Quotulatiousness

October 18, 2017

“Obama is actually the most conservative President since World War II”

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 03:00

Dan Mitchell does some statistical legerdemain to calculate US government spending increases by presidential terms in office and discovers some surprising results:

I’ve learned that it’s more important to pay attention to hard numbers rather than political rhetoric. Republicans, for instance, love to beat their chests about spending restraint, but I never believe them without first checking the numbers. Likewise, Democrats have a reputation as big spenders, but we occasionally get some surprising results when they’re in charge.

President Obama was especially hard to categorize. Republicans automatically assume he was profligate because he started his tenure with a Keynesian spending binge and the Obamacare entitlement. But after a few years in office, some were arguing he was the most frugal president of modern times.

  • So I crunched the data in 2012 and discovered that he was either a big spender or a closet Reaganite depending on how the numbers were sliced.
  • I then re-calculated the budget numbers in 2013 and found that spending grew at a slower rate the longer Obama was in office.
  • And when I did the same exercise in 2014, using another year of data, Obama looked even more like a tight-fisted fiscal conservative.

Or, to be more accurate, what I basically discovered is that debt limit fights, sequestration, and government shutdowns were actually very effective. Indeed, the United States enjoyed a de facto spending freeze between 2009 and 2014, leading to the biggest five-year reduction in the burden of federal spending since the end of World War II. And it’s unclear that Obama deserves any of the credit since he was on the wrong side of those battles.

Anyhow, I’ve decided to update the numbers now that we have 8 years of data for Obama’s two terms.

But first, a brief digression on methodology: All the numbers you’re about to see have been adjusted for inflation, so these are apples-to-apples comparisons. Moreover, all my calculations are designed to show average annual increases. I also made sure that the “stimulus” spending that took place in the 2009 fiscal year was included in Obama’s totals, even though that fiscal year began (on October 1, 2008) while Bush was President.

Lots of links in the original post that I’m too lazy to re-link, so go read the whole thing. H/T to Rafe Champion for the link.

QotD: The course of economic progress in a nutshell

Filed under: Economics, Food, History, Quotations — Tags: , — Nicholas @ 01:00

It is customary in these days of “slow food” to sneer at these devices, to aver that a real cook doesn’t need more than a cast-iron dutch oven, a good chef’s knife and a sense of adventure. As someone who took herself off to Chicago for three months with pretty much exactly this set of equipment (okay, also an electric pressure cooker), I can testify that this is true — sort of. You can get by with a very minimal set of equipment if you know how to cook. But as someone who has done so, I have to ask: Why would you?

I mean, yes, I know how to chop onions just fine. But doing so makes me cry like the dickens, unless I wear goggles. I know how to make great lemon curd, béchamel, hollandaise, caramelized onions. But my Thermomix makes them just as well, and I can read a novel instead of standing at the stove, stirring. I can whisk up an angel food cake in a copper bowl … or I could let the stand mixer do that, and my arms won’t hurt.

For that matter, I could also go out and grow my own wheat, mill it myself, and then mine some salt and cultivate some wild yeast to bake bread. But I don’t do these things, because subsistence farming is actually pretty arduous and unrewarding, which is why few of us have chosen to live off the grid. I see no reason to romanticize the grunt labor of the kitchen. If a machine does it as well as I do, and fits in my paycheck, I’ll happily outsource to the machine, and save my labor for the stuff the machine can’t do. This being basically the entire history of human economic progress to date.

Megan McArdle, “Give Thanks for Williams-Sonoma and the Garlic Press”, Bloomberg View, 2015-12-07.

October 15, 2017

David Suzuki’s (incomplete) economic understanding

Filed under: Cancon, Economics, Environment — Tags: , , — Nicholas @ 05:00

Several years ago in the Literary Review of Canada, Joseph Heath explained how he tried “being green” and in the process discovered that Canada’s secular environmental saint David Suzuki literally didn’t have a clue about economics:

David Suzuki’s most recent, The Legacy: An Elder’s Vision for Our Sustainable Future, is billed as an attempt by “one of the planet’s preeminent elders” to “sum up in one last lecture all that he has learned over his lifetime.” Suzuki is, of course, one of the most influential public intellectuals in this country. Like most Canadians of my generation, I grew up watching The Nature of Things, and so tend to think of Suzuki as a constant in the universe.

