Month: March 2008

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?

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.”

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?

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.

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?