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Ages ago, when his name was still one to conjure with, I took a long walk with John Seely Brown to discuss the applicability of literary criticism to the success of inventions. My recent ex at the time had gotten a thesis and several books out of the idea (going back to kierkegaard at least) that it was in many ways impossible for people schooled in 19th-century traditions to read modern writers, so I was primed for the discussion. What Brown’s researchers had found was that new gadgets were usable — at least at first — only insofar as they could be understood as a better/faster/smaller X, where X was a genre of technology that people already thought they understood.
That meant innovators had to think about how the things they were creating fit into existing ideas about the world (most obvious case: the desktop metaphor) and/or tell stories about the world that shifted people’s perceptions in ways that made new gizmos more comprehensible and acceptable — just as modernist writers have so often had side gigs as book reviewers and manifesto-promoters. And people who bought and tried to use the new tools had to learn — and sometimes privately revise– the stories they were told, until they had something that made sense.
The history of recent tech is littered with innovations that have stories, from blogs to “community” to android phones and e-book readers. Some of the stories make sense, some of them don’t, or at least not yet.
So now let’s apply this to financial innovations. All the fancy mortgage instruments, for example, were billed as cheaper/more flexible/more accessible/longer/lower/wider/faster versions of existing mortgages, even when they were only barely related to same. (Really: the last time people were issuing loans with no verification of income stream and options to add the first few years’ payments to the loan balance was during the savings&loan scandal, and most of them ended up in jail.) But the story made for good sales.
And the fancy instruments the big boys played had their own set of stories as well. They were just well-analyzed aggregations of existing securities, or adaptations of well-understood methods of laying off risk (never mind that the last time the insurance industry had a crisis they found out that no one had a clue of who had laid off how much risk to whom, or how much had come right back to its original roost). And in a sort of bitch-slap version of the usual genre issues, if you thought that they were too complex and opaque for people to be trading safely, then you clearly didn’t have the analytical chops and were better off playing in the low-risk kiddie pool.
That last bit is important because of the way it intersects with Keynes’s dictum that the market can stay irrational longer than you can stay solvent. In this particular case, the irrationality consisted in believing the stories being told about all these opaque financial instruments. If you decided to trade in them (with the exception of a few very-deep-pocketed pessimists who took the short sides of transactions) you pretty much had to accept the models that everyone else was using, or else your valuations would be way off from everyone else’s, and you’d get clobbered in the day-to-day shifts. Playing that particular game involved accepting the shared consensual hallucination — buying into the MBS/CDO genre — so that your conversations, as expressed in bids and asks, would be mutually intelligible.
And once everyone was speaking the same language, they were all lost.
So I was building a little (40-odd piece) lego kit with the elder boy, and instead of being something fun to do after supper, it pretty much ended in tears. Not for the usual reason that modern lego kits are evil: we pretty much knew when we bought it that the pieces would be useful only for building precisely the thing pictured on the box, in precisely the configuration shown.
What I hadn’t understood was that they wouldn’t really be useful for doing that either. Half a dozen times the kid almost got some subassembly together, only to have it come apart because he pressed on an unsupported flange, or the tolerances of the fancy curved pieces were too loose. And then when we managed to put the whole thing together, he picked it up to play with it — it’s a spaceship, fercryinoutloud, it’s supposed to be whizzed through the air — and it fell apart again. Designers: if you are using a minifig as a primary structural element, your design sucks.
So I explained to him that some toys are made for display only, that you build them in order to put them on a shelf and look at them. And he said: “The reward the designers should get for this is a big thumbs down.”
Y’know, I was looking forward to doing the whole lego universe thing with him and designing kits that we then would be able to build. But eek.
A second argument is that the presence of additional market imperfections does not change the first-best logic; it simply calls for each market imperfection to be treated with its own first-best solution. This allows each expert in a field to propose first-best solutions in that field, leaving complications elsewhere to be dealt with by others. Larry Summers had a nice point to make about this approach in his comments on a paper on banking reform in China (Brookings Papers on Economic Activity, 2006:2):
Like experts in many fields who give policy advice, the authors show a preference for first-best, textbook approaches to the problems in their field, while leaving other messy objectives acknowledged but assigned to others. In this way, they are much like those public finance economists who oppose tax expenditures on principle, because they prefer direct expenditure programs, but do not really analyze the various difficulties with such programs; or like trade economists who know that the losers from trade surges need to be protected but regard this as not a problem for trade policy.
This used to piss me off no end when I was talking to economists. The “free” traders always thought it was sufficient to show that the aggregate gains from increased trade were sufficient for the winners to compensate the losers, but showed no interest in making sure that the compensation actually took place. (There was a strange disconnect in their positions — they argued for “free” trade as some kind of moral good because it increased overall wealth, but the fact that it virtually always resulted in more wealth for some groups and less for others was somehow morally neutral.)
