Monday, May 28, 2012

Very Cool Picture

Showing where tourists and locals go in the D.C. area.

Here's the link with other cities included.

Sunday, May 27, 2012

The Emergence of Micro(scopic)economics

I know discussion on this topic has already gone through the blogging cycle - but I still wanted to express my fascination with it.

A couple of weeks ago, Tyler Cowen posted an article by the Boston Globe that surveys a group of economists working on a new sub-field called "genoeconomics." (The group of economists includes Edward Glaesar - one of my favorites.)

The article previews a bit of the world of genoeconomics - a new field in economics that takes a look at how genes impact certain economic traits. Pretty cool stuff, indeed.

Of course, this isn't the first time that there have been crossovers between the hard sciences and economics. At the turn of the century, neuroeconomics was starting to gain some traction, though I'm certainly not in-tune enough to gauge its success.

Either way, I would argue that genoeconomics is a pretty big frontier for economists. When I was taking my first microeconomics class, my professor emphasized that economics tried the answer the affects of how people behaved, not why they behaved that way. Well it certainly looks like that's about to change.

So why is this a good thing?

1. If you find a way to effectively measure the influence of genes (which is where 90% of the work lies) then you're making way for some very strong microfoundations from which to analyze other economic phenomenas. It's a lot harder to take an abstraction from genetics - because it's all right there. Now this doesn't mean that if we figured out every nook and cranny of the human genome, that we won't have to do any abstractions at all. I'm just saying that what pushes our behavior will be a lot more concrete than just saying "everyone is rational."

2. Just by the very fact that economists are wading into harder science is exciting - because it's making more economists think like scientists.

3. There are more possibilities for natural experiments. (Just look at twin studies.)

But at the same time, there are certainly downfalls to pursuing genoeconomics.

1. For one, you're giving social darwinism a lot of tools to work with. This is a point that is made clear in the Boston Globe article. There is definitely a fear of banks requiring DNA testing before receiving a loan, and other such discriminations.

2. Figuring out the statistical methods of genoeconomics will also be incredibly hard, and will have to take time. Because it's easy for someone to say - "Hey look, these people all have this gene, and they all are rich. Therefore, you will be rich if you have this gene." Bad science. I know that papers like these will emerge eventually, but we should be wary of them. 

Wednesday, May 23, 2012

Game Theory is a little too hip for Ronald Coase

An interesting quote from an interview with Ronald Coase:
Roberts: “What was your reaction to [game theory] and its influence on the study of the firm?” 
Coase: “I think the influence was wholly bad, because people developed high theoretical approaches instead of approaches based on what actually happens.”
The full interview is here.

So is he saying that the models are bad? Because I actually think game theory does a pretty neat job of showing the different choices people will make when they have incentives. In many cases, you can break down the relationships that are happening in a firm or institution.

Monday, May 21, 2012

Scratch that.

Calculated Risk posts that this is the fourth consecutive months with a year-over-year increase in miles driven.

The lack of growth in miles driven over the last 4+ years is probably due to a combination of factors: the great recession and the lingering effects, the high price of gasoline - and the aging of the overall population. 
I had suspected earlier that the "driving stagnation" could be attributed to structural payoffs in urbanization - i.e. people don't have to drive so much to get where they want to go. I had not thought about the impact of an aging population. Nevertheless, I don't actually think that gasoline prices are a cause. It'll be a fascinating trend to follow.

Sunday, May 20, 2012

Microfoundations is spreading

Interesting link from Mark Thoma yesterday:
Cultural entities and characteristics do require microfoundations, and it is in fact a fruitful avenue of sociological and ethnographic investigation to discover the concrete social mechanisms and pathways through which these entities come to be embodied in various populations in the ways that they are.  
The author is Dan Little from Understanding Society - a blog that I will be reading more often.

I think it's excellent that other branches of social sciences are thinking about microfoundations and their affect on understanding aggregate behavior. Maybe other fields will find creative methods of aggregation that will benefit economics.

