Category Archives: books and book reviews

Tim Harford and Russ Roberts

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An econtalk podcast, of course. At one point, Harford says,

one thing I learned is not to undervalue innovations that are important simply because they have become very, very cheap, so they’ve become ubiquitous. The other thing I learned was not to forget the way that inventions reshape organizations, reshape the way we live, reshape societies. Often in order to use an invention, take advantage of an invention, you need an awful lot of adjustment. The classic example, which will be well known, I think, to some EconTalk listeners, is Paul David’s essay on “The Dynamo of the Computer”, reflecting on how long it took electric motors to be adopted in manufacturing in the late 19th-early 20th century, because people had to completely readjust, reconfigure the factories, retrain the workers. I mean, just everything had to change in order to take advantage of this new technology. And initially when it was used, they tried to direct replacement to the steam engine–just rip out a big steam engine, replace it with a big electric motor, and that should be fine. And of course that doesn’t realize the gains. Because to really take advantage of these technology, we often have to change, and adjust the way we do things–the way we work, the way we live. Otherwise we don’t enjoy the benefits. And sometimes those changes can be–well, they are very hard to predict, but they are occasionally quite hard, quite wrenching.

Reading in my youth

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Tyler Cowen writes,

Way back when, I considered the ten books that influenced me most, a list I still stand by. In response, someone asked me to name the books that influenced me, but whose influence I probably was not aware of. Let’s ignore the semi-contradiction in that request and plow straight ahead! Here goes, noting that if memory serves I read most of these between the ages of 10 to 12

Let me play the same game, focusing on what I read around that age. Should I include Baseball Digest and Mad Magazine? I am sure that they had influence. The former led me to Strat-O-Matic baseball, which incented me to work out the probabilities of two dice. Mad was big into exposing hypocrisy–Dave Berg even had a regular feature “When they say ___ what they really mean is _____.”

My chess reading was limited to Fine’s Ideas Behind the Chess Openings. It did not turn me into a chess player. I did not know enough about the midgame to appreciate the opening theory. For the purpose of learning chess, my guess is that it would have been better to start reading about the endgame and work backwards.

Neither did Common Sense at Poker turn me into a poker player. But it was a great book, very well written, with memorable characters: Mouse, the guy who was afraid to bet big. Brill, the sharpster. Guffy, the bluffer who bid up pots. Years later, when I had my Internet business, I thought of VC-backed competitors as Guffy types. They made the pots a lot bigger, and it was expensive to stay in, but our hand was as good as theirs, so it was worth it to call their bluff.

Of the books that Tyler mentions, I read Instant Replay and Guadalcanal Diary. The former was extremely well written, and about ten years ago I ordered a used copy to re-read. The latter I have forgotten, apart from the title. Speaking of sports books, I read Jim Brosnan’s The Long Season, among many others. Percentage Baseball, by Earnshaw Cook, was sabermetrics before Bill James, although Cook could not write anywhere near as well as Bill James. I doubt that I was able to follow Cook’s math, although perhaps the attempt was good for me.

When I was ten, my father was asked to be on a panel judging the best political science books of the year, so we were sent a lot of books by publishers. Two that I remember are The Agony of the GOP, 1964 and a book whose title eludes me that chronicled the run-up to the first world war. We were sub-letting a professor’s house in Princeton, and the professor had really fancy rare edition of The Three Musketeers, which my parents read to me/with me, probably because they were afraid that if I read it myself I would destroy it. I did wreck a lot of other things in the house. Boys do that, you know. They also read with me The Wind in the Willows, which I did not appreciate as much at the time as I have come to appreciate later.

Somewhere around that time I read Churchill’s six-volume history of the Second World War. I probably absorbed the fact that Churchill felt much more relaxed being in charge than trying vainly to convince others in charge of what to do about Hitler before the war started. I also noted his obsession with capital equipment (as I would put it now), such as the rate at which merchant ship tonnage was being sunk by U-boats compared to the rate at which new ships were being built.

