Noah Stoffman asks me two questions

by on October 27, 2009 at 10:57 am in Economics | Permalink

I have two pretty random questions about which I would love to see a discussion on MR:

  • What
    will applied economics research be like in 50 years? I spend a huge
    amount of time gathering, cleaning, and organizing data.  I spend a
    lot of time writing code to do analysis. Will this become unnecessary?
    Will I just be able to say to my computer "Check if this relationship
    exists in the data"? If that happens, what will be special about people
    with PhDs?

  • Suppose you were given a large amount of money (say $10
    million) and you wanted to make sure that you would remain (relatively)
    wealthy in as many future states of the world as possible. Where would
    you invest it? Remote arable land? Organizing a cult of followers?

  • The lesson, of course, is that "pretty random" questions rarely are.  Usually it is someone asking the same question twice.

    I believe with p = 0.6 that the world is in for a "great disruption."  It has come to MSM first but it will not end there.  In the longer run I am optimistic about the results of this change — computers will free up lots of human labor — but in the meantime it will have drastic implications for income redistribution, across both individuals and across economic sectors.  For a core metaphor, the internet displacing paid journalism and classified ads is a good place to start.  The value of newspapers has been sucked into Google. 

    Later, we'll be much better at measuring which research Ph.d's are contributing value and which ones are not, or at least we'll think we are.  Since academic achievements follow a Power Law, that will mean a huge ouch for many would-be academicians.  The new professor will need to be skilled in assembling collages of information, raising money, and communicating to broader public audiences.  Either that or his research should be very obviously of the top order.  The distribution of income across professors will become radically less equal as indeed the trend has been for well over a decade now.

    If you have $10 million, the safest thing to do is to diversify across currencies, buy government securities of various kinds, hold $1.5 million in gold, and otherwise not invest at all.  Oh yes, invest in some cheap hobbies.  In a real crunch remote land is worthless — transport costs — and your cult followers are as likely to betray you as not.  Trying to become a professor is no longer such a safe path.

    Once The Great Disruption becomes more evident, entertainment will be very very cheap.  Medical treatments will become either much more expensive or again very cheap.  If you get the wrong ailment, you're going to need the $10 million.

    Robin Hanson believes we are headed back toward a Malthusian equilibrium; in contrast I believe that machines will never outcompete humans across the board and so the scenario will more closely resemble Baumol and Bowen's "cost disease."  The variance of real wages will continue to rise.

    I predict the equity premium will go up.

    Yancey Ward October 27, 2009 at 11:12 am

    The answer to the second question is 95% in gold. Gold will have value as long as people still trade- this isn’t true of paper money or government securities. Take the other 5% and buy a farm somewhere relatively remote from dense population centers, buy a Toyota Landrover along with the gas and accessories to run it for 10 years, and buy yourself 5 years worth of canned goods.

    babar October 27, 2009 at 11:29 am

    yancey ward, would you spend the other 5% on a police force to guard the gold?
    and while you’re at it, you might need a second police force to defend the gold against the first one.

    Andrew October 27, 2009 at 11:35 am

    If I were an economist and I only had special knowledge about an obscure coding language to the point where I couldn’t speculate better than on a diversified portfolio, I’d invest in rectifying that situation. I might start by writing a pop-econ book about how the market is inefficient and what that really means. Things are less efficient when change happens fast.

    Increasing income inequality is good if you are good. My bet is that the money will flow away from the gatekeepers. It’s going to be easier to do without their expertise. We never really liked them anyway. You also won’t have to spend as much time teaching basics, but then, you won’t get to spend as much time teaching the basics.

    People are not just going to decide that division of labor is pass√©. On the other hand, I think we may still be coming to grips with the fact that any building over 10 stories isn’t a sure thing.

    crispy&cole October 27, 2009 at 11:40 am

    Step away from the ledge…way too much fear in these comments. 95% gold? Give me a break!

    Barbar October 27, 2009 at 11:47 am

    Yes, it’s possible that civilization will completely collapse… but at least everyone will still want gold more than ever!

    Tuttle October 27, 2009 at 11:50 am

    My best shot might be:

    50% CEDARS
    30% Index Funds
    20% A House

    This should provide a nice income stream as well as the ability to keep pace with broad economic growth.

    Reed October 27, 2009 at 12:02 pm

    Just invest in the skills of survival, basic agricultural/foraging/hunting skills, mechanical skills, and water treatment. Learn to enjoy free things. Get a decent personal library (just large classic books). You don’t need $10 m to do that. You don’t need large ingots of gold. You’ll be fine.

    Every disaster scenario implies a return to solitary man (who never really existed anyway). We are forced back to our primitive state and to be segregated from our fellow man. Here is my question: Is there a disastrous state of the world where we are forced to be more *interdependent* than we would prefer?

    Brian Timoney October 27, 2009 at 12:14 pm

    Best insurance against “the future” is to be part of a cohesive community away from an urban center that is as self-sustaining as possible.

    In other words, give a look to the Amish or Mennonites.

    Brian

    Andrew October 27, 2009 at 12:19 pm

    I think the point of gold is that if you have to have some value in nearly all possibilities, you are left with gold and guns.