The first-besters remind me of the famous joke about the mathematician and the hotel fire: he dabbles his finger in the water from the tap, murmurs “a solution exists” and goes back to sleep.
Microvision’s PicoP Display Engine is small – very small. Microvision lists the size of its evaluation kit (PDF) as 60-by-68-by-10 millimeters (2.36-by-2.68-by-0.39 inches), but EETimes reports that the OEM version will be squeezed into a 20-by-40-by-7 millimeter (0.79-by-1.57-by-0.28 inches) package.
Why wait for foldable e-ink or oled? One of these with a suitably engineered rear-projection screen would do just fine. (It could do front-projection too, but you just know everyone would be sticking their fingers in the beam to make shadow pictures.)
Of course, the economy isn’t really much like a game of prisoner’s dilemma, but some of the outlines are the same: you make a transaction, you both win; you don’t make a transaction, you both lose (at least this time around); if you pay someone and they don’t hand over the goods or services, they win and you lose; if you convince them to hand over the goods/services and then don’t pay, you win and they lose. Economic theories have been built from way more distant analogies than that.
A single instance of the prisoner’s dilemma isn’t such a big deal. Where things get interesting is when you have lots of prisoners and lots of interactions. Way back in 1981, Robert Axelrod’s Evolution of Co-operation established that a simple tit-for-tat- model of cooperation and defection was more effective than almost any other algorithm for behavior in repeated prisoner’s dilemma interactions. If you ran a generational model where the most successful algorithms reproduced and the least successful ones were culled, pretty soon almost the whole population turned into tit-for-tat cooperators. And because tit-for-tat always cooperated on the first turn, the payoffs across the whole population were uniformly positively. (Or in simple-minded economic terms, when everybody does business with everybody else, the economy prospers.) Instead of nature (and society) being red in tooth and claw, it was plausibly hardwired for cooperation to appear from chaos.
Over the next 10 years or so, people with a lot more computing power than Axelrod had available kept looking at prisoner’s dilemma population, and they found something interesting and disturbing. Cooperation evolves, and then it unevolves. They ran simulations like Axelrod’s for tens of thousands of generations, and found that once cooperators had become an overwhelming majority of the population, algorithms based on defection could take root and eventually wipe out almost the entire cooperating population, so that they became the overwhelming majority in turn. Payoffs over the entire population became uniformly negative (defection matched with defection) and stayed that way for arbitrarily long periods, until some random combination of lucky events let enough tit-for-tat cooperators survive to form a critical mass and retake the majority again.
The first half of that sentence is what struck fear into my heart 15-odd years ago, and still does today: Payoffs over the entire population became uniformly negative and stayed that way for arbitrarily long periods. Translated into economic terms, that means you don’t automatically get a recovery after a bad enough crash. Absent government action, economies are supposed to recover from depressions because eventually productive assets become cheap enough that they’re attractive to buy for people who want to put them to work. But that assumes anyone has money to buy things, and when all your asset prices have gone through the floor, then you’re limited to cash on hand…
So we come around to the liquidity trap from a different direction. And obviously we can complicate the algorithms of our cooperators and defectors so that they react to general conditions, or act like bubble speculators or masters of the universe, but the ultimate lesson stays the same: a tanked economy with no one working and no one buying anything is just as stable a state as a prosperous economy with lots of people working and buying.
For a long time I’ve felt a background annoyance at the stupid “for environmental reasons you should buy a high-efficiency used car rather than a new prius or other higher-efficiency car” meme. And debunkings like this one didn’t satisfy me:
the Prius will consume 3,710 gallons of gas. Each gallon contains approximately 124,000 BTUs of energy, so that translates into 460 million BTUs’ worth of burned fuel. Add in the production energy, and the new Prius is responsible for a grand total of 573 million BTUs over its lifetime (not including disposal costs).
A Corolla with an automatic transmission, by contrast, averages 30.5 mpg—more than eight miles per gallon better than the average car on America’s roads. Over the vehicle’s lifetime, that translates into 5,656 gallons of gas containing more than 701 million BTUs of energy. Since the Corolla we’re considering is used, we won’t add to that total by factoring in production energy.
