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Stock market facts
1. The earliest known example of an organized market for equities dates from Rome, second century B.C.
2. Nathan Mayer Rothschild arranged his own personal transportation to the Battle of Waterloo, which he viewed from a distance. He bribed a ship to hurry him back to London, where he traded on his information of a British victory.
3. In 1913, 52.3 percent of all traded securities in London were non-British in origin. Great Britain exported seven percent of its gdp in the form of foreign investment, a figure which no developed nation has equalled since.
4. In 1929 less than two percent of all American households were buying stocks on margin. At the peak of the boom the average P/E ratio for NYSE-listed stocks was 16 to 1, which is not especially high by subsequent standards.
5. In 1958-9 dividend yields on stocks fell below bond rates in the U.S. and U.K., for the first time. They have stayed below ever since. At the time this was a source of shock and worry, the Modigliani-Miller theorem was not yet widely understood.
The above facts are from B. Mark Smith’s engaging The Equity Culture: The Story of the Global Stock Market.
Addendum: Michael Ward writes:
I recently came across a passage that identifies an even earlier example than second century BC Rome. Archeologists have uncovered evidence of what amounts to a stock market operating almost 2600 years ago. The following passage is set in a discussion of life among the subject peoples of Cyrus the Great, 559-530 BC, but also refers to archeological findings from the late Chaldean period and early Achaemenid period, roughly 650-500 BC. The passage reads:
“One more feature of contemporary economic life is strangely modern. In earlier times the high temple officials obtained as perquisites of their offices the right to certain of the sacrifices on certain days. These prebends were now bought and sold on the open market, not only for a given day, but for a small fraction of a day. The temple had become a huge corporation, shares of which could be transferred on what almost corresponded to our modern stock exchange.”
[A.T. Olmstead, History of the Persian Empire (Chicago: The University of Chicago Press, 1948), p. 85]
Second Addendum: The Rothschild fact is wrong, thanks to Jay McCarthy for the right answer.
Haitian life
Haiti remains mired in possible civil war, but this was not the most depressing Haitian news story of the day. The Washington Post reports on water supplies in Haiti:
…three times a day, she [a mother] fills a five-gallon tub, balances it on her head and walks steadily and gracefully back up to her one-room house, careful not to spill a drop. The water may not be safe to drink, but it is precious.
She said she has no alternative to drinking tainted water, which kills thousands of people in Haiti every year. This is her test for the daily water: “If it is clean, nothing will happen. When the water is not clean, my children get diarrhea.”
It is a risk that millions of Haitians must take each day. Although there has been a public campaign to teach people how to drop a small quantity of bleach into their buckets to purify the water by chlorinating it, no one has been able to instruct families on what to do if they have no money to buy the bleach. So some Haitians decide on their own. “Sometimes,” Zilice said, “I use lemon.”
“When we see the doctor, the doctor will say, ‘Take precautions for the water. Put Clorox so you can drink it,’ ” she said. But when there is no bleach, she said her children sometimes become sick with fever. That is when she boils the water if she can. Boiling water is a luxury for the rich. “I don’t always have money to buy charcoal or gas to boil the water,” she said. “I know it is a risk but I have no choice.”
Or how about this?
“Sometimes you see small children go at 5 in the morning to get water before classes. If they do not walk for water they die.”
Sixty percent of Haiti’s 8.5 million people do not have clean drinking water. It puts this whole RSVP business into perspective.
How much is a bathroom worth?
Economists are now applying econometrics to the time-honored questions of real estate. Based on a sample of 29,000 sales, and a proper set of statistical controls, the researchers derived an extensive set of valuations. The numbers given express the percentage change in the value of the home:
1. A full bathroom: 24 percent
2. A water view: 8 percent (I would have expected more)
3. Waterfront location: 18 percent
4. View of a golf course: 8 percent
5. A garage: 12.9 percent
6. A tennis court: 3.1 percent
7. In-ground sprinkler systems: 8 percent (surprisingly high)
8. An in-ground pool: 7.9 percent
9. A separate laundry room: 15 percent (surprisingly high)
10. An above-ground pool: minus 2 percent.
11. Is your house a “fixer-upper”?: minus 23.6 percent.
Here is a summary table of the results. Here is original research. Here is a Washington Post story.