    I don’t believe there is a high probability of worst case, but I did just buy some more guns. They will hold value as well. When you get a good bit of money, you start to realize how cheap it is.

    TheRadicalModerate October 27, 2009 at 12:29 pm

    Since academic achievements follow a Power Law…

    You mean you think that there will eventually be achievements in any human endeavor that don’t follow a power law? The more you jack up productivity in any given area, the steeper the power distribution curve gets.

    I think Onyx Mousse is on the right track. You can always crowd-source the data analysis, but somebody has to ask the right question. I doubt that asking the right question will require academic credentials, though…

    Silas Barta October 27, 2009 at 12:42 pm

    @An_Onyx_Mousse and anyone else: aren’t there data-mining methods that can do the job of finding questions to ask? Principal components analysis, self-organizing maps, etc?

    Martin Brock October 27, 2009 at 1:31 pm

    Will I just be able to say to my computer …?

    No. Computers will make PhDs less valuable by making them more productive but not this way. Natural language processing and “common sense” reasoning are notoriously difficult for computers, not because computers differ so fundamentally from brains but because brains incorporate far more information than we imagine. PhDs themselves don’t realize how much diverse information they bring to bear on analytical problems, and computers don’t possess all of this information. Computers can’t easily pass a Turing Test for the same reason.

    Related question: Shouldn’t a more productive PhD become more valuable? No. Lords of the productivity enhancing capital become more entitled to value added. If PhDs themselves are lords of this capital, their enhanced productivity can become more valuable to them, but that often doesn’t happen in practice. The “valuable” factors will be lords of propriety, like the lords of feudal Europe, as they are now.

    Where would you invest it?

    The answer depends heavily on the current state of the world. If I give you $10 million in Federal Reserve Notes for title to 10,000 acres of remote, arable land, I’ve only exchanged one stack of paper for another. Do I trust the armed men securing the value of the title more than the armed men securing the value of the FRNs? If future states are highly uncertain, why prefer one over the other? What is my title worth when the established protection racket peddling it disintegrates?

    If I were really worried, I’d buy a dense, valuable commodity (dense in value, not necessarily in mass) and bury it in diverse places. I don’t need to own these places. I only need to know that most of them will be accessible to me. I’m not worried about trespassing in this scenario, but I’d bury a few small arms along with other commodities. I’m not sure gold is one of these commodities. Maybe they’re seed for very high yield, genetically modified foods.

    If you have $10 million, the safest thing to do is to diversify across currencies, buy government securities of various kinds, hold $1.5 million in gold, and otherwise not invest at all.

    You assume that most established states remain viable. It’s probably a safe bet, so “investment” in entitlement to tax revenue (government securities) remains attractive, but with this assumption, I might buy title to land instead. If entitlement to tax revenue becomes too attractive, established states stagnate.

    Felipe October 27, 2009 at 1:48 pm

    About data analysis and PhD’s. Data analysis is essentially organization of data. Statistical methods help you do that, but in the end of the day your data analysis will only be any good if you know your data really well. Cleaning the data is really making a judgement call about what data-points are worth including in the analysis and which ones are not. You can’t do that well just using mechanical methods.

    Also: you can always do more complicated things. 40 years ago you could write a paper with a single linear regression. Now a days you do bayesian estimates of structural models.

    Last, the ability to process data will increase, but so will the amount of data available will be much larger and you will need a lot of skilled people to sort through that. The trend that I see right now is empirical work becoming more and more important, particularly in macro where it was second class. And this is all good.

    But I agree with Cowen that it will be harder to make a living in academia just from technical skill. Or at least, I hope so.

    An Onyx Mousse October 27, 2009 at 1:57 pm

    @Silas Barta: There are lots of statistical methods to find patterns in data, leading to questions of the form “Does x cause y?” or “Is x typically associated with y?” and these are often a good way to start asking lots of questions about a topic. But most patterns are trivial or useless. A human will always have to sort the wheat from the chaff to uncover insights that are valuable to our fellow humans. There are gains from trade to having highly trained, specialized people to do this. Thus there will always be work for some analogue of PhD’s in the world, although their topics of specialization and tools of the trade will change over time.

    Also to the guns and gold crowd above: “Wealth” is a social status, when considered across different civilizations, and therefore what most of you are proposing is actually to retreat into abject poverty – that’s what most people would call buying canned goods and ammunition and hiding out. That’s great if the zombies attack or near-total nuclear holocaust breaks out but not in most situations.