As a side note - I'm reading Maarten Janssen's Microfoundations as a bit of light reading for the summer. He uses two very good examples for using microfoundations in a way that builds fairly strong aggregate models. The first is Mancur Olson's optimal utility hypothesis, and the second is the Ideal gas law. I found the aggregation used in the IGL to be a remarkable use of microfoundations, and I will probably post more about it in the future.

Saturday, May 19, 2012

It's the end of the Valley as we know it.

Very interesting interview with Steve Blank in The Atlantic:
If I have a choice of investing in a blockbuster cancer drug that will pay me nothing for ten years,  at best, whereas social media will go big in two years, what do you think I'm going to pick? If you're a VC firm, you're tossing out your life science division. All of that stuff is hard and the returns take forever. Look at social media. It's not hard, because of the two forces I just described, and the returns are quick.
Here is a bit more:
In the last bubble, venture capitalists went into a frenzy if anything had an ear and eye. I don't think this a bubble. I think the valuations are a bit of a bubble, but social media is real.
But weren't some of the companies that came out of the dot-com bust "real"? Part of their problem was that they weren't making revenue and valuations were way off-base. It still seems like that is happening again.

Blank notes that federal small business and research grants are important in driving research in long-term return industries - such as the life sciences. I think so too. But it still means the market will need to naturally support these investments.

Thursday, May 17, 2012

Deurbanization was a leading cause of the Dark Ages

Pretty cool comment from user on Reddit (all sourced, and everything):
The Medieval Warming Period that started in the 900s and the discovery of new crops in the New World in the 1500s increased Europe agriculture capacity. This led to more urban living and education which led to the development of new agriculture technologies and even more dense populations (return of urban civilization like Rome). 
The bubonic plague happened in the 1300s which screwed up Europe's economy for a temporary 150 years and in the 1400s you got the Gutenberg Printing Press which lead to 20 million copies of books being printed by 1500 spreading literacy to the masses. 
It took 150 years for Europe's population to recover.  
The Medieval Warm Period, the period from 10th century to about the 14th century in Europe... 
This protection from famine allowed Europe's population to increase, despite the famine in 1315 This increased population contributed to the founding of new towns and an increase in industrial and economic activity during the period.  
A lot can be said about the rise in power of Western Europe once it collected itself from the collapse of the Roman Empire but I dont want to make this too long.
He was refuting the idea that the Catholic Church was behind the European Dark Ages.

The logic actually makes a lot of sense. I wonder if the initial gains from urbanization were greater than the gains now. Is there a diminishing marginal benefit for every person that enters a city?

Chris Dixon on the Facebook Business Model

Now that final's season is over - I'm trying to dive back into daily blogging.

Chris Dixon has a great post on Facebook's business IPO that I think complements some points I was making in a previous post (albeit much more clearly):
The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) 
Here is the link.

Chris is certainly right that Facebook has a lot of resources to use if it's going to alter its business model. When Google+ was first coming out, I remember some people talking about the prospects of inserting a search engine into Facebook (probably using Bing). If Facebook is going to stick with display ads, they should shift their "social lock-in" strategy to include consumer habits - which involves expanding Facebook beyond purely social interactions.

Wednesday, May 9, 2012

Was Aristotle a governmental Malthusian?

"Experience shows that a very populous city can rarely, if ever, be well goverened. To the size of states there is a limit, as there is to other things (plants, animals, implements), for none of these retain their natural power when they are too large or too small." 
Aristotle (322 B.C.) 
This quote was posted on the top of a report from the Indian Census on population density.

It seems that he believes jurisdictions that are ungovernable if they grow too large.

Saturday, May 5, 2012

Vehicle miles traveled is falling

It appears...for the first time in 40 years, the the total miles driven per year is taking a downward shift. 

Of course, some would say that these reflect patterns in rising gas prices. But as you can see in the graph below: Gas prices have been rising for the past 40 years, as well!

