Category Archives: History

The economics of bubbles

By Brent Goldfarb and David Kirsch – The space between fiction and reality is where economic bubbles take shape. Froth fills that space.

As the Dutch Tulipmania of the 17th century and the South Sea Bubble of the 18th century attest, speculative bubbles have been with us since the early days of corporations and market capitalism. Instant mass communication, in the form of the radio, was an amazing invention of the 1920s. Almost 700 new radio stations – the United States’ entire current AM broadcast infrastructure – were established in 1922. But nobody had identified a successful business model for radio broadcast.

Often the opportunity for a bubble arrives on the back of a new technology. And some technologies make for fantastic stories – indeed, sci-fi is a whole fictional genre based on this premise. Bubbles form whenever a new story is not only told, but can also be sold. However, not every new story leads to a bubble. Sometimes stories can be told, but not sold.

These cases highlight two important necessary conditions for the formation of a bubble: first, bubbles need narratives. Every startup begins as a story about an imagined future. Every venture, every investment, is a statement about the future, an attempt to create a future that conforms to the imagined vision of the promoter. Teams are formed, resources acquired, alliances entered, products and services developed, all in furtherance of that story and that future.

Every startup story will have some common elements – a protagonist (sometimes, but not necessarily a technology), a plotline in which the protagonist struggles against a challenge from dark forces (incumbents, or the current way of doing things), and a happy ending where the sun shines and human progress is advanced. Ever incomplete, these stories provide the mental scaffolding for individuals and institutions to invest in new ventures. Good stories sell, and the more uncertain the outcome, the more leeway for entrepreneurs to fabulate.

Bubbles inflate as the distance between fiction and reality increases. Contexts – such as investor liquidity, regulatory frameworks and cultural and macro-economic factors – establish boundaries on how far our stories can depart from reality. But entrepreneurs are also creatures of context, and some are better than others at ‘entrepreneuring’, stretching the limits of plausibility and maximizing time for their imagined realities to catch up to their promises.

Sometimes, we don’t observe a bubble not because the stories aren’t sticky or because the technology isn’t narratible, but because the narrative comes to fruition and the technology or entrepreneur delivers. more>

How ergodicity reimagines economics for the benefit of us all

By Mark Buchanan – The principles of economics form the intellectual atmosphere in which most political discussion takes place. Its prevailing ideas are often invoked to justify the organization of modern society, and the positions enjoyed by the most wealthy and powerful. Any threat to these ideas could also be an implicit threat to that power – and to the people who possess it. Their response might be brutal.

In the real world, through the pages of scientific journals, in blog posts and in spirited Twitter exchanges, the set of ideas now called ‘Ergodicity Economics’ is overturning a fundamental concept at the heart of economics, with radical implications for the way we approach uncertainty and cooperation. The economics group at LML is attempting to redevelop economic theory from scratch, starting with the axiom that individuals optimize what happens to them over time, not what happens to them on average in a collection of parallel worlds.

The new concept is a key theme of research initiated by Peters about a decade ago, and developed with the collaboration of Gell-Mann and the late Ken Arrow at SFI, and of Alex Adamou, Yonatan Berman and many others at the LML. Much of this view rests on a careful critique of a model of human decisionmaking known as expected utility theory.

But there is one odd feature in this framework of expectations – it essentially eliminates time. Yet anyone who faces risky situations over time needs to handle those risks well, on average, over time, with one thing happening after the next. The seductive genius of the concept of probability is that it removes this historical aspect by imagining the world splitting with specific probabilities into parallel universes, one thing happening in each.

The expected value doesn’t come from an average calculated over time, but from one calculated over the different possible outcomes considered outside of time. In doing so, it simplifies the problem – but actually solves a problem that is fundamentally different from the real problem of acting wisely through time in an uncertain world. more>

How America Lost Faith in Expertise

By Tom Nichols – I’m used to people disagreeing with me on lots of things. Principled, informed arguments are a sign of intellectual health and vitality in a democracy. I’m worried because we no longer have those kinds of arguments, just angry shouting matches.

