivalent of Austrian Business Cycle Theory ; seductive rubbish readily ensnaring the lazy minded.

Back when I did my own work using language as an explanatory variable I was at pains to point out that the characteristics of the language were of no account. When I thought the idea was arising  elsewhere on Troppo I intervened. In that last case I was even using a Future Tense hypothesis like Chen uses, only to mock the idea.

Still Chen (the author) does not appear to be lazy or feeble minded. He’s certainly aware of the esteem in which the Whorf Hypothesis is held. So I think it’d be wise to treat this as legitimate, but in my mind probably spurious research. I still think the economics of language, or linguoeconomics is ripe for more research. If this opens up the doors a little, it only does good.

At Language Log, Geoffrey Pullum critiques Chen on the linguistics. Interestingly:

When I engage in amateur reflection on how language might affect thought, I find that I might just as well be convinced that a language with grammatical future tense marking would have speakers who paid MORE attention to worrying about the future. After all, they use a linguistic device that explicitly picks it out. Chen’s hypothesis is that instead they would naturally pay LESS attention to what the future might hold in store. Which hypothesis is right? Why is it Chen’s favorite that is right?

The alternate hypothesis Pullum is actually the one I used to mock Whorfism here, the reverse relationship Chen proposes would never have occurred to me [fn1]. Earlier he uses the Pirahãas a counterexample to Chens hypothesis when I used as an example of false correlation (the “small tribal group”) .

His Stable mate Mark Liberman merely focuses on the potential for spurious correlation. Chen graciously responds on the same blog, but I think their skepticism is well warranted…..even if they appealed to my preconceptions.

[fn1] Which weakens the findings in a Bayesian light I guess.

 

 

Australia is Part of Asia

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It is, of course, the season for holiday fun times making worthless definitions.

Last week my wife and I were making a rare trip into Namba, a popular entertainment and shopping district in Osaka. We happened to see a restaurant named “Blue Billabong (Japanese)”. It purported to be an Australian themed restaurant. We looked at the menu, expecting to snigger in the same resigned fashion as we would looking at the Menu for the Outback Steakhouse.

Here’s some of the items  on the menu.

Pasta with 5-spice prawns.

Steamed Shredded Chicken with Ginger and Green Onion Oil.

Sweet and Sour Pork with Red Wine Sauce

Seasame Crusted Lotus Seeds in Red Beans with Salty Icecream.

Xiaolongbao (“soup dumplings” associated with Shanghai).

Fish and Chips

You can make out some other items here (if you zoom in).

This was unexpected. It’s easily recognisable as something you’d find in a contemporary Australian restaurant. It’s the same combination of Mediterranean and Asian flavours (here mainly Italian and Chinese [fn1]) that has been labeled Modern Australian for roughly 20 years.

But it’s also in a country where tourism campaigns portray Australia with dozens of photos of Cairns and the Gold Coast, the Harbour Bridge and nothing of the rest of the country where Australians live.

It’s good to see we are beginning to be recognised for who we are.

…and maybe “Asia literacy” is just a code word for established government and media following belatedly where the rest of the country has already trod.

[fn1] And much different to the Italian (read “Spaghetti”) and Chinese (read 1970′s RSL) one most frequently encounters in Japan.

Australia, F*** Yeah?

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Ken has already linked to Possum’s post on Australian Exceptionalism, but I have a distinct point I want to make about it. In a great part I agree with the sentiment, although I’d espouse most of the past 220 years rather than just the past three decades.  It’s far less the “Three Cheers school” of history than the “holy shit school” of history. That we became Australia rather than Argentina or the US South is astonishing, yet constantly overlooked in favour of petty events distinguished only by white on white violence.

A few years ago I had this missive printed on The Interpreter.

 

As much as I am wary of discussions of national character, there’s another aspect of cricket that I think relates to Australian character. This is the fretting that comes from unfavourable comparison with the unattainable.

There is a permanent dialogue about the fall of sportsmanship in cricket, the end of walking, players celebrating excessively etc. and an endless stream of scorn on players who are not saints. It never seems to be mentioned that no other sport would have an expectation that a player should disagree with the officials when he is favoured by them. What other sport would even conceive that the officials are a contingency plan against the teams’ disagreement rather than the first authority?

Likewise, following the generation after white settlement, Australia has consistently had among the highest standards of living and consistently been preoccupied with the weakness thereof, along with any other metric of national quality.

Who cares that the revealed preference of the world, expressed through net migration (people vote with their feet, after all) is overwhelmingly positive, nor that we have replaced Fair Verona as a literary fantasyland. Our kids aren’t learning! Our buildings are ugly! No one likes our films! We didn’t invent the computer! Our workers work less hours than the Koreans, are shorter than the Dutch, have fewer football skills than the Brazillians, do maths worse than the Chinese, make crappier cars than the Germans!

The deep insecurity about being less than perfect may be the greatest strength of both sport and country.

I really like the insecurity that obscures Australian achievement. I think it is a boon. It’s The Lucky Country Syndrome. Krugman once started a review of a Tom Friedman book with “Every few years a book comes along that perfectly expresses the moment’s conventional wisdom–that says pretty much what everybody else in the chattering classes is saying, but does it in a way that manages to sound fresh and profound.”.

XKCD

That’s how I feel about Donald Horne. It’s so strange that even today references to the book are always accompanied with boilerplate about how people misunderstood the title. I find it hard to think of a thesis so universally accepted in Australia, nor one so which is so universally believed to be not widely accepted. Continue reading →