Obviously, this requires much more in-depth research. But I suspect these are real structural pay-offs of urbanization. More people are living in areas that require driving or no automobiles at all. 

Greece has a Nazi problem

Here is some disturbing news coming out of Greece:
At Greece's last general election in 2009 Golden Dawn, whose members use the Nazi salute and whose party symbol is an adapted swastika, polled fewer than 20,000 votes nationwide. Now as the country goes to the polls on Sunday, national politics more closely resemble those of the embattled area.
Fascism is on the rise among the Greek youth. And it isn't very surprising. Over half of Greece's youth are unemployed - paving way for nationalist political sects to pin Greece's problems on foreigners.

A fascist Greece, while concerning, would not pose a daunting threat to international security, and they would almost surely be thrown out of the EU. However, if these political trends were to gain more popularity, it would not pose well for investor confidence.

I think the Greek government needs to focus on short-term policies that will give Greek youth some support. Of course, living in the age of austerity, there isn't much room for creative solutions.

One proposal would be lowering the minimum wage. As you can see in the graph below, the minimum wage has risen by about 300 euro over the past decade. (I'm not even going to get into what's going on in Ireland.)        

Greek youth need jobs, even if they don't pay well. It'd help companies hire low-skilled youth if their wages were lowered to market levels. 

There are strong relationships between high unemployment and radical political activity. Will lowering the minimum wage employ all youth? Definitely not. But it's a policy that could help stem off growing Nazi power. If the government isn't prepared to make these changes, they're going to have some tough coworkers in a year or two. 

Friday, May 4, 2012

Technology innovations are only half the story

A quick quandary for the afternoon:

When it comes to big technology innovations - there tends to be a stagnation period where the technology doesn't make a sizable impact on growth or the economy until someone figures out to really apply it. The same was true for electricity, engines and computers. People come up with all these inventions - but all the real value came out of Microsoft's ability to retrofit them into everyday use, or Henry Ford's ability to run automobiles through the assembly line.

All of these things developed new systems. And with all the venture capital/Internet technology talk this week, the big question is: How do we apply the new age of Internet technologies?

Wednesday, May 2, 2012

From the Lecture Hall: The Euro Crisis and U.S. Debt

Every once in a while, I like to talk about things that my economics professors say in class. My last post about my class was on the history of recessions.

As I've said before, a lot of my criticism isn't directed toward my professor's conclusions - rather how they got to those conclusions. An economics class is supposed to push students to explain and prove why something is happening based off of the tools that we know. And I like to blow the whistle when they relax that requirement.

So yesterday, we're brushing over capital utility and interest rates. Throughout class, my professor enjoys diverging from the material and applying what we're learning to the real world. Of course, this being George Mason, those applications often involve anti-liberal, anti-government, pro-liberty themes.

Yesterday's divergence was about Greece and the United States. We were calmly told that the US was on the same path as Greece given our debt-to-GDP ratio (shown below), and that we should invest $45-50k in gold so that we can get out of the country when it collapses. 

I believe what we have here is a breakage of Noah Smith's Principles of Arguing with Economists: Arguments by accounting identity almost never work. 
Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case the accounting identity acts like a budget constraint. But that is a very rare situation indeed.
My professor says that America will become the next Greece because both dept-to-GDP ratios are on the same path. That sounds like an argument by accounting identity to me.

So that's all scary and everything. But how much is it really telling us? Because while our debt ratios are on the same path, just take a look at U.S. interest rates:

I don't see many people fleeing from U.S. bonds with that trend. I haven't done Macro in a while, so I'm still a little rusty at comparative economics. But what I'm trying to show is that there is more to the Euro crisis than just debt and output. A lot more. Some of these things are applicable to the U.S. (like fiscal policy, interest rates, bond yields) and some of them are not (like the political structure of the EU, monetary unions).

But here's my point. If you're going to tell the class that the U.S. is will become an apocalyptical hell zone in the next few years, don't just casually tell us why. I think we're grown up enough to get the full picture of why you think that's happening.