Suzuki was also an environmentalist long before it was cool to be an environmentalist. Perhaps because of this passionate commitment to the cause, it is startling to discover that Suzuki is oblivious to the logic of collective action. What’s worse, he does not even know what an externality is, and seems unwilling to learn. In The Legacy, he repeats the same incorrect definition that he has been using for years (he equates externalities with anything that is not part of, and hence external to, an economic model, and then claims, on that basis, that economists ignore them). Elsewhere, he even provides a detailed account of where the misunderstanding arose. It was apparently based upon something that the instructor said to him, on the first day of an economics class, which he evidently misinterpreted and never bothered to double check.

It is worth pausing for a moment to reflect upon this. It means that Suzuki does not know the first thing about environmental economics. It means that in 38 years as a university professor, public intellectual and environmental activist, he did not once take the time to find out what social scientists have to say about the problem of global warming. It means that he has never even glanced at the Wikipedia page on environmental economics.

Because of this, Suzuki winds up committing the core fallacy of environmental activism. He thinks that if people only understood the consequences that their actions were having on the environment, they would each be motivated to change their behaviour. And so, to the extent that we are not changing our behaviour, it must be because we do not understand, or that we have not been telling ourselves the right “story.” Yet this is manifestly not the case. My wife understands the science of global warming perfectly well. But she also does not like dandelions growing by the side of the road. And when push comes to shove, the desire to kill dandelions wins over environmental peccadilloes. It is not particularly mysterious. It is called free riding; people do it all the time.

Thus when Suzuki writes “we say we are intelligent, but what intelligent creature, knowing that water is a sacred, life-giving element, would use water as a toxic dump?” he seems genuinely not to know. The answer is easy: we are intelligent creatures who care just slightly more about ourselves than we do about other people. For example, like most residents of Toronto I do not use the water on my land as a toxic dump; I use Lake Ontario for that purpose. Saying that “we are water, and whatever we do to water, we do to ourselves” sounds very nice, but all the “we” talk actually encourages a very serious confusion. What I do to water, I primarily do to other people, not to myself, which is why I care about it just ever-so-slightly less.

In the end, and somewhat contrary to all expectations, Suzuki winds up coming off as a science chauvinist. There are basically two bodies of knowledge that he respects. There is physical science — genetics, biology, the stuff that he studies — and there is what he calls “traditional knowledge” — by which he means the wisdom of aboriginal and indigenous peoples. Conspicuously absent is any interest in what social scientists might have to say about how human beings work, about the political process, about the economy and about how societies mobilize to address collective action problems. As a result, he knows a lot more about the nature of things than he does about the nature of people.

H/T to Andrew Potter, via Stephen Gordon for the link.

October 11, 2017

The Great Recession

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 04:00

Marginal Revolution University
Published on 9 Aug 2016

There’s already been much discussion over what fueled the Great Recession of 2008. In this video, Tyler Cowen focuses on a central theme of the crisis: the failure of financial intermediaries.

By 2008, the economy was in a very fragile state, with both homeowners and banks taking on greater leverage, many ending up “underwater.” Why did managers at financial institutions take on greater and greater risk? We’ll discuss a couple of key reasons, including the role of excess confidence and incentives.

In addition to homeowners’ leverage and bank leverage, a third factor played a major role in tipping the scale toward crisis: securitization. Mortgage securities during this time were very hard to value, riskier than advertised, and filled to the brim with high risk loans. Cowen discusses several reasons this happened, including downright fraud, failure of credit rating agencies, and overconfidence in the American housing market.

Finally, a fourth factor joins homeowners’ leverage, bank leverage, and securitization to inch the economy closer to the edge: the shadow banking system. On the whole, the shadow banking system is made up of investment banks and various other complex financial intermediaries, highly dependent on short term loans.

When housing prices started to fall in 2007, it was the final nudge that pushed the economy over the cliff. There was a run on the shadow banking system. Financial intermediaries came crashing down. We faced a credit crunch, and many businesses stopped growing. Layoffs ensued, increasing unemployment.

What could have been done to prevent all of this? You’ll have to watch the video to find out.

October 10, 2017

India’s bold experiment … is an economic failure

Filed under: Economics, Government, India — Tags: , , — Nicholas @ 05:00

Back in December, I linked to an article by Shikha Dalmia, discussing the rhetoric and (likely) reality of India’s currency experiment. Now, Lawrence White rounds up the damage done:

The debate over demonetization was revived this month (September 2017) after the Reserve Bank of India finally announced the count of returned currency. It announced that 99 percent of the discontinued notes, Rs 15.28 trillion out of Rs 15.44 trillion, had been returned. As Vivek Kaul has noted, “The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them.”