Many of these amenities sell for more than what they cost to install. So the bottom line here supports the conventional wisdom of the trade. People don’t fix up their homes enough before selling them.
Why Ed Sullivan is important
This coming Sunday marks the fortieth anniversary of the Beatles on The Ed Sullivan Show. We look back on Sullivan as an antiquated, somewhat quaint relic of a bygone era. In reality he was a daring market entrepreneur who promoted important music and broke down racial barriers.
Sullivan was especially important for his advocacy of African-American music and entertainment. He helped Bill “Bojangles” Robinson, Ethel Waters, Nat “King” Cole, Leontine Price, Louis Armstrong, George Kirby, Duke Ellington, Richie Havens, Mahalia Jackson, Louis Armstrong, Diana Ross and the Supremes, and Marvin Gaye, among others. At the time the major networks typically shied away from carrying such performers, primarily for racial reasons. Sullivan consistently fought with his conservative sponsors and insisted on booking these individuals.
Sullivan was a musical visionary more generally. In addition to the Beatles, he promoted The Rolling Stones, Elvis Presley, and Barbra Streisand. In comedy he showcased Woody Allen, Richard Pryor, and Jerry Lewis, among many others. In each case the performers had not yet established their later significance.
Sullivan’s show, of course, was an institution. At its peak it regularly commanded an audience of over 50 million Americans and it ran for 23 years. Here’s a hat tip to Sullivan, who exemplified the best of entrepreneurship and cosmopolitan vision.
An economist in Baghdad
Chris Foote an economist at the Boston Fed worked in Baghdad last year. His report makes for interesting reading. This was not your usual job for an economist.
Early on, I visit Iraq’s Central Bank, which was also destroyed by looters. Our mission is to check on the Treasure of Nimrud, a collection of ancient Assyrian jewelry that was stored in the bank’s vault for safekeeping in the early 1990s. The bank’s basement was flooded with sewage water during the looting and has only recently been drained. Our group trudges down the unlit, still slimy stairs, careful not to slip. When we reach the bottom, I see that the corner of one of the vault doors has been peeled away, as if by a giant can opener. I am told that during the postwar chaos, someone tried to open this door with a rocket- propelled grenade, incinerating himself in the process. (The lock in the door held.) The deputy head of the Central Bank jiggles a number of keys and opens another door nearby. We are happy to learn that the treasures are intact.
Most of the time, however, he is working 8 am to 11 pm trying to solve economic problems. As economic theory would predict, but many economists would deny, it’s the basic economics that has the most value added.
In many ways, the job is similar to the one I held at the Council of Economic Advisers (CEA) before coming to Iraq. There the economic questions changed from day to day, sometimes from hour to hour. Baghdad is the same. What is the best way to fix Iraq’s currency? How could foreign investment help Iraq? What tariff regime should we recommend? The questions are all over the map, so I draw more from my experience teaching macroeconomics to undergraduates, and less from my own specialized research.
The evolution of proverbs
First-graders were asked to complete the first halves of proverbs and they came up with the following:
“Better to be safe than punch a fifth-grader.”
“Don’t bite the hand that looks dirty.”
“A penny saved is not much.”
“Don’t put off till tomorrow what you put on to go to bed.”
“You can lead a horse to water, but how?”
All, I might add, appear to show a familiarity with economic reasoning, with the possible exception of number four, which to my mind makes no sense whatsoever.
Here is the full story. My colleagues David Levy and Daniel Houser have recently started designing some economic experiments about the evolution of proverbs. Proverbs, like prices, aggregate information. One question is whether proverbs evolve to demonstrate the wisdom embodied in some weighted notion of “average opinion”, the opinion of the median member of the language community, or the most frequently expressed opinions at the mode.
The Winners of the MR Challenge
As expected, President Bush’s plan for a moon base and eventual trip to Mars failed to ignite. MR readers have some better ideas.