I fear we are moving beyond a natural skepticism regarding expert claims to the death of the ideal of expertise itself: a Google-fueled, Wikipedia-based, blog-sodden collapse of any division between professionals and laypeople, teachers and students, knowers and wonderers—in other words, between those with achievement in an area and those with none. By the death of expertise, I do not mean the death of actual expert abilities, the knowledge of specific things that sets some people apart from others in various areas.

There will always be doctors and lawyers and engineers and other specialists. And most sane people go straight to them if they break a bone or get arrested or need to build a bridge. But that represents a kind of reliance on experts as technicians, the use of established knowledge as an off-the-shelf convenience as desired. “Stitch this cut in my leg, but don’t lecture me about my diet.”

The larger discussions, from what constitutes a nutritious diet to what actions will best further U.S. interests, require conversations between ordinary citizens and experts. But increasingly, citizens don’t want to have those conversations. Rather, they want to weigh in and have their opinions treated with deep respect and their preferences honored not on the strength of their arguments or on the evidence they present but based on their feelings, emotions, and whatever stray information they may have picked up here or there along the way.

This is a very bad thing. more>

America’s Hot New Job Is Being a Rich Person’s Servant

“Wealth work” is one of America’s fastest-growing industries. That’s not entirely a good thing.
By Derek Thompson – In an age of persistently high inequality, work in high-cost metros catering to the whims of the wealthy—grooming them, stretching them, feeding them, driving them—has become one of the fastest-growing industries.

The MIT economist David Autor calls it “wealth work.”

While there are reasons to be optimistic about this trend, there is also something queasy about the emergence of a new underclass of urban servants.

Wealth work falls into two basic categories. First, full-time retail and service jobs at places like nail salons and spas. “You’re talking about people with $30,000 incomes that are often employed in high-wealth metro areas, or resort economies,” Muro said.

Because they often cannot afford to live near their place o-f work, they endure long commutes from lower-cost neighborhoods. These arrangements aren’t merely time-consuming; they can also be exploitative. For example, New York City nail salons are notorious for flouting minimum-wage laws and other labor regulations, and massage parlors across Florida have served as fronts for human trafficking.

A second category is the “Uber for X” economy—that nebulous network of people contracted through online marketplaces for driving, delivery, and other on-demand services.

Optimistically, these jobs offer autonomy for workers and convenience for consumers, many of whom aren’t wealthy. But the business models that keep these firms aloft rely on the strategic avoidance of laws like the Fair Labor Standards Act, which regulates minimum wage and overtime pay. These laborers often do the work of employees with the legal protections of contractors—which is to say, hardly any. more>

Is Tourism an Antidote to the Global Wave of Nationalism and Xenophobia?

By Stewart M. Patrick – As vacation photos from exotic locales pile up in Facebook and Instagram feeds this summer, it’s easy to take far-flung tourism for granted. Well-heeled friends riding elephants in Thailand or camels in Giza might as well be at the Jersey shore or beside a lake in the Adirondacks. Mass international tourism, like the free flow of goods, services, money and data, has become a hallmark of globalization.

This is neither accidental nor trivial. The ability of those with with means and passports to travel the world is a function of international cooperation. It is also a force for global understanding, a potential antidote to the resurgent nationalism that now infects this era. Achieving such cosmopolitan ideals, however, requires a tourism focused on people-to-relpeople contacts and mutual benefits, rather than perpetuating self-contained bubbles of privilege.

At the dawn of the 20th century, foreign leisure travel required no passports. But it was the province of aristocrats and plutocrats of the sort that populated Henry James novels. The advent of jet travel, followed by package tours and declining airline fares, hastened mass tourism. According to the World Bank, between 1995 and 2017 the number of international tourist arrivals rose more than 250 percent, from slightly above 500 million to more than 1.3 billion, while tourist expenditures more than tripled, from $463 billion to $1.45 trillion. The United Nations estimates that tourism now accounts for 10 percent of global GDP and 7 percent of exports, and supports one out of every 10 jobs. Tourists still flock to Paris and Acapulco, but new, once unimaginable destinations from Antarctica to Zanzibar have also emerged.