The trivial size of unreturned currency, of course, obliterates BDK’s [Bhagwati, Dehejia, and Krishna’s] projection of a government seigniorage windfall.

What about BDK’s other projected source of revenue, the 50% tax on acknowledged black deposits? Whereas in BDK’s scenario, black currency holders would make Rs2 trillion in voluntary-disclosure deposits, which would yield Rs 1 trillion in revenue, the actual collections under the scheme were reported in April at Rs 23 billion, or 2.3% of the BDK-imagined sum. Such paltry revenues mean that demonetization, from the fiscal perspective, was all pain and no gain.

The accumulating evidence on economic growth, meanwhile, has become damning. Between July and September 2016, India’s GDP grew 7.53 percent. Between January and March 2017 it grew 5.72 percent. Former head of the Reserve Bank of India Raghuram Rajan, now returned to the University of Chicago, links the drop to demonetization: “Let us not mince words about it — GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money — over Rs2 lakh crore [i.e. trillion] and maybe approaching Rs2.5 lakh crore.” Kaul adds that GDP does not well capture the size of the informal cash sector, where the losses from demonetization were greatest.

In response to the RBI report and GDP data, and to their credit, BDK have substantially retreated from claims of success to what can be regarded as the claim that there is still a chance to break even.

October 9, 2017

Reviewing Democracy in Chains as speculative fiction, rather than as history

Filed under: Books, Economics, History, Politics, USA — Tags: , , , , , — Nicholas @ 05:00

James Devereaux critiques the recent book by Nancy MacLean which was intended to tarnish the reputation of James McGill Buchanan by tracing the intellectual roots and influences that shaped Buchanan’s life and work.

Nancy MacLean, in her new book Democracy in Chains, has allegedly revealed the master plan of right-wing political operatives, funded by the Kochs and inspired by James McGill Buchanan. MacLean pulls no punches as she describes a right-wing conspiracy meant to bring about “a fifth column movement the likes of which no nation has ever seen.” (page 127) Alas, the major problem with her account, as her fellow Duke Professor Mike Munger summarized, is it is “a work of speculative historical fiction.” MacLean’s contribution is a failure of academic discourse more likely to increase unfounded paranoia and division than to reveal any hidden agenda. MacLean’s bias bleeds into nearly every aspect of this book and taints her interpretation of the facts and sources beyond any reasonable interpretation could support. At one point she ponders the genius of Buchanan but determines it to be an “evil genius” for his work, much of which discusses the difficulties of democracy (page 42).

Why, one may feel justified in asking, dwell on speculative fiction? Unfortunately, when speculative fiction enters the popular culture, is applauded, and treated as fact, a measure of scrutiny is required. MacLean has received a fair share of positive press. NPR wrote that Democracy in Chains is “a book written for the skeptic; MacLean’s dedicated to connecting the dots.” That is if the dots were points on a corkboard tied together with red yarn. Oprah’s book club put it in their “20 books to read this summer” list. The Atlantic’s review praised the book as “part of a new wave of historiography that has been examining the southern roots of modern conservatism.” Slate also wrote a review.

A Deluge of Error

MacLean’s revelation regarding this “stealth plan” for a “fifth column movement” focuses on the relatively obscure, but well-respected, founder of public choice economics Nobel laureate James McGill Buchanan. MacLean weaves a fascinating tale but one that paints Buchanan and sympathizing libertarians as radicals determined to undermine democracy for the purpose of satisfying elitist urges, squashing the underdog, burdening the minority, and exploiting the poor. Unfortunately for MacLean, and those heaping praise, it is clear this tale rests on ransom-note-style citations, cutting and pasting together portions of phrases to change the meaning and support her narrative. In certain places it appears she has woefully misunderstood the source material or did not care – the notes do not match the claims. By cobbling together this mish-mash of selective quotes and speculation MacLean errs twice: first in describing Buchanan’s views and second in describing the motives of Buchanan and anyone sympathetic to his view.

