Month: March 2008

The theory of interstellar trade

By Paul Krugman, circa 1978.  He considers the arbitrage conditions for interstellar trade, given that not all traders will inhabit the same frame of temporal reference.  There is much humor in this piece. 

My own puzzling focuses on the determinants of real interest rates, given how time dilation changes the meaning of time preference.  As you approach the speed of light you move into the future relative to more stationary observers.  So can you not leave a penny in a savings account, take a very rapid spaceflight, and come back to earth "many years later" as a billionaire?  Hardly any time has passed for you.  In essence we are abolishing time preference, or at least allowing people to lower their time preference by spending money on fuel.  I believe that in such worlds the real interest rate cannot exceed the costs at which more fuel can "propel you into the future through time dilation."   

Whether the individual arbitrage conditions translate into economy-wide arbitrage conditions is a difficult puzzle.  What if everyone gets into a fast spaceship?  Do the savings accounts still bear positive interest?  How does the price of robots enter into this equation?

Is monetary policy neutral in such a world, with time travelers arbitraging against any attempt by the Fed to shift real interest rates?  Does the Fed have to subsidize the price of fuel to stimulate the economy?  Does everyone just end up in the future?

Those who do not know history…

But wait, surely these people do know history.  Marco, a loyal MR reader, writes to me:

Over here in the Netherlands, court proceedings are starting this week on the "biggest speculation fraud ever in the Netherlands", according to a national newspaper that ran a big story about it today. Investors have lost tens of millions of euros in what turned out to be a big pyramid scheme.

Now for the ultimate irony. Any idea what these people were investing in? Tulip bulbs. Really.

Here is one link in Dutch, here is another.  I can’t find anything in English but these articles do seem to reflect Marco’s summary.  I can understand sentences like: "Ook volgens De Greve was er sprake van een piramidefonds," and "November 2006 ging Novacap falliet," if not: "De Greve: „Er is geen spatje bewijs voor dat de groep die Novacap heeft gedaagd, de boel heeft opgelicht. Dat is flauwekul.”

A Boy Named Sue

“Researchers have studied men with cross-gender names like Leslie,” Dr.
Evans explained. “They haven’t found anything negative – no
psychological or social problems – or any correlations with either
masculinity or effeminacy. But they have found one major positive
factor: a better sense of self-control. It’s not that you fight more,
but that you learn how to let stuff roll off your back.”

Here is much more, interesting throughout.  I liked this part:

“In the past, there was more of a sense of humor, probably because
fathers had more say in the names.” He said the waning influence of
fathers might explain why there are no longer so many names like Nice
Deal, Butcher Baker, Lotta Beers and Good Bye, although some dads still

As I’ve told you before, my dad had wanted to name me Tyrone.  It could have been worse:

…why would any parent christen an infant Ogre? Mr. Sherrod found several
of them, along with children named Ghoul, Gorgon, Medusa, Hades,
Lucifer and every deadly sin except Gluttony (his favorite was Wrath

Department of unpalatable results

This new NBER working paper (ungated here) argues that media criticism of the U.S. war effort in Iraq leads to more U.S. troops being killed:

Are insurgents affected by information on US casualty sensitivity? Using data on attacks and variation in access to international news across Iraqi provinces, we identify an "emboldenment" effect by comparing the rate of insurgent attacks in areas with higher and lower access to information about U.S news after public statements critical of the war. We find in periods after a spike in war-critical statements, insurgent attacks increases by 5-10 percent. The results suggest that insurgent groups respond rationally to expected probability of US withdrawal. As such counterinsurgency should consider deterrence and incapacitation rather than simply search and destroy missions.

Might Fox News be right after all?  Still I am not yet convinced.  First, I fear that the measurement of satellite TV access of different Iraqi districts is a proxy for some other measure of district quality and that the TV programs have no causal role in driving killings.  Is news access across Iraq really so different?  Can’t one district simply send an email to another district: "now is time to kill some more of them?"  Second, I worry that the authors decided not to include Baghdad in the results.  Still, if you want a jolt to your system, right now this paper is the place to go.

How to respond to Hillary Clinton

Read this, the headline is "Obama: I’m no V.P.".  That’s not just the biased framing of the journalist, it captures Obama’s words.  My unsolicited advice is this: if you are a political candidate, proclaiming "I am not X" is not much better than admitting "I am X."  Either way it frames the debate.  And avoid phrases like "If I’m not ready [for the Presidency]…"  Why not punch back with: "A President needs to do at least two things.  First, read the will of the voters.  Second, figure out which country in a region is winning the race for influence and which country is coming in second.  This kind of talk is a sign that Hillary Clinton can do neither.  I’m running for President, while she is busy failing arithmetic."

I know I promised, way back when, no candidate blogging, but alas every now and then some things just bug me.


It’s not so hard to explain:

The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined.  Increased price is shown to be a means of assuring contractual performance.  A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted stream of rents on future sales which is greater than the wealth increase from nonperformance.  This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets.  Advertising investments therefore becomes a positive indicator of likely performance.

That’s Klein and Leffler, JPE, 1981, who shy away from making the prurient explicit.  This is one easy way to get a demand curve sloping upwards, namely you only trust the person if she is receiving lots of money.  But what’s the point of preventing shirking if you’re going to be self-incriminating?