Honorable mention goes to Roger Meiners for suggesting that a moon base is a good idea so long as Congress and the President must occupy it. Now I am inspired!
Third place goes to Chris Rasch for brain freezing. Chris Rasch writes “I believe that reversible cryopreservation of the human brain could be developed. Remarkable advances have already been made on a shoestring budget. Such a technology would allow people dying today to halt the dying process until technology can advance to the point that we can cure their disease or repair their injuries. I would wager that, for a mere billion dollars, which is far more than has probably been spent on cryobiology during the entire existence of the field, we could have effectively unbounded lifespans. We could then use those extra years to pursue all of the other goals that other submitters may send to you.”
Here is a good, short summary of cryonics and you can sign up to have you brain (or more) frozen here.
I like the cryonics idea and have thought seriously about signing up (believe it or not, one of my colleagues (not Tyler) has already done so). The reason the idea takes third place is that we don’t see a big private demand for cryonics and the public is more likely to think this idea crazy than inspiring.
Second place goes to Nick Shultz for suggesting that we “provide potable water for everyone on the planet.” A number of other ideas were also motivated by the goal of alleviating abject third-world poverty. I think these ideas are inspiring but am unsure whether we can deliver on them given that so many of the problems of the third world have to do with poor governance. My suggestion would be to work on something related but more under our own control. We could do far worse, for example, than following Bill Gates’s lead and put a billion or so into the Malaria Vaccine Initiative.
First place goes to David Wood and Robin Hanson both of whom suggested a space elevator. At first, the space elevator idea seems impossible, even absurd. The idea is to string a cable some 62,000 miles long from a spot on the equator up into outerspace. Wouldn’t it fall down? No, recall that a sateillite some 22,000 miles up is in geosynchronous orbit. The space elevator would extend enough past this point so that gravity at the lower end and centripetal acceleration at the far end would keep the cable under tension. Once the cable is strung, reaching outerspace is as simple as Jack climbing the beanstock.
The most difficult part of the space elevator is finding a material strong enough to carry a load yet light enough not to collapse under its own weight – a short time ago there was no such material but today it’s believed that carbon nanotubes could do the job (nano-technology more generally was another favourite of MR readers and this proposal would advance that cause.)
A space elevator is a game-changer because it dramatically lowers the cost of putting payloads into space. Moreover, once you have one elevator it becomes much easier to get a second. In contrast, rockets are always going to be expensive because you have to carry a lot of fuel just to lift the fuel and sitting on top of 4 million pounds of explosive is always going to be dangerous. The space elevator would provide a permanent access point to the stars and it can be had for less than 100 billion. Going up anyone?
The Poincare conjecture
Has the Poincare Conjecture been solved? Possibly. Read this recent news report about a new proof by an obscure Russian loner, Grisha Perelman. The Conjecture is one of the famous Millennium Problems in mathematics.
“This is arguably the most famous unsolved problem in math and has been for some time,” said Bruce Kleiner, a University of Michigan math professor reviewing Perelman’s work.
Here is the clearest statement I can find of what the whole thing means:
To solve it, one would have to prove something that no one seriously doubts: that, just as there is only one way to bend a two-dimensional plane into a shape without holes — the sphere — there is likewise only one way to bend three-dimensional space into a shape that has no holes. Though abstract, the conjecture has powerful practical implications: Solve it and you may be able to describe the shape of the universe.
Or try this:
[the] work has huge implications for our understanding of partial differential equations. PDEs (as they are known in the trade) are the mainstay of physics and engineering. Mazur notes that physicists and engineers use PDEs to model everything from the flow of water to the buildup of heat in aircraft engines. “I would expect this work to have enormous applications in many fields of science,” he says.
There may also be applications for scientists studying DNA…Some kinds of DNA wrap themselves into knot formations that can be insanely difficult to decipher. But Mazur says Thurston’s classification [referring to related work] may provide a way to calculate the exact nature of any knot – so in theory it could be used to work out the structure of knotty DNA molecules.