A litany of scholars have examined the book and revealed a deluge of error. Russ Roberts wrote that MacLean owed Tyler Cowen an apology, courteously gave her room to respond, which she used to double down on her claims despite the obvious selective use of unfairly parsed phrases which attributed a view to Cowen he did not hold. Steve Horwitz, Michael Munger, Jonathan Adler, and David Bernstein have found issues with her citations and claims (Adler aggregated them at the Washington Post). Most thoroughly, Phil Magness has dissected numerous errors, misquotes, and general failures of citation found within the book, it appears to be an ongoing project. The errors which have compiled are such that they undermine credibility in the reading. As others have listed her poor citations, mangling of quotes, and selective editing, this will not be the focus of this review.

Since the publication of Maclean’s book, Don Boudreaux at Café Hayek has been hammering her work on an almost daily basis.

The Centuries-Old Debt That’s Still Paying Interest

Filed under: Economics, Europe, History — Tags: , , — Nicholas @ 02:00

Tom Scott
Published on 25 Sep 2017

In the archives of Yale University, there’s a 367-year-old bond from the water authority of Lekdijk Bovendams, in the Netherlands. And it’s still paying interest.

Thanks to:
Prof. Geert Rouwenhorst for his time and explanation
All the team at the Beinecke Rare Book and Manuscript Library
Michelle Martin (@mrsmmartin) for editing the interview
and Leendert van Egmond for telling me about the bond!

October 8, 2017

Limited liability isn’t magic

Filed under: Economics, Humour, Law — Tags: , — Nicholas @ 03:00

John Hasnas has a Princess Bride problem:

In the much-beloved movie, The Princess Bride, Inigo Montoya has spent his life seeking revenge against Count Rugen, the man who murdered his father. When he finally confronts Count Rugen, he keeps repeating, “Hello. My name is Inigo Montoya. You killed my father. Prepare to die.” Finally, in utter frustration, Count Rugen yells, “Stop saying that!”

I know just how Count Rugen felt.

Everywhere I go, people begin arguments for a wide variety of normative conclusions with the premise, “Corporations have the special privilege of limited liability.” Thus:

  • “Corporations have the special privilege of limited liability; therefore, they have social responsibilities that individuals and other businesses do not.”
  • “Corporations have the special privilege of limited liability; therefore, government regulation is required to level the competitive playing field.”
  • “Corporations have the special privilege of limited liability; therefore, they are obligated to manage their company in the interest of all their stakeholders.”

I encounter this statement in so many contexts, both inside and outside the academy, that, like Count Rugen, I want to yell. “Stop saying that!”

However, in my case, it is not because I fear death, but because the statement is so patently false.

Corporations Do Not Have Limited Liability

Shareholders have limited liability. If a corporation contracts a debt that it does not pay or is found liable for a tort, one hundred percent of its assets are available to satisfy the debt or judgment. If it does not have enough cash on hand to pay what it owes, its creditors may force the firm to liquidate and sell off its physical assets to discharge its debt. The corporation is fully liable for all the debts it incurs and all the torts it commits.

It is the corporation’s shareholders who have limited liability. They are liable to lose one hundred percent of their investment in the firm, but no more. The firm’s creditors may not collect the corporation’s debt or judgment out of the shareholders’ personal wealth. Thus, the shareholders’ liability for the debts of the firm is limited to the size of their investment in the firm.

October 5, 2017

Four Reasons Financial Intermediaries Fail

Filed under: Americas, Economics, Japan — Tags: , , , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 26 Jul 2016

As we’ve discussed in previous videos, financial intermediaries bridge savers and borrowers. When these bridges crumble, the effects can be disastrous. For businesses, credit shortages can lead to bankruptcy, or layoffs. For individuals, they rely on credit to invest in education or a new home or car. These negative effects show you how crucial intermediaries are to our lives.

Still, what exactly causes failed intermediation? Four answers:

First, insecure property rights. Simply speaking, when you save money at a bank, you expect the ability to pull out your funds when needed. But what if your deposits are frozen? Or confiscated altogether? For instance, in 2013 amidst a financial crisis, the government in Cyprus confiscated bank deposits to help pay down the country’s budget shortfall. You can see how insecure property rights can scare away potential savers.

Second, controls on interest rates. Interest rates are the price of borrowing. Thus, controls on interest rates, often called usury laws, are effectively price ceilings—they set the interest rate lower than the market equilibrium interest rate. With this forced lowering of interest rates, borrowers will want to borrow more, but lenders won’t want to lend. The effect? A lending shortage.