Back in 1795, the philosopher Immanuel Kant famously outlined three preconditions for “perpetual peace.” The first two are more well-known: the emergence of self-governing constitutional republics and open international commerce. Kant’s third precondition is more often overlooked. It is the principle of “universal hospitality”: the right of all “citizens of the earth” to visit and be welcomed in all lands, regardless of their country of origin.

Kant believed that humans should act according to moral imperatives regardless of the precise effects of those actions. But his concept of hospitality still carried a utilitarian logic, since if universally practiced it would contribute to a cosmopolitan peace. more>

The end of us

By Thomas Moynihan – As ideas go, human extinction is a comparatively new one. It emerged first during the 18th and 19th centuries. Though understudied, the idea has an important history because it teaches us lessons on what it means to be human in the first place, in the sense of what is demanded of us by such a calling.

For to be a rational actor is to be a responsible actor, which involves acknowledging the risks one faces, and this allows us to see today’s growing responsiveness to existential risks as being of a piece with an ongoing and as-yet-unfinished project that we first began to set for ourselves during the Enlightenment.

Recollecting the story of how we came to care about our own extinction helps to establish precisely why we must continue to care; and care now, as never before, insofar as the oncoming century is to be the riskiest thus far.

The story of the discovery of our species’ precariousness is also the story of humanity’s progressive undertaking of responsibility for itself. One is only responsible for oneself to the extent that one understands the risks one faces and is thereby motivated to mitigate against them.

It was the philosopher Immanuel Kant who defined ‘Enlightenment’ itself as humanity’s assumption of self-responsibility. The history of the idea of human extinction is therefore also a history of enlightening. It concerns the modern loss of the ancient conviction that we live in a cosmos inherently imbued with value, and the connected realization that our human values would not be natural realities independently of our continued championing and guardianship of them.

But if human extinction was first spoken about in the 18th century, where was the notion prior to this point? What about the perennial tradition of end-of-the-world scenarios coming from religion? For a start, prophecies concerning religious apocalypse provide us with a final revelation upon the ultimate meaning of time. Prognoses concerning human extinction, instead, provide us with a prediction of the irreversible termination of meaning within time. Where apocalypse secures a sense of an ending, extinction anticipates the ending of sense. They are different in kind – not degree – and therefore different in their origins.

So, why was human extinction and existential catastrophe not a topic of conversation and speculation prior to the Enlightenment? more>

Consumerism isn’t a sellout – if capitalism works for all

By Richard V. Reeves – The essential thinginess of capitalism has been one of its most-criticized features. Materialism, and specifically consumerism, are almost always used as pejorative terms. Nostalgic conservatives, egalitarian progressives and environmentalists loudly agree on at least one thing: we are just buying too much stuff.

They’re not wrong. The U.S. self-storage market is already worth $38 billion, and growing fast. Almost one in ten households are now renting extra space. One feature of late capitalism is that many of us have more things than we have space for things.

At its best, however, consumerism is a powerful, positive force. It allows for the expression of identity, it can hold sellers to public account, and it drives new thinking and development. But this is only the case when consumers are being served fairly in the market. Today, there is a pressing concern about whether the forces of “bigness” – a trend toward fewer larger companies – combined with a reluctance on the part of governments to intervene in consumer markets, is dampening innovation and narrowing choice.

Before worrying about whether the market is serving consumers, we need to agree that it should. Critiques of consumerism have to be taken seriously before examining whether contemporary capitalism is friendly to consumers. These critiques usually come in four types: moral, aesthetic, financial, or environmental.

The moral critique of consumerism is that the acquisition of things displaces more worthwhile activities or priorities. Instead of shopping, we should be spending time with friends and family, in places of worship, or in nature. more>

Updates from Chicago Booth

Free markets for free men
By Milton Friedman – Do free markets make free men, or do free men make the free markets?

