Month: December 2010

*The Long Divergence*

The author is Timur Kuran and the subtitle is How Islamic Law Held Back the Middle East.  My previous and longer discussion of Timur is here.  Here is a short excerpt from the book: 

…several institutions…blocked evolutionary paths in the direction of modern banking: the Islamic law of commercial partnerships, the Islamic inheritance system, the waqf system, and the individualism of Islamic law.  All were introduced earlier as causes of the region's other handicaps.  Like the region's previously discussed symptoms of underdevelopment, delayed financial modernization was an unintended consequence of institutional choices that served laudable objectves.

This book avoids and indeed remedies two major problems often found elsewhere.  First, many books on Islam are weak on law and economics or simply ignore the topic altogether.  Second, many books on "the New Institutional Economics" give generalities and taxonomy, rather than concrete, historically well-founded analysis.

Arthur Schopenhauer on tetragamy

Was any major philosopher better than Schopenhauer at starting with genuine insight and turning it into an untenable conclusion?

Tetragamy adjusted marriage into an institution that would make life better for men and women, Schopenhauer theorized, because it accommodated the natural sexual and reproductive capacities of humans in ways in which monogamy did not.  It also addressed the material and financial needs of all parties in a more rational way.  Two young men should marry a young woman, and when she outgrew her reproductive ability, and thereby lost her attractiveness to her husbands, the two men should marry another young woman who would "last until the two young men were old."  The financial advantage of this type of marriage would be considerable, Schopenhauer thought.  At first, when the two young men's incomes were low, they would only have to support one woman and her small children.  Later, when their wealth increased, they would have the means to support two women and many children…Schopenhauer never published his musings on tetragamy…

That is from David E. Cartwright's recent Schopenhauer: A Biography.

Investment markets in everything

While this business is in its infancy, Balance Point is part of a bigger trend – the growing industry that invests in other people’s lawsuits, arming plaintiffs with money to help them win more money from defendants. Banks, hedge funds and boutique firms like Balance Point now have a total of $1 billion invested in lawsuits at any given time, industry participants estimate.

Lawsuit lenders initially focused on personal injury cases, but over time they have sought new frontiers, including securities fraud cases brought by disgruntled investors, whistleblower claims against corporations and property development disputes.

Stacey Napp, a lawyer by training who has spent her career in finance, founded Balance Point last year with money from her own divorce. Since then, she has provided more than $2 million to 10 women seeking divorces. She says she is helping to ensure both sides can defend their interests.

The full story is here.

Unusual sentences

In one school that was closed, Homeland Security Academy, a middle school with a security-industry theme, students regularly set fires in the bathrooms.

The full story is here, and I thank Samuel Henly for the pointer.  Or how about this one:

Deborah A. Cunningham , the manager of $261 billion at Federated Investors Inc. , was squeezed into the bathroom of her family’s recreational vehicle, trying to help save the $3.6 trillion money market industry.

Haiti: the next step?

Cité Maxo is one of 1,300 known spontaneous camps where 1.5 million people await, in the UN's term, "shelter solutions". What were intended to be temporary settlements are in many cases morphing into semi-permanent slums.

In other cases they are on the verge of being forcefully uprooted. About 65% of the camps are on private land. Since March landlords have started demanding their property back.

"A truck with masked men came last week and told us to leave," said Touren Jackson, 23, a resident of Cap y Verte, a camp of 8,000 people in Cité Soleil. "They said next time they come they'll act up," he added, imitating a gun with his hand.

There is more here.


Close the Washington Monument

The National Park Service wants to add airport-level security to the Washington Monument.  Bruce Schneier says we should close it:

…Let it stand, empty and inaccessible, as a monument to our fears.

An empty Washington Monument would serve as a constant reminder to those on Capitol Hill that they are afraid of the terrorists and what they could do. They're afraid that by speaking honestly about the impossibility of attaining absolute security or the inevitability of terrorism — or that some American ideals are worth maintaining even in the face of adversity — they will be branded as "soft on terror." And they're afraid that Americans would vote them out of office if another attack occurred. Perhaps they're right, but what has happened to leaders who aren't afraid? What has happened to "the only thing we have to fear is fear itself"?