Third, politicized lending. Banks profit by assessing risk, and then loaning, based on that assessment. Banks that excel at assessment succeed. Those poor at it die out. Problems arise when the government intervenes to prop up failing banks, resulting in what we call “zombie banks.” In such cases, intervention undercuts normal competition, and intervention tends to favor banks that are politically connected. In fact, it’s been shown that there’s an inverse correlation between government ownership in banks and a country’s GDP per capita and productivity growth.

Fourth, you have runs, panics, and scandals. Remember, trust is vital to the financial system. When trust erodes, depositors may rush to withdraw their money from banks, causing what is known as a “bank run.” This can cause banks to fail, as we saw during the Great Depression. Scandals can also depress market confidence. Enron, WorldCom and Bernie Madoff may come to mind.

So, which of these four factors contributed to the Great Recession of 2008?

We’ll discuss that in our next video.

October 1, 2017

Deirdre McCloskey on the rise of economic liberty

Filed under: Economics, History, Liberty — Tags: , , , , , , — Nicholas @ 03:00

Samizdata‘s Johnathan Pearce linked to this Deirdre McCloskey article I hadn’t seen yet:

Since the rise during the late 1800s of socialism, New Liberalism, and Progressivism it has been conventional to scorn economic liberty as vulgar and optional — something only fat cats care about. But the original liberalism during the 1700s of Voltaire, Adam Smith, Tom Paine, and Mary Wollstonecraft recommended an economic liberty for rich and poor understood as not messing with other peoples’ stuff.

Indeed, economic liberty is the liberty about which most ordinary people care.

Adam Smith spoke of “the liberal plan of [social] equality, [economic] liberty, and [legal] justice.” It was a good idea, new in 1776. And in the next two centuries, the liberal idea proved to be astonishingly productive of good and rich people, formerly desperate and poor. Let’s not lose it.

Well into the 1800s most thinking people, such as Henry David Thoreau, were economic liberals. Thoreau around 1840 invented procedures for his father’s little factory making pencils, which elevated Thoreau and Son for a decade or so to the leading maker of pencils in America. He was a businessman as much as an environmentalist and civil disobeyer. When imports of high-quality pencils finally overtook the head start, Thoreau and Son graciously gave way, turning instead to making graphite for the printing of engravings.

That’s the economic liberal deal. You get to offer in the first act a betterment to customers, but you don’t get to arrange for protection later from competitors. After making your bundle in the first act, you suffer from competition in the second. Too bad.

In On Liberty (1859) the economist and philosopher John Stuart Mill declared that “society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering; and feels called on to interfere only when means of success have been employed which it is contrary to the general interest to permit — namely, fraud or treachery, and force.” No protectionism. No economic nationalism. The customers, prominent among them the poor, are enabled in the first through third acts to buy better and cheaper pencils.

[…]

Indeed, economic liberty is the liberty about which most ordinary people care. True, liberty of speech, the press, assembly, petitioning the government, and voting for a new government are in the long run essential protections for all liberty, including the economic right to buy and sell. But the lofty liberties are cherished mainly by an educated minority. Most people — in the long run foolishly, true — don’t give a fig about liberty of speech, so long as they can open a shop when they want and drive to a job paying decent wages. A majority of Turks voted in favour of the rapid slide of Turkey after 2013 into neo-fascism under Erdoğan. Mussolini and Hitler won elections and were popular, while vigorously abridging liberties. Even a few communist governments have been elected — witness Venezuela under Chavez.

September 30, 2017

Kathleen Wynne’s “War on Economics” is going great!

Filed under: Cancon, Economics, Politics — Tags: , , , , — Nicholas @ 03:00

Giving people “free” stuff will always get you support from people who don’t understand TANSTAAFL (including the leader of the opposition), as Chris Selley explains:

Polls suggest Premier Kathleen Wynne’s ongoing war on economists is paying dividends. Fifty-three per cent approve of her Liberal government extending rent control to units built after 1991, according to a Forum Research poll conducted in May; only 25 per cent disapproved. In June, Forum found 53 per cent of Ontarians supported jacking up the minimum wage to $15 from $11.40 by Jan. 1, 2019, versus 38 per cent opposed. The move was hugely popular among Liberal voters (79 per cent) and NDP voters (28 per cent). Wynne’s approval rating is staggering back up toward, um, 20 per cent. But a Campaign Research poll released Sept. 13 had the Tories just five points ahead of the Liberals. That’s pretty great news for this beleaguered tribe.

The boffins still aren’t playing along, though.