I was very loyal to Alexandre Dumas, primarily because I had seen on television the 1939 movie version of The Count of Monte Cristo and been enthralled by the tale of hard-earned revenge. The book, it turns out, ends on a more ambivalent note than the movie, so at that age I did not enjoy the book as much. I wrote a book report on The Scarlet Pimpernel, saying that although I did not like it very much I intended to read other works by Dumas. My English teacher wrote on my book report something to the effect of, “You don’t have to do that, you know.” And so I didn’t. I think that might have been a revelation, that not every book by a given author is equally worth reading.

Disaggregating the economy using big data

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When do you suppose that the following sentences were written:

Should we worry about a computerized creation that plays to our unconscious? How vulnerable are we to these increasingly refined sales pitches?

They come from Michael J. Weiss, on p.25 of his book The Clustering of America. It is a mostly-favorable treatment of the use of big data to sort American zip codes into socioeconomic clusters, to help businesses make better use of direct-mail marketing and local advertising. The data also were used by political organizations to target efforts to get out the vote, solicit donations, and tailor messages.

The book appeared almost thirty years ago, in 1988. I read it when it first came out, and I recently ordered it so that I could read it again. I also ordered a follow-up book that Weiss wrote in 2000, called Our Clustered World. I will have more to say about the two books when I have finished. I am interested in what they contribute to the project of disaggregating the economy, meaning treating the U.S. as a collection of diverse economies that trade with one another.

One side note: In the late 1990s, when I was running my commercial web site providing information to people who were relocating, we contacted a company that had a similar cluster analysis, in order to enable users to search for particular types of towns. For example, you could select a place where you lived (or wish you lived) near Baltimore and then look for the three most similar towns near, say, Los Angeles. The application would take the socioeconomic cluster that you started with and match you with a part of Los Angeles that had a similar socioeconomic cluster.

The company provided us with their data on a couple of CD’s, and for us, loading it and putting up a front-end that could do the searches the way we wanted was a technical project. Probably the biggest challenge was creating a way to search by town name as well as by zip code.

Shortly after the application went live on the web, I received a very angry note from a Civil Rights organization. The data for each socioeconomic cluster included the two or three consumer items that were purchased much more in that cluster than in other clusters. Our application spat out that information, along with the other data about location. It turned out that one cluster’s unusually strong consumer propensities included fast food fried chicken. Someone evidently had done a search that caused this cluster description to appear and contacted the The Civil Rights group about it. The note that they sent us accused us of stereotyping the location as African-American, so that we were promoting segregation and redlining.

Of course, the company was not using racial stereotyping to speculate on consumer propensities. All of the consumer propensities that the company identified were data driven. If this was a stereotype, it evidently had a basis in reality.

We decided that it was appropriate to edit out that particular example, and just leave in the consumer propensities that did not have any racial connotations. As I recall, we looked in the cluster descriptions for other examples of consumer propensities that might have ethnic connotations, but we did not see any.

Equity without capital, twenty years later

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I received a review copy of Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which has a 2018 copyright date.

1. My first reaction is to be a bit miffed that my name is not in the index. Nick Schulz and I wrote a book on the intangible economy, and the first edition appeared in 2009. Going back even further, in 1998 I wrote an essay called Equity without Capital. That essay is still interesting to read, and it anticipated some of the central issues in their book. But probably fewer than 200 people saw it when I wrote it.

2. Hal Varian and Carl Shapiro aren’t in the index, either. That is a less forgivable omission. Information Rules sold well.

3. I hurried through the book, and I was inclined to give it a mixed review. But when I re-read it, I only re-read the sections that I liked the first time. I decided that those sections are really good. Now I am inclined to give the book a strong recommendation.

4. The organization of the book is excellent. The good news is that you usually can skip to the end of the chapter and read its conclusion to get the main point. The bad news is, well, why not just condense the book into an extended essay? And if you left out the sections of the book that did not do much for me, the extended essay would work even better.

Gosh, I am really being hard on them, for some reason. It really is a first-rate book. I’m not sure why I keep wanting to talk about what I don’t like about it. But, here I go again:

5. They make a big deal about recent literature that arrives at measures of intangible capital. However, as they point out, such measures are fraught.

