Some simple Bitcoin economics

That is a new paper by Linda Schilling and Harald Uhlig, here is the abstract:

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a “fundamental condition,” which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a “speculative” condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.

In this framework, I would attribute the volatility of the recent Bitcoin price to a) sometimes being in the speculative equilibrium or uncertainty about such, b) regulatory uncertainty, and c) uncertainty about the hedging or store of value properties of Bitcoin and other cryptoassets.  If you are interested in other considerations, here is a good Jimmy Song essay on why Bitcoin might be special.  And see this paper by Garratt and Wallace, though unlike with Schilling and Uhlig I am less sure how they are modeling the black/gray market uses for Bitcoin as a transactions medium.

Monday assorted links

What if we paid for Facebook?

Geoffrey Fowler asks that question, here is one bit from his analysis:

You can actually put a dollar figure on how much we’re worth to the social network. Facebook collected $82 in advertising for each member in North America last year. Across the world, it’s about $20 per member. Facebook the company is valued at about $450 billion because investors believe it will find even more ways to make money from collecting data on its 2 billion members.

You might imagine charging Americans $82 a year, though at that price the overall network would be smaller and of lower value to users.  Alternatively, Zeynep Tufekci wrote (NYT):

Internet sites should allow their users to be the customers. I would, as I bet many others would, happily pay more than 20 cents per month for a Facebook or a Google that did not track me, upgraded its encryption and treated me as a customer whose preferences and privacy matter. [She earlier had cited 20 cents per month as their profit per customer…TC takes all of these numbers with a grain of salt.]

Like Jonathan Swift, I have a simple proposal: don’t use “Facebook the service,” and conduct all of your social networking on WhatsApp, which by the way is owned by “Facebook the company.”  WhatsApp is fully encrypted, and it has no algorithms and indeed few bells and whistles of any kind.  From each person, messages are stacked in sequential order.  You can send photos and you can delete content, permanently I believe.  You can set up groups.  There is some kind of microphone function, though I’ve never figured it out.  And did I mention it is totally free?  Zero ads too.  Nor is the page cluttered, nor do you get these little notifications: “You have 37 messages, 49 notifications, 23 friend requests, 81 pokes, and a partridge and a pear tree,” etc.

Everything you are asking for exists now, from “Facebook the company,” though it is not “Facebook the service.”

Problem solved!  Oh, wait, you’re not interested…?  What should I infer from that?

Addendum: I do get that if everyone switched from “Facebook the service” to WhatsApp, the cross-subsidy would diminish and the terms of WhatsApp would change.  But still, at the margin, and in the meantime, plenty of people — including you — could switch and I expect this deal can remain the same.  Be a free rider!  Our democracy may depend on it.

Edward Tenner’s *The Efficiency Paradox*, or are big tech and finance actually the same?

The author is Edward Tenner and the subtitle is What Big Data Can’t Do.  Overall, I prefer to read Tenner on engineering more narrowly construed, but still I found some novel and interesting ideas in this book, as you might expect.

Most notably, I was struck by his claim that the rise of “Big Tech” and the rise of finance are more or less the same thing.  Many of the tech innovations are in fact transactional innovations, and both the “financialization” revolution and much of social network tech promulgate the idea of “life as a portfolio,” albeit portfolios of different kinds.  Both have an ideal of “friction-free commerce,” or social interactions, as the case may be, and of course in both cases this is organized by code.

Furthermore, if you make buying and finding things much easier, finance as a percentage of gdp likely will go up.  Do not forget that Jeff Bezos was first a young star at Shaw, a hedge fund.  Is it any accident that finance and tech are often, these days, competing for the same pool of talented young quant workers?

Here is one good bit from Tenner:

We have all heard of Jeff Bezos, founder of  Only technical specialists and historians have heard of Jacobus Verhoeff.  Yet when Bezos planned to transform online retailing, bookselling was a natural beginning because, thanks to Verhoeff’s algorithm, more books had standardized product numbers than any other category of merchandise.

You can buy the book here.

Arbitrage, by economics departments

Foreign STEM graduates (the acronym stands for science, technology, engineering and mathematics) can get visa extensions for three years of practical training (ie, work). Those from other disciplines are allowed only a year.

Two more years working in America means more earnings. It also means a better chance of finding an employer willing to sponsor an application for an H-1B visa, the main starting-point for skilled foreign workers who hope to settle permanently. In 2012 the Department of Homeland Security expanded the list of STEM courses. Now any reasonably crunchy economics degree can count as STEM with a tweak to its federal classification code, from economics (45.0601) to econometrics and quantitative economics (45.0603).

Economics departments appear to be catching on. Yale and Columbia have both changed the code for their economics major in the past few months; five of the eight Ivy League Universities have now done so. Students at Pennsylvania and Cornell are agitating for a switch.

Here is more from The Economist.

Sunday assorted links

What is Skim Milk? The FDA versus Dairy Farmers

FDA food regulation isn’t as high stakes as FDA drug regulation but it can be both costly and absurd. A case in point. The FDA controls how foods are labeled with the goal of ensuring that they are “properly” labelled. It’s important that consumers not be misled but what does one say, for example, about soy milk? Is that label proper? (The FDA so far has declined to rule on that issue but the “Defending Against Imitations and Replacements of Yogurt, Milk, and Cheese To Promote Regular Intake of Dairy Everyday Act (DAIRY PRIDE) act may force their hand.)