I realized that it’s because both the initial “contrarian” claim and this refutation are completely divorced from market economics. Or in philosophical terms, they’re Ayn Randian rather than Kantian. (or in physics terms, they hew to Galileo rather than Boehm… oh, nevermind)
In the world where the original claim and its refutation make sense, there’s an essentially infinite supply of high-efficiency used cars, and new higher-efficiency cars never enter the used market. Because if either of those assumptions is false (and both of them are) let’s see what happens:
If you buy a high-efficiency used car, that means someone else can’t buy it. They’re either going to have to buy a lower-efficiency used car or a new car, or no car at all. if demand for cars is unchanged by your decision, either you’re (by proxy) responsible for the BTUs spent manufacturing a new vehicle or for the BTUs spent by someone driving the less-efficient car they bought because you snagged the one they wanted. (And it gets worse: each decision to buy a particular car displaces some other potential buyer, so ultimately in the used-cars-only scenario you’re responsible for all the energy wasted by some gaz-guzzling battlewagon with blown piston rings that would have been junked had you not pushed every buyer down one notch by purchased a high-mileage used car.) In the new-vehicle case, the most you save is the difference in manufacturing energy between your original desire and the car that your displaced buyer decides on. But since all the people buying lightweight, higher-efficiency new cars are now buying used cars for ecological reasons, you might cause the saving of manufacturing any manufacturing energy at all. You might just have triggered the purchase of a Lincoln Navigator.
But what if demand for cars does change as a result of your decision? Can you now bask in the warmth of your ecological soundness? Well, sure, but the argument now boils down to “save the environment by not buying a car, or, preferable, arranging for someone poorer whom you don’t know or care about to not buy a car.” Contributing to someone else not having transportation to work or school or grocery store is an easy way to reduce carbon emissions, but it doesn’t have quite the self-righteous contrarian gloss.
Now look down the road five or ten years. All the original high-efficiency cars in the used market are clapped out. There aren’t a lot of newer high-efficiency cars entering the market because the people who were going to buy for ecological reasons them bought used cars instead. So what we have on the used market is a bunch of lower-efficiency cars. And what we have on the new market is a bunch of ditto, because manufacturers try (yes, try) not to build cars people don’t want to buy. It’s called responding to market signals.
Net result? More energy spent manufacturing (because the new-car manufacturers will be responding to the market of people who don’t care about manufacturing energy costs) and more energy spent driving (because the new-car market ultimately determines what’s available for used-car buyers). And this would be true even if today’s higher-efficiency new car had a higher lifetime energy cost than today’s high-efficiency used car. Because it’s not always going to be today.
The equivalent of Intrade’s margin requirement for banks is the reserves that they have to set aside to cover the risks in their derivative positions. The banks lobbied hard to allow these to be calculated with their own in-house models – this laxity will have to go. The total amount of capital tied up, even at current inadequate ratios, must be in the tens of billions. These capital requirements are also, as noted above, inherently more volatile; so banks become more dependent on each other to meet their regulatory obligations. What brought the house down however was the systemic informational risk; the subprime mortgage derivatives couldn’t be priced.
But the folks who’ve been failing aren’t (in regulatory terms) banks. Published accounts have leverage ratios (very roughly the reciprocal of margin requirements) at 30:1 to 100:1. And even that’s not really a reserve requirement, because who knows where the original money for the pyramid came from. Imagine that someone lent you money for that Intrade bid, and someone lent them money…
But the real misunderstanding is thinking that all this deadweight and all the cuts taken out for processing are bugs. This is the financial industry we’re talking about. Who gets all the fees, and who collects all the spare interest? So the more layers and the more opaque each layer, requiring more advice and more fees, the more profitable. If bankers could find a way to spin money around that was all deadweight and fees, with no benefit to the physical economy at all, they’d be so there.
Some Internet technologists and privacy advocates say those actions and other government policies may be hastening the shift in Canadian and European traffic away from the United States.
“Since passage of the Patriot Act, many companies based outside of the United States have been reluctant to store client information in the U.S.,” said Marc Rotenberg, executive director of the Electronic Privacy Information Center in Washington. “There is an ongoing concern that U.S. intelligence agencies will gather this information without legal process. There is particular sensitivity about access to financial information as well as communications and Internet traffic that goes through U.S. switches.”
Markoff also point out that US companies have, as they often do, dropped the ball on sustained investment. But it’s an intriguing notion, or would be if it weren’t more about who gets to wiretap than about the idea of wiretapping at all.
The Intel team describes its system as a “wireless resonant energy link,” and is experimenting with antennas less than two feet in diameter to remotely light a 60-watt light bulb.
In 2006, the M.I.T. researchers demonstrated that by sending electromagnetic waves around a waveguide it was possible to produce “evanescent” waves that could permit electricity to wirelessly tunnel to another waveguide “tuned” to the transmitting loop.
Mostly, I think it’s pretty cool, albeit another 25% in power consumption by all the things that are currently plugged in doesn’t sound so great.