That might seem like a play on words or a purely semantic question, but it is not. It is a very real and very important question, and I think it contributes a great deal to understanding the kind of world we live in, and might live in.

One’s offhand impression is to say, “Well it must be free men who make free markets.” There’s an element of truth in that, but I think to a far greater extent, free markets make free men and not the other way around.

It’s true that there have been free men who have made free markets. The founders of the United States were free men who believed in individual and personal freedom, and they set up a constitution that was designed to preserve free markets.

But many people who regarded themselves as free men have produced totalitarian societies. The intellectual creators of the Soviet Union would have called themselves free men and would have said that they believed in individual and personal freedom. Yet they created not free markets but controlled markets. more>

Related>

Nobel Economist Says Inequality is Destroying Democratic Capitalism

By Angus Deaton – As at no other time in my lifetime, people are troubled by inequality.

Across the rich world, not only in America, large groups of people are currently questioning whether their economies are working for them. The same can be said of politics. Two-thirds of Americans without a college degree believe that there is no point in voting, because elections are rigged in favor of big business and the rich. Britain is divided as never before and, once again, many believe that their voice doesn’t count either in Brussels or in Westminster. And one of the greatest miracles of the 20th century, the miracle of falling mortality and rising lifespans, is no longer delivering for everyone, and is now faltering or reversing.

At the risk of grandiosity, I think that today’s inequalities are signs that democratic capitalism is under threat, not only in the US, where the storm clouds are darkest, but in much of the rich world, where one or more of politics, economics, and health are changing in worrisome ways. I do not believe that democratic capitalism is beyond repair nor that it should be replaced; I am a great believer in what capitalism has done, not only to the oft-cited billions who have been pulled out of poverty in the last half-century, but to all the rest of us who have also escaped poverty and deprivation over the last two and a half centuries.

But we need to think about repairs for democratic capitalism, either by fixing what is broken, or by making changes to head off the threats; indeed, I believe that those of us who believe in social democratic capitalism should be leading the charge to make repairs. As it is, capitalism is not delivering to large fractions of the population; in the US, where the inequalities are clearest, real wages for men without a four-year college degree have fallen for half a century, even at a time when per capita GDP has robustly risen. more>

Giving Europe political substance

By Mary Kaldor – Many of us who live in Britain feel embarrassed and ashamed by the contortions of our politics and the meanness of our government, towards the poor, the foreign and, particularly, the European—which is only going to get worse with Boris Johnson as prime minister.

Yet, paradoxically, the continuing struggle over ‘Brexit’ is an expression of democracy: the fact that the UK has not yet left the European Union is due to debates and positions which have been taken in Parliament, based on a mix of tactical advantage, public pressure and moral conscience. ‘Britain is thinking,’ I remember the great English-European historian Edward Thompson saying during the 1980s—‘and it only thinks every 50 years or so.’

Yes, the rise of right-wing populism has unleashed the dangerous demons of racism, homophobia, misogyny and general human cruelty. But it has also galvanised a new engagement with progressive politics, which could help to make possible the reforms needed if the EU is to survive until 2025.

The problem today is the weakness of substantive democracy: we have ‘a vote but not a voice’, said the Spanish indignados. And this is the consequence of three decades of neoliberalism.

The Maastricht treaty of 1991 was a compromise between the new wave of Europeanism, constructed from below by the peace and human-rights movements which opposed the cold-war divide during the 1980s, and the then newly-fashionable (if retro) market fundamentalism pioneered in Britain by Margaret Thatcher.

Maastricht enshrined in law the requirement to reduce budget deficits and the imposition on debtor countries of the burden of deflationary adjustment of fiscal imbalances. Meanwhile, the freeing up of capital movements and the liberalization of markets associated with the establishment of the single market speeded up the process of globalization, facilitated by the emergent information and communication technologies.

In a world where democratic procedures remain focused on the national level but where the decisions that affect one’s life are taken in the headquarters of multinational companies, on the laptops of financial speculators or otherwise in Brussels, Washington or New York, substantive democracy is evidently weakened. more>