An empty Washington Monument would symbolize our lawmakers' inability to take that kind of stand — and their inability to truly lead.

…The empty monument would symbolize our war on the unexpected, — our overreaction to anything different or unusual — our harassment of photographers, and our probing of airline passengers. It would symbolize our "show me your papers" society, rife with ID checks and security cameras. As long as we're willing to sacrifice essential liberties for a little temporary safety, we should keep the Washington Monument empty.

Terrorism isn't a crime against people or property. It's a crime against our minds, using the death of innocents and destruction of property to make us fearful. Terrorists use the media to magnify their actions and further spread fear. And when we react out of fear, when we change our policy to make our country less open, the terrorists succeed — even if their attacks fail. But when we refuse to be terrorized, when we're indomitable in the face of terror, the terrorists fail — even if their attacks succeed.

…We can reopen the Washington Monument when we've defeated our fears, when we've come to accept that placing safety above all other virtues cedes too much power to government and that liberty is worth the risks, and that the price of freedom is accepting the possibility of crime.

I would proudly climb to the top of a monument to those ideals.

I agree.

Which city is this analysis from?

…maintenance personnel bid on the escalators for which they’ll be responsible. Workers with the most seniority get the first choices…

The source said it’s very common for someone with seniority to bid on escalators they know to be well maintained so they can slide and and not do anything for the six months it's under their "care."

“They can coast for a while,” the source said. “Then when problems start, they can move on,” leaving an ailing escalator under the supervision of someone with less experience.

This way of doing things, the source said, "destroys the incentive" of the younger workers who know that if they do a good job, their escalators will be taken away by someone with more seniority.

“There’s a culture in which you don’t really have to perform to keep your job,” they said.

Hint: if you guessed Minsk, Belarus, you are wrong!  The full story is here and for the pointer I thank Stan Tsirulnikov.

A simple public choice theory of the Ireland bailout

In a very good piece, Barry Eichengreen writes:

One can interpret the intransigence of the German government and its EU allies in two ways.

  • First, they understand neither economics nor politics. As Tallyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”
  • Second, policymakers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems.

My model here is simple.  The Germans fear that if Ireland pulls the plug on the bailout deal, some of the other PBIIGS will meet immediate financial crises, and that spills over onto both German lending banks and Germany as the country holding the eurozone together.  Ireland feels that if it pulls the plug on the bailout deal, the Germans don't lend enough support and a) they lose what's left of their banking system, and b) their next government bond auction goes very, very badly.

I agree with the critics of the current arrangement, but I don't think they're facing up to how bad the alternatives will be (see also Megan).  Predictively speaking, I am betting on Irish electoral resentment to carry the day.  But in the meantime, EU bond purchases are kicking the can down the road.

Mexican drug cartel marketing strategies

Rodriquez said the local mafia – La Familia de Michoacan – blocked all street sales in the city a few years ago. The cartel said it was protecting the people from a scourge. Mexican law enforcement agents confirm that La Familia ordered a halt in local use, though they say it was a cynical ploy, a bit of propaganda.

"Now if you use it, they'll kill you," Rodriguez said. "Now it is just for the foreigners."

The longer article is here.

Markets in everything?

Brookline [Massachusetts] officials are proposing to charge a fee for the right to let dogs run off-leash in designated parks. Residents would have to pay $50 a year to let a dog loose in the parks; nonresidents would have to pay $100. And the fees for park usage by professional dog-walkers would be considerably steeper: $500 for those who live in Brookline, and $750 for those who do not.

The story is here and for the pointer I thank Jeff Miron.

Don’t Play Games with Your Kids

Seeing that my 9-year old was reading The Mysterious Benedict Society and the Prisoner's Dilemma I thought this was an excellent opportunity to teach my kids some game theory. Thus, I explained the prisoner's dilemma and offered the 9 and 12 year old the opportunity to cheat or cooperate with substantial cash payoffs.

My kids are competitive so I didn't foresee any problems. Yet the kids kept cooperating. Did they not understand the game? Alas, it soon became clear that they understood all too well. Silly me. I had neglected to take into account that the opportunity to take money from Daddy greatly raised the payoff to (cooperate, cooperate). (As an aside this did increase somewhat my belief in Steve Landsburg's unusual interpretation of some experimental games).