The upper reaches of mathematics can often seem absurdly detached from life down here on planet earth, but Mazur points out that you can never know where things might lead. He cites the case of James Clerk Maxwell. In the late 19th century Maxwell worked out the equations of electromagnetism. “At the time it would have been easy to write off Maxwell’s ideas about invisible forces as a mystical abstraction,” Mazur says. But Maxwell’s work laid the foundations for the development of radio, and hence the communications revolution. Every time we turn on the TV or pick up a cellphone or log onto a WiFi system we are reaping the rewards of Maxwell’s equations.
Another bottom line: Perelman will receive a million dollars if his result stands up. Alex says this is another win for bounty hunters!
Oxford Encyclopedia of Economic History
Oxford University Press has just published a five-volume Encyclopedia of Economic History, edited by Joel Mokyr of Northwestern University.
Virginia Postrel offers a good review and some interesting details:
Did you know that the oldest records of chemical pest control date back 4,500 years, to Sumerian farmers who used sulfur compounds to kill insects and mites?
Or that a century ago, railroad companies accounted for half the securities listed on the New York Stock Exchange? (Before the railroads, with their huge demand for capital, securities markets traded almost entirely in government debt.)
Or that in 1850, shoemaking employed more workers in the United States than any other manufacturing business?
The past doesn’t look quite like we tend to picture it: many of the people who got rich from the Industrial Revolution were not industrialists, but landowners who held urban real estate or property with access to water power or mines. From 1880 to 1914, unions went on strike at least 50 times to stop American employers from hiring black workers. Above all, Professor Mokyr says, “in the Middle Ages and in classical antiquity, the destitute were the vast majority of the population.”
And what is the bottom line to economic history?
Professor Mokyr says: “There are certain unifying themes that you see everywhere. People have to make a living. People would rather have more than to have less. On the whole, they don’t behave stupidly. They do as well as they can under the circumstances. The variation is in the circumstances, in the richness and diversity of human economic institutions that have emerged over time.”
That is not all:
“Economic history,” Professor Mokyr writes in the preface, “covers nothing less than the entire material existence of the human past.” The encyclopedia gives theoretical economists a way to check their ideas against the realities of the past. “You guys can’t write these big, fancy models without looking at the details,” Professor Mokyr says.
I have not yet seen the volumes but most likely the set will not be surpassed anytime soon.
Vernon Smith on Iraq
Our colleague, Vernon Smith writes in today’s Wall Street Journal about privatizing the Iraqi economy, based in part on an idea pioneered in Alaska. See also my earlier post on why oil has been a curse to the discovering countries. Here are some key quotes:
For long-term success, the enormous task of nation rebuilding in Iraq requires attention to more than the creation of a political democracy. No matter how well-intentioned and democratic it might be, the next government will be tempted to corruption, violation of rights and expanded political power if it owns and controls the great economic wealth potential of Iraq. This is the time, and Iraq is the place, to create an economic system embracing the revolutionary principle that public assets belong directly to the public …
In Iraq, the rights in question are to the former government’s producing properties, transportation, terminal facilities, waterways, land and subsurface rights. These assets should first be declared transferred to the account of the citizens, recognizing the birthright of each citizen to a personal, empowering property right in the land and assets of the country of their birth. All citizens should have an equal share in this fund and be issued the same number of share claims to the fund.
Over a period of several decades, all Iraqi assets should be auctioned to the highest bidders in an individual, national and international business competition so that each asset or bundle of complimentary assets is transferred to the bidders who value them most for production, development or exploration. The auction could begin by selling existing producing oil properties, refineries, pipelines, and gathering, separating and terminal facilities over the next several years, then move to mineral, oil and gas exploration leases, and to land surface rights.
The proceeds would be deposited in a giant mutual fund for investment in index securities of the world’s stock markets and monitored — but not managed — by the U.N. Investing in stock indexes would minimize the need for discretionary financial management, and the prospect of the next government exercising or re-establishing any central control over Iraqi assets. The Iraqi Fund should be a closed-end fund whose shares are tradable and listed on world stock exchanges. The proceeds of each new property auction would be deposited to the account for investment in index funds. Redemptions at market value would go to any Iraqi citizen who elects at any time to cash out any portion of his shares.