The FDA’s control over labeling is more powerful than it appears because it can be used to define what a product is. The FDA, for example, can’t force milk producers to add vitamins to milk but by defining milk as including certain vitamins they can say that milk without these vitamins is mislabeled! This is exactly the case with dairy farmer Randy Sowers and South Mountain Creamery. South Mountain Creamery sells skim milk, i.e. milk with the fat skimmed off. The FDA, however, wants skim milk to contain as many vitamins as whole milk so they define skim milk as including vitamin A and D. If farmers want to sell skim milk and call it “skim milk” they have to add vitamins. To avoid prosecution the FDA is requiring South Mountain Creamery to label their skim milk, “imitation skim milk”! Yes. War is Peace. Freedom is Slavery. Real Skim Milk is Imitation Skim Milk. Sowers and the Institute for Justice are suing on First Amendment Grounds.

The FDA has a history of losing First Amendment cases and will probably lose this case as well. A Federal appeals court in Florida has already ruled in a very similar case that labeling skim milk, “skim milk” is not deceptive.

A simple point about Conversations with Tyler

As you may know from the series, I put in a good amount of preparation for each guest, generally absorbing as much of their life’s work as I can get my hands on.  Even for authors where I have read plenty of them before, I try to reread them fairly comprehensively and all at once, plus some of the secondary literature, criticisms, and the like.  And of course hardly anyone else does this in such a concentrated manner, even if they over time have read everything an author has produced.

Virtually everyone I have done this with has gone up in my eyes as a result.  Both as a content creator and as a “carrier of a career.”

Just keep that in mind the next time you are tempted to criticism a well-known person harshly.  Or for that matter a less well-known person.

You don’t understand them as well as you might.

*A Quiet Place* (the only spoiler is about the basic premise)

Yes this is a horror movie but no you don’t have to like horror movies to want to see it, you only have to like original movies.  I am not giving away much by telling you this is largely a silent movie, as the humans know if they make sounds or speak they will be hunted and killed.  (Which family member’s relative bargaining power increases when talk is relatively difficult?)  It is one of the most implicitly Christian movies I have seen, though no reviewer seems to have noticed.  Think monasticism, devils, baby Moses, the unwillingness to consider abortion as an option, silos of grain, and Shyamalan’s (underrated) Signs.  It’s also one of the most insightful films on disability issues, although further explanation there would indeed give you too many spoilers.  Here are various reviews, mostly full of spoilers.

Saturday assorted links

How gender relations define American politics

That is the topic of my latest Bloomberg column, here is one bit:

I view the national-level Republican Party, at least in its current incarnation, as putting forward a vision of strong sexual dimorphism. That is, the underlying presumption is that men and women are very different, and there’s a belief that in terms of norms, behavior and the law, men and women should be very different.

The symbols emanating from the White House reflect this vision. The Trump cabinet and advisory teams have been well-stocked with traditional white men in business suits. There doesn’t appear to have been much deliberate attempt to pursue gender balance. Trump’s manner projects an older American vision of masculinity; he even married a fashion model. His broader patterns of behavior with women are well-known, and very far away from being gender egalitarian.

And the conclusion?:

So how will this turn out? There is a tendency on the progressive left to think that enlightenment eventually arrives, and that egalitarian visions will outcompete the attempts to ramp up gender dimorphism. I’m not so sure. I’m struck by recent research that in wealthier economies men and women tend to show greater personality differences, and that women are less likely to pursue STEM degrees. If we wished to give this story a Shakespearean close, it could be said that politics and sex are two topics that usually surprise us.

Do read the whole thing.

More arguments against blockchain, most of all about trust

Here are more arguments about blockchain from Kai Stinchcombe, here is one ouch:

93% of bitcoins are mined by managed consortiums, yet none of the consortiums use smart contracts to manage payouts. Instead, they promise things like a “long history of stable and accurate payouts.” Sounds like a trustworthy middleman!


Auditing software is hard! The most-heavily scrutinized smart contract in history had a small bug that nobody noticed — that is, until someone did notice it, and used it to steal fifty million dollars. If cryptocurrency enthusiasts putting together a $150m investment fund can’t properly audit the software, how confident are you in your e-book audit? Perhaps you would rather write your own counteroffer software contract, in case this e-book author has hidden a recursion bug in their version to drain your ethereum wallet of all your life savings?

It’s a complicated way to buy a book! It’s not trustless, you’re trusting in the software (and your ability to defend yourself in a software-driven world), instead of trusting other people.

Here is the full essay, via Chris F. Masse.  Here is Kai’s earlier essay on blockchain.

What I’ve been reading and not reading

Linda Yueh, What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today’s Biggest Problems.  Think of this as the updated Heilbroner.

John Blair’s Building Anglo-Saxon England is a remarkable look at the archaeological and historical evidence on what went on before 9th century A.D.  This is not a book of irresponsible generalizations.

Sebastian Edwards has a new, forthcoming book American Default: The Untold Story of FDR, the Supreme Court, and the Battle Over Gold.

Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights, is a useful and readable treatment of the history of how businesses acquired various kinds of “personhood.”

Michael J. Piore and Andrew Schrank, Root-Cause Regulation: Protecting Work and Workers in the Twenty-First Century is an interesting book, written under the premise that the Continental model of labor safety and labor market regulation is a good thing, including for Latin America.

David C. Engerman, The Price of Aid: The Economic Cold War in India.

I have only browsed Fawaz A. Gerges, Making the Arab World: Nasser, Qutb, and the Clash that Shaped the Middle East, but it looks quite good.

Ge Zhaoguang, What is China?: Territory Ethnicity Culture & History is the result of a China scholar considering all the questions suggested in the subtitle.  I was not ever astonished, but it is about time we all read more books by the Chinese about China.

Self-recommending is Richard Sylla and David J. Cowen, Alexander Hamilton on Finance, Credit, and Debt.

I spotted several intellectual and emotional fallacies in Zadie Smith’s Feel Free: Essays.