Earlier this month, Queen’s Park’s Financial Accountability Office projected the hike would “result in a loss of approximately 50,000 jobs … with job losses concentrated among teens, young adults, and recent immigrants.” And it could be higher, the FAO cautioned, because there’s very little precedent for, and thus little evidence on which to judge, a hike as rapid as the one the Liberals propose — 32 per cent per cent in less than two years.

This week, TD Economics weighed in with a higher number: “a net reduction in jobs of about 80,000 to 90,000 positions by the end of the decade.” And the Canadian Centre for Economic Analysis paints the grimmest picture: “We (expect) that the Act will, over two years, put 185,000 jobs at risk” — that’s jobs that already exist or that would otherwise have been created.

It’s easy to see why raising the minimum wage is popular. Governments like it because it doesn’t show up in the budget. We in the media can pretty easily find victims of an $11.40 minimum wage, and reasonably compassionate people quite rightly sympathize. Forty hours a week at $11.40 an hour for 50 weeks a year is $22,800. You can’t live on that.

Of course, these Liberal policies are flying in the face of mainstream economic theory, so you’d expect the Ontario Progressive Conservatives to have lots of arrows in the quiver to fight … oh, wait. Tory leader Patrick “I’m really a Liberal” Brown supports both the rent control and the minimum wage hike, just not quite as much at Wynne does. There’s Canadian “conservatism” in a nutshell for you: we also want to get on the express to Venezuelan economic conditions, just not quite as fast as the government wants. There’s a reason Kathleen Wynne isn’t as worried about getting re-elected as she used to be…

Office Hours: The Bond Market

Filed under: Economics — Tags: , — Nicholas @ 02:00

Marginal Revolution University
Published on 19 Jul 2016

In Intro to the Bond Market, you learned the basics about bonds and how they differ from stocks. But what if you’re investing and you’ve got a few possible companies to choose from? How would you evaluate which bond is likely to be the best investment for you?

Let’s look at an example from our bond market practice questions:

Suppose you’d like to invest in a company and you’ve narrowed your choice down to three firms: Company A is offering a zero-coupon bond with a face value of $1000 to be repaid in 1 year for $963. Company B has the same face value and maturity date but sells for $871. And company C also has the same face value and maturity but sells for $985. In which would you rather invest?

If some of the terms have you scratching your head, don’t worry! Go ahead and start this Office Hours video. Mary Clare Peate from the MRU team will cover the jargon and give you the tools you need to master the problem on your own.

September 29, 2017

Blockchain primer – blockchain as a ledger

Filed under: Business, Economics, History, Technology — Tags: , — Nicholas @ 04:00

At Catallaxy Files, Sinclair Davidson provides some background knowledge of blockchain technology as a modern evolution of the simple ledger:

The blockchain is a digital, decentralised, distributed ledger.

Most explanations for the importance of the blockchain start with Bitcoin and the history of money. But money is just the first use case of the blockchain. And it is unlikely to be the most important.

It might seem strange that a ledger — a dull and practical document associated mainly with accounting — would be described as a revolutionary technology. But the blockchain matters because ledgers matter.

Ledgers all the way down

Ledgers are everywhere. Ledgers do more than just record accounting transactions. A ledger consists simply of data structured by rules. Any time we need a consensus about facts, we use a ledger. Ledgers record the facts underpinning the modern economy.

Ledgers confirm ownership. Property title registers map who owns what and whether their land is subject to any caveats or encumbrances. Hernando de Soto has documented how the poor suffer when they own property that has not been confirmed in a ledger. The firm is a ledger, as a network of ownership, employment and production relationships with a single purpose. A club is a ledger, structuring who benefits and who does not.

Ledgers confirm identity. Businesses have identities recorded on government ledgers to track their existence and their status under tax law. The register of Births Deaths and Marriages records the existence of individuals at key moments, and uses that information to confirm identities when those individuals are interacting with the world.

Ledgers confirm status. Citizenship is a ledger, recording who has the rights and is subject to obligations due to national membership. The electoral roll is a ledger, allowing (and, in Australia, obliging) those who are on that roll a vote. Employment is a ledger, giving those employed a contractual claim on payment in return for work.

Ledgers confirm authority. Ledgers identify who can validly sit in parliament, who can access what bank account, who can work with children, who can enter restricted areas.

At their most fundamental level, ledgers map economic and social relationships.

Agreement about the facts and when they change — that is, a consensus about what is in the ledger, and a trust that the ledger is accurate — is one of the fundamental bases of market capitalism.