There is a very important precedent, in part, for this action — the Alaska Permanent Fund. The state of Alaska elected to put a portion of its vast Prudhoe Bay annual royalty revenue into a citizens’ Permanent Fund for investment in securities. Each year a dividend from this fund is paid to every Alaskan citizen. This Fund was the first to recognize the full rights of citizens to share directly in the income from public assets.
This Fund, however, had three important shortcomings that should not be repeated in the proposed Iraqi Fund.
†¢ First, Alaska did not put all of Prudhoe Bay state revenue into the people’s account. A portion of it went to the state government. When oil prices went up, the state succumbed to the temptation to repeal its income tax and spend its oil income like there was no tomorrow. Consequently, today the Alaskan state government has a budget crisis and a deficit gap, but the 600,000 Alaskan citizens still share equally in the dividends from their Fund, now worth $27 billion….
†¢ Second, the Alaska Fund is not a ready source of private investment and venture capital for its individual owners. This is because there are no tradable certificate shares in their mutual fund. This lack of liquidity denies citizens’ access to capital markets: An individual citizen cannot sell some portion of his shares for investment in a private start-up business, or borrow against the shares for such investment. …
The Iraqi People’s Fund would consist of tradable shares; all public property would be held, then sold, for the account of the fund; and the new government would be required to obtain its revenue from taxes levied on the citizens who are willing to elect them and finance their spending programs. The government could not raid the fund to finance its operations. All this could be made explicit in the Iraqi constitution.
There should be room in the proposal for a temporary transition mechanism. For example, sales of citizen shares in the fund might be limited at first, but gradually lifted as citizen registrations and claims were settled, and the auction/sales mechanisms became established. Also, an initial budget set-aside for financing the new government might be in order, but this budget should decline on a fixed planning schedule at 15%-20% per year as the new government gets its tax and spending program together.
This action would launch the new Iraqi state as one based on individual human rights, and the rule of law, and anoint it with rock-hard credibility by giving every citizen a stake in that new regime of political and economic freedom. The objective is to undermine any citizen sense of disenfranchisement in the country’s wealth, economic and political future, and to galvanize citizen support for a democratic regime. Now is the time to act, before post-war business-as-usual creates de facto foreign and domestic spoils-of-war property right claims, leaving out a citizenry brutalized enough by a totalitarian regime, and in sore need of empowerment in their own future.
Earthlike planets may be common in the universe
Read Futurepundit on this topic. This news increases the expected well-being out there in the universe, but probably lowers the expected welfare of mankind. Visiting aliens could be a boon or a disaster but I am risk-averse in this capacity. Neither my juvenile love for science fiction nor my general optimism make me wish to live to see alien visitation. While earth institutions are far from efficient, they could be much worse. Right now the dominant technological power, the United States, is relatively benevolent by the standards of world history. Technologically superior aliens would upset this balance and could leave too much power in the wrong hands.
This whole news about planets only raises the question anew: Where are they? One possibility is that civilizations simply do not last very long on a cosmic time scale. If intelligent life has evolved elsewhere in the universe, most of the time it has expired before having a chance to contact us. If the window of opportunity is sufficienly small, it would help explain why we do not receive signals from other civilizations.
The research also shows that the nature of Jupiter’s orbit may be responsible for intelligent life on earth:
The simulations show that the amount of water on terrestrial, or Earthlike, planets could be greatly influenced by outer gas giant planets like Jupiter.
“The more eccentric giant planet orbits result in drier terrestrial planets,” Raymond said. “Conversely, more circular giant planet orbits mean wetter terrestrial planets.”
In the case of our solar system, Jupiter’s orbit is slightly elliptical, which could explain why Earth is 80 percent covered by oceans rather than being bone dry or completely covered in water miles deep.
This points to another reason why the aliens have not come. The existence of intelligent life requires a very large number of favorable coincident factors, perhaps larger than we have realized to date. But read Brad DeLong on the Fermi paradox, which suggests a large number of intelligent civilizations out there in the universe, even once we account for all the improbabilities.