Ok, I was losing money but no problem, I resolved to change the game on the fly greatly increasing the payoff to cheat. Only I miscalculated. In my eagerness to drive the kids to the (cheat, cheat) equilibrium I raised the payoff to cheat so high that they did best by (cheat, cooperate) followed by a side-payment to split the spoils. Of course the kids saw that right away. Daddy loses again.

Having satisfied myself that the kids understood strategic thinking, unfortunately even better than me, I ended the game. But now I was a substantial sum of money in the hole. What to do? I resolved to auction off some money with an all-pay auction. Success! As usual, I managed to sell a dollar for well over a dollar. Even the kids didn't see their way past that one.

Having regained some dignity I sent the kids to bed. Still the kids were up on net. What could I do? Finally, after some thought I figured out how I could rebalance our portfolios and at the same time teach the kids all about Ricardian Equivalence and (appropriately) the Rotten Kid Theorem. All I had to do was give them less for Christmas. Daddy wins!

(Well, at least until I explained my clever idea to my wife. Nuff said.)

Are bees more Bayesian?

It appears, therefore, that a swarm's scout bees do something sharply different from what humans do to reach a full agreement in a debate.  Both bees and humans need a group's members to avoid stubbornly supporting their first view, but whereas we humans will usually (and sensibly) ive up on a position only after we have learned of a better one, the bees will stop supporting a position automatically.  As is shown…after a shorter or longer time, each scout bee becomes silent and leaves the rest of the debate to a new set of bees.  Figure 6.7 shows how this regular turnover in which scouts are dancing can help a swarm's scouts quickly reach an agreement…

In other words, the bee algorithms allow attrition (a time-honored process of improving the scientific community) to operate at an especially rapid pace.

That is from the fascinating book Honeybee Democracy, by Thomas D. Seeley.  Here is the book's home page.  Here is a good review of the book:

In the final chapter, Seeley suggests five lessons we could learn from bees.

†¢ Compose a decision-making group of individuals with shared interests. Here bees have a higher stake than us: all members of a colony are related (sisters) and nobody can survive without the group.

†¢ Minimise the leader's influence on the group. Here we humans have much to learn.

†¢ Seek diverse solutions to the problem. Humans realised only recently that diversity is good for a group.

†¢ Update the group's knowledge through debate. Here again, bees are superior to us, as each scout's "dances" become less effective with time, no matter how good a new site is, while stubbornness can lead humans to argue forever.

†¢ Use quorums to gain cohesion, accuracy and speed. Impressively, bees came up with this concept long before the Greeks.

As a departmental chair at Cornell University, Seeley says, he applies these principles at faculty meetings with great success.

Definitely recommended.

On a scale of one to ten, how much of an outrage is this?

Every now and then, it is worth posing that question.  I don't mean to prejudge the answer:

The state, needing some of Lerner's land in Tysons to build a Metro station and tracks there, took it by eminent domain and paid the developer about $24 million for the property two years ago. Construction is underway on the new station, slated for the corner of Chain Bridge Road and Tysons Boulevard.

But that price – set just a few months before real estate values went into a freefall – almost immediately appeared to the cash-strapped state to be too high. The discrepancy led the transportation department and the hard-bargaining developer into a court battle over what the property was worth at the time it was taken, in November 2008.

Earlier this month, a Fairfax County jury agreed with the state that it had overpaid for the property, saying that one Lerner parcel was worth only $19.3 million, less than the $22.8 million Lerner was originally paid. It ruled that a much smaller parcel was worth just $313,000, not the $1.5 million that was originally paid.

Fairfax County Circuit Court Judge David S. Schell confirmed the decision Nov. 19, ordering that the Lerners pay the state $5.1 million for the excess and interest.

The full story is here.

How much did low interest rates matter?

It is popular to attribute the credit boom (at least in part) to the Federal Reserve having kept the federal funds rate "too low for too long," but comparison of the path of the funds rate in Figure 5 with the measures of credit growth in Figure 1A shows that the increase in lending was greatest in 2006 and the first half of 2007, after the federal funds rate had already returned to a level consistent with normal benchmarks.

That is Michael Woodford from the Journal of Economic Perspectives.