[…]

The evolution of the ledger

For all its importance, ledger technology has been mostly unchanged … until now.

Ledgers appear at the dawn of written communication. Ledgers and writing developed simultaneously in the Ancient Near East to record production, trade, and debt. Clay tablets baked with cuneiform script detailed units of rations, taxes, workers and so forth. The first international ‘community’ was arranged through a structured network of alliances that functioned a lot like a distributed ledger.

A fragment of a late Babylonian cuneiform ledger, held by the British Museum, 58278

The first major change to ledgers appeared in the fourteenth century with the invention of double entry bookkeeping. By recording both debits and credits, double entry bookkeeping conserved data across multiple (distributed) ledgers, and allowed for the reconciliation of information between ledgers.

The nineteenth century saw the next advance in ledger technology with the rise of large corporate firms and large bureaucracies. These centralised ledgers enabled dramatic increases in organisational size and scope, but relied entirely on trust in the centralised institutions.

In the late twentieth century ledgers moved from analog to digital ledgers. For example, in the 1970s the Australian passport ledger was digitised and centralised. A database allows for more complex distribution, calculation, analysis and tracking. A database is computable and searchable.

But a database still relies on trust; a digitised ledger is only as reliable as the organisation that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.

September 28, 2017

A very different kind of “hockey stick” – everything sucked until the industrial revolution

Filed under: Economics, History — Tags: , , — Nicholas @ 03:00

Steve Kates linked to this post at Luke Muehlhauser’s blog, showing another graph with a hockey stick pattern, but it isn’t one of the IPCC’s misleading bits of propaganda:

In How big a deal was the Industrial Revolution?, I looked for measures (or proxy measures) of human well-being / empowerment for which we have “decent” scholarly estimates of the global average going back thousands of years. For reasons elaborated at some length in the full report, I ended up going with:

  1. Physical health, as measured by life expectancy at birth.
  2. Economic well-being, as measured by GDP per capita (PPP) and percent of people living in extreme poverty.
  3. Energy capture, in kilocalories per person per day.
  4. Technological empowerment, as measured by war-making capacity.
  5. Political freedom to live the kind of life one wants to live, as measured by percent of people living in a democracy.
  6. (I also especially wanted measures of subjective well-being and social well-being, and also of political freedom as measured by global rates of slavery, but these data aren’t available; see the report.)

Anyway, the punchline of the report is that when you chart these six measures over the past few millennia (data; zoomable), you get a chart like this (axes removed for space reasons):

Click to embiggen

(And yes, there’s still a sharp jump around 1800-1870 if you chart this on a log scale.)

Basically, if I help myself to the common (but certainly debatable) assumption that “the industrial revolution” is the primary cause of the dramatic trajectory change in human welfare around 1800-1870, then my one-sentence summary of recorded human history is this:

    Everything was awful for a very long time, and then the industrial revolution happened.

September 20, 2017

Intro to the Bond Market

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 12 Jul 2016

Most borrowers borrow through banks. But established and reputable institutions can also borrow from a different intermediary: the bond market. That’s the topic of this video. We’ll discuss what a bond is, what it does, how it’s rated, and what those ratings ultimately mean.

First, though: what’s a bond? It’s essentially an IOU. A bond details who owes what, and when debt repayment will be made. Unlike stocks, bond ownership doesn’t mean owning part of a firm. It simply means being owed a specific sum, which will be paid back at a promised time. Some bonds also entitle holders to “coupon payments,” which are regular installments paid out on a schedule.

Now — what does a bond do? Like stocks, bonds help raise money. Companies and governments issue bonds to finance new ventures. The ROI from these ventures, can then be used to repay bond holders. Speaking of repayments, borrowing through the bond market may mean better terms than borrowing from banks. This is especially the case for highly-rated bonds.

But what determines a bond’s rating?

Bond ratings are issued by agencies like Standard and Poor’s. A rating reflects the default risk of the institution issuing a bond. “Default risk” is the risk that a bond issuer may be unable to make payments when they come due. The higher the issuer’s default risk, the lower the rating of a bond. A lower rating means lenders will demand higher interest before providing money. For lenders, higher ratings mean a safer investment. And for borrowers (the bond issuers), a higher rating means paying a lower interest on debt.

That said, there are other nuances to the bond market—things like the “crowding out” effect, as well as the effect of collateral on a bond’s interest rate. These are things we’ll leave you to discover in the video. Happy learning!

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