Dangerous Rice
Rice arrived in Spain in about the eighth century, from the Moors, and the Spanish word “arroz” comes from the Arabic. In medieval times, growing rice was extremely controversial, largely because the rice fields were a breeding ground for malaria. For this reason, the Spanish city of Valencia, to this day renowned for its rice and its paella, was called “land of rice, land of tears.” Various regulations restricted the growth of rice in order to limit malaria. Debates continued to rage throughout the eighteenth century, a distinction was commonly drawn between fields with stagnant water and irrigated fields, which were supposedly safer.
The clincher: Malaria has long been eradicated in Spain, but to this day “the allocation of land or enclosures for rice growing requires special authorization from the office of the Spanish Ministry of Agriculture in Valencia.”
The race to space
Everyone has his or her obsession, one of mine is collecting Mexican amate painting, for some people it is investing in space travel.
The tangible pieces of John Carmack’s dream are scattered around an 8,000-square-foot warehouse: industrial water-purification tank, aluminum cones, compressed air cylinders, used Russian spacesuit.
All are components of the software developer’s project to launch a manned rocket 62 miles up by January 2005.
What binds the pieces together are Carmack’s quiet intellect and considerable bankroll.
“We mostly look at it as a two-horse race,” the 33-year-old millionaire said of the international competition for the $10 million X Prize, offered by a St. Louis-based foundation.
The entrepreneur has a background in computer games and works with a team out of a warehouse, sometimes using the parking lot for small-scale launch attempts. Rather than pursuing secrecy, progress is publicized on the project website, there you can even see videos of failed launch attempts.
NASA had the following response:
NASA has no official comment on the civilian attempts.
“It’s certainly a complicated business. Sometimes [sic] we make it look easy,” said Melissa Mathews, a space agency spokeswoman.
Is Carmack crazy? Beats me, read this interview if you want more data. The whole point is that there is only one way to find out, which is to let him try. Maybe he is right that “Aerospace is plumbing with the volume turned up.”
Thanks to Marko Siladin for the pointer.
What would it cost to send a man to the moon?
Recently the Bush administration has been making noises about sending a man to the moon again. Gregg Easterbrook offers some cogent critical points:
A rudimentary, stripped-down Moon base and supplies might weigh 200 tons. (The winged “orbiter” part of the space shuttle weighs 90 tons unfueled, and it’s cramped with food, oxygen, water, and power sufficient only for about two weeks.) Placing 200 tons on the Moon might require 400 tons of fuel and vehicle in low-Earth orbit, so that’s 600 tons that need to be launched just for the cargo part of the Moon base. Currently, using the space shuttle it costs about $25 million to place a ton into low-Earth orbit. Thus means the bulk weight alone for a Moon base might cost $15 billion to launch: building the base, staffing it, and getting the staff there and back would be extra. Fifteen billion dollars is roughly equivalent to NASA’s entire annual budget. Using existing expendable rockets might bring down the cargo-launch price, but add the base itself, the astronauts, their transit vehicles, and thousands of support staff on Earth and a ten-year Moon base program would easily exceed $100 billion. Wait, that’s the cost of the space station, which is considerably closer. Okay, maybe $200 billion.
What can a man do on the moon that automated vehicles cannot? Virtually nothing, and of course he requires far more maintenance and protection.
Given all that, where should we go from here?
NASA doesn’t need a grand ambition, it needs a cheap, reliable means of getting back and forth to low-Earth orbit. Here’s a twenty-first century vision for NASA: Cancel the shuttle, mothball the does-nothing space station, and use all the budget money the two would have consumed to develop an affordable means of space flight. Then we can talk about the Moon and Mars.
Mostly I agree, though I expect private enterprise can beat NASA in this latter project, at least provided we allow the privatization of space.
Fact of the day
In 2001 American spent $25 billion on recreational watercraft, more than the gdp of North Korea.
From Gregg Easterbrook’s new and noteworthy The Progress Paradox.