    The best way to ensure continued success in your lifetime is to have a large, influential social network. Use the money to buy your way into as many high end country clubs, yacht clubs, university groups, political fundraisers, etc, and be sure to include a wide swath of the political spectrum. c.f. the Americal Civil War, the French and Russian Revolutions, and the fall of Rome. Or are you suggesting the coming cataclysm is likely to be worse than those?

    liberalarts October 27, 2009 at 2:26 pm

    I am with the commenters who argue that better and easier computing power will not put Ph.D. economists out of work. Algebraic software like Mathematica already exists allowing a user to simply ask, “solve this for x,” or “what is the second derivative of that,” and the computer spits it out immediately. Such software has made theoretical modeling much easier, but if you don’t know what to ask of the machine, it can’t tell you. I doubt that any more people can do such modeling now as when they had to crank it out by hand. Ditto with meaningful econometrics.

    jk October 27, 2009 at 3:31 pm

    I don’t think it will ever be the comparative advantage of professors to assemble collages of information and be good at raising money and disseminating information. We will face tough competition from lower cost providers

    My guess is this will be the work of the next generation of journalists. They will probably have some basic knowledge of trade-offs and equilibrium and go from there. I doubt if they will have PhDs – the long and specialized education of a PhD would be an obstacle. Of course there will be value to the specialized professors being good communicators of their specialized research. Possibly some value to being an intermediary between the braniacs and the journalists – this activity might evolve into a general class of humble intermediaries.

    This means there will be three competitive groups: Professors, teachers and journalists… Oh that is pretty much we have now … forget it

    Mark October 27, 2009 at 5:00 pm

    I have to agree (mostly) with An Onyx Mousse at Oct 27, 2009 12:01:21 PM.

    In response to Silas – data is not self-organizing (yet? ever?). Intelligence/creativity in analysis is key. In my own field (bioinformatics), we are “behind” the experiments in that there is a backlog of analysis to do – and I would love to just use some R package to do some of it.

    So as with most things, trying to get by doing rote work is becoming harder. Doing new stuff is increasingly valued.

    I’m always asking my lab: “What is important here? What is the heart of the question? What is the key experiment (even if we can’t do it)? Why are you doing this?”

    I don’t think computers are going to take this over anytime soon.

    gorgias October 27, 2009 at 5:16 pm

    I’m with Onyx Mousse. The commentators who are preparing for a survivalist worst are not ensuring relative wealth in most states of the universe. If things go well and the market booms as it did from the 1970s to the mid 1990s, the gold and guns types will be relatively poor. They may do well in disaster scenarios but not in technical shifts like the late 19th century, when things didn’t fall apart but a lot of traditional activities like ag saw dramatically lower returns.

    Bill October 27, 2009 at 8:48 pm

    The great disruption I believe will continue from the discontinuous introduction of isolated economies that have surplus labor into the world economy.

    Think of it this way. We isolated China and Russia in pursuit of the Cold War. There was no trade, no development of internal investment that served world markets, no exploration for natural resources that exceeded internal needs. The wall comes down, and woosh.

    Had we been trading over thirty years, the world would have been different. Perhaps China would have been third world; perhaps Russia would have been a bloated bureacracy.

    This reminds me of a neighborhood we once lived in in the suburbs. There was this farmer whose farm encompassed this great lake. Neighbors gave all sorts of tax credits to the farmer so that, in the 70′s, he would not develope the land next to their well sized houses and low density yards.

    In 2005 the farmer decides to sell the farm. Now, the maximized value of the farm is to have condos around the lake, bringing high density traffic to the neighbors who did all they could to have him not develop the land in the 70′s, when the likely development would have been other houses with large yards just like their own.

    When markets get blocked, and then become unblocked, businesses that had built their markets on the blocked equilibria, face massive changes all at once–changes that would have been better made earlier, changes that would have organically developed–rather than the forceful changes that happen all at once.

    babar October 27, 2009 at 10:09 pm

    did you hear the one about the man who shot himself in the head to reduce uncertainty?

    SheetWise October 28, 2009 at 1:57 am

    Use the money to buy a small fleet of sail-assisted trampers, 30 to 40 ton cargo — use them to do last-mile and short delivery of “green” goods. Pure bullshit, but a lot of people are paying for that these days. On the plus side, they’re mobile and can be registered in an offshore jurisdiction and employ offshore crews.

    Barbar October 28, 2009 at 11:05 am

    You can get great lectures and learn what you need to learn by yourself.

    Yes, the recent invention of the “book” has rendered academia obsolete.

    Andrew October 29, 2009 at 5:22 am

    “You probably aren’t falling behind” is the best investing advice there is. I’m still with Yancey. Gold and guns are guaranteed to have value. If you ask the question, that means you don’t already have a better idea. If things are booming, maybe your gold is $500 an ounce. Maybe even $200. I just bought some guns from pre-WW2. What else can someone pay money for that has useful value and is nearly 100 years old that could be sold in one day in a pinch? The only reason not to buy gold is that it may be overpriced and you have a better idea.

    Alternatives: Dollars are almost gauranteed to be half. Treasurys will be half plus, what, a couple percent or something? Of course, interest rates will go up, and that’s the bad news. Currencies can be diversified but not diversified away from governments. Stocks can go to zero. Or the ones you buy can be relative underperformers. What if America is in decline. Do you know how to buy foreign companies?

    Specialization is tricky, but it’s not about having a PhD. That is an accolade and a credential. Math isn’t going anywhere. Only if division of labor breaks down will we not have the luxury of having smart people sit around thinking in math. It’s about the sweet gig academia has had. I’m a buyer of Apollo group (especially now that the government doesn’t like them). For you, it is both an investment and a hedge.

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