Why politics cannot be captured by the intelligent, installment #45,869

It seems the Barack Obama campaign is distancing itself from Austan Goolsbee, who is indeed a first-rate economist.  Samantha Powers, who wrote a highly intelligent and heart-rending book on genocide, was dismissed last week for speaking her mind about Hillary Clinton.  Of course no one doubts that such actions may be necessary, given that a Presidency can function only with some amount of message discipline.  But think about the economics of message discipline.  How many people are receiving the message?  300 million, plus some number abroad as well.  What kind of messages do these people desire?  What must be done to make these messages understandable and then to show that the promise behind the message has been met?  Which kinds of advisors will flourish best in a "message consistency" environment?  Independent and critical minds, able and willing to speak the truth to power?

Here is my question for the left-wing bloggers: How good would The Wire be, if it had to appeal to 300 million plus viewers?  While it is obvious that politics is a form of mass culture, this point is not made with sufficient frequency for my taste.

Addendum: Arnold Kling comments.  And Matt Yglesias responds.

What is the aggregate cost of trying to beat the stock market?

Investors collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult.

Here is much more, and from Felix Salmon.  You can think of this sum as the amount it costs to keep markets relatively efficient, a source of societal fraud and rent-seeking, a Nash equilibrium mixed strategy (no one tries to beat the market on every margin), a donation to the broader social good, or most properly all of the above.  Interfluidity adds comment.

Mad Men

Thomas Schelling showed that it could sometimes pay to be irrational, or at least to appear to be irrational.  If they think you’re crazy then in a game of chicken it’s your opponent who will backdown.

It’s known that Nixon understood the theory but in an frightening article in Wired we learn the insane extent to which the theory was practiced.

Frustrated at the state of affairs in Vietnam, Nixon resolved to:

…threaten the Soviet Union with a massive nuclear strike and make its
leaders think he was crazy enough to go through with it. His hope was
that the Soviets would be so frightened of events spinning out of
control that they would strong-arm Hanoi, telling the North Vietnamese
to start making concessions at the negotiating table or risk losing
Soviet military support.

Much more was involved than words, at one point nuclear bombers were sent directly towards Soviet airspace where they triggered the Soviet defense systems.

On the morning of October 27, 1969, a squadron of 18
B-52s – massive bombers with eight turbo engines and 185-foot wingspans
– began racing from the western US toward the eastern border of the
Soviet Union. The pilots flew for 18 hours without rest, hurtling
toward their targets at more than 500 miles per hour. Each plane was
loaded with nuclear weapons hundreds of times more powerful than the
ones that had obliterated Hiroshima and Nagasaki.

The Soviets went nuts but following Nixon’s orders Kissinger told the Soviet ambassador that the President was out of control.

Apparently neither Nixon or Kissinger had absorbed another Schelling insight – if you want to credibly pretend you are out of control then you have to push things so far that sometimes you will be out of control.  The number of ways such a plan could have resulted in a nuclear war is truly frightening.  After all, Nixon was gambling millions of lives on the Soviets being the rational players in this game.

Next time you are told how a madman threatens the world remember the greatest threats have come from our own mad men.

Who’s Your City?

The always-interesting Richard Florida has a new book out, namely Who’s Your City: How the Creative Economy is Making Where to Live The Most Important Decision of Your Life.

The book tells you how to find the city for you (for me it is Los Angeles, but somehow closer to everything else, and with better bookshops) and why the mood of a city matters. 

Is the following true:? The class of city you live in matters less than before, because you can use Amazon or Starbucks in either Manhattan or Chattanooga.  But within a class of city, personality now matters more precisely because people can sort themselves on the basis of personality rather than convenience.

What about me?  I enjoy living in an area which is not totally flat and I also enjoy the feeling that I can drive from one mini-region to another and experience changes; Maryland and DC really do differ from Virginia.  I felt hedged in living in Wellington, New Zealand and in general I don’t like having my back to the water.

Last week Robin Hanson and I discussed which would be the best city to live in if a) all your basic needs were taken care of, and b) you could not otherwise spend any money.  Oxford, even with mediocre weather, seemed like a strong pick.  There is a true intellectual community and everything there costs a lot anyway; not being able to spend any money isn’t so different from the reality.

The ongoing dispute over file-sharing papers

Here is a very interesting article in German on the controversy surrounding Stan Liebowitz, Felix Oberholzer-Gee, and Koleman Strumpf and the issue of whether illegal file-sharing has hurt music sales.  An English translation is here; Craig Newmark reports as well.  The upshot is that Liebowitz has been attacking the Oberholzer-Gee and Strumpf claim that illegal downloads do not much hurt music sales.  Liebowitz claims that the original paper, published in the JPE, is incorrect.  In English, here is Liebowitz’s side of the story.  Here are our earlier posts on the Oberholzer-Gee/Strumpf paper.  Here are quotations by Koleman Strumpf.  Does anyone have a link to a further defense by the paper’s authors?

An educational experiment with higher salaries

A New York City charter school set to open in 2009 in Washington Heights will test one of the most fundamental questions in education: Whether significantly higher pay for teachers is the key to improving schools.

The school, which will run from fifth to eighth grades, is promising to pay teachers $125,000, plus a potential bonus based on schoolwide performance. That is nearly twice as much as the average New York City public school teacher earns, roughly two and a half times the national average teacher salary and higher than the base salary of all but the most senior teachers in the most generous districts nationwide.

Here is the story, thanks to Kurt Muehmel for the pointer.  For many years I’ve been telling some of my Ph.d. students that they should consider teaching in private high schools.  None of them seem to listen but maybe this will have some impact.