Their analysis says that intangible capital has four s’s: sunk costs (investments in assets that cannot be re-sold); scale (network effects and path dependency can bring very high returns); synergies (combinations of ideas are worth more than the ideas are worth separately); and spillovers (ideas are easily copied or imitated).

This implies, as they recognize, that intangible capital can be worth much more than what it costs to obtain, because of scale and synergies. But it can be worth much less than what it costs to obtain, because of sunk costs in non-marketable assets. In bankruptcy, you can sell off the office furniture and the fleet of trucks (tangible assets), but not the business process that proved unsustainable or the failed attempt to establish a brand (sunk costs).

But the measures of intangible capital use acquisition cost as the measure of investment in intangible capital. That may be a reasonable way to value tangible capital. But to me, their four s’s imply that intangible capital’s value cannot be reliably represented by its acquisition cost.

To get technical, Tobin’s q is the ratio of the market value of capital to its replacement cost. Think of it as the ratio of the stock price of a firm to the acquisition cost of its assets. For tangible capital, q should be close to 1. But for firms with a lot of intangible capital, like The Four, it is much, much greater than 1. Tyler Cowen’s recent column, Investors are celebrating the tech revolution, says that the current high values of q are a positive signal about future economic growth.

Of course, for many dotcom stocks in the 1990s, q shot way up before dropping to zero, which is what my essay was predicting. But by the way, one of the stocks I was skeptical about back then was Amazon, and if you held onto that, the losses on the rest of your 90’s doctcom portfolio might not trouble you.

Looking at this balance between superstar value and failure, the authors propose that, well, on average, the value of intangible capital for the whole economy ought to be somewhere close to what it costs. I thought they were just hand-waving at that point.

They understand well enough that intangible capital is not exactly like tangible capital in the neoclassical model. But I do not think that they are ready as I am to take the next step and jettison the neoclassical framework.

Reality vs. Kurzweil’s expectations

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One way to track scientific and technological progress is to compare outcomes to predictions that were made by futurists. So I pulled out my copy of Ray Kurzweil’s The Age of Spiritual Machines, written 20 years ago, which has predictions for 2009 and every decade thereafter. Are there predictions that he made for 2019 that came true sooner? Are there predictions that he made for 2009 that came true much later?

I will get into some specifics below, but some general points that occur to me from re-examining these predictions are the following.

1. Relative to his predictions, I can think of few “upsides” (something that appeared sooner or turned out better than predicted) and many “downsides.” Most of his predictions for 2009 have come to pass only in the past few years, and some are still remote. But to offer a more positive take, the fact that most of his milestones for 2009 have been hit as of 2017 is probably a better outcome than most other prognosticators would have been willing to bet on in 1999.

Roughly 50 percent of his predictions for 2019 now appear likely to be realized between 2025 and 2030, and the remaining 50 percent ought to be pushed back even farther.

2. I sense that a lot of progress that he expected has been held back by ergonomic issues. For example, language translation software may be effective, but people find ear buds and microphones to be uncomfortable. Similarly, augmented reality has been held back by the poor ergonomics of what goes over your eyes and ears. Collaboration across distance is not nearly as effortless as Kurzweil anticipated, even though software firms have put a lot of resources into “collaboration tools.”

Maybe more venture capital resources ought to be focused on finding breakthroughs in ergonomics.

3. Progress also has been slow in developing applications that react to the emotional state of human users. This is particularly important if computers are going to contribute outstanding value in education.

4. There is considerable cultural drag. Kurzweil predicted that by 2019 there would be parts of the road system dedicated exclusively to self-driving cars. One can argue that the technology is here to do that, but the culture is not ready to accept the idea.

I think that this cultural drag is becoming increasingly important. William Gibson’s saying that “The future is already here. It’s just not very evenly distributed” is even more apt than when he said it. Continue reading →

Scott Galloway on the four

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I watched the video. My sense is that now I don’t have to read the book. (And I don’t feel bad about that. For consultants, books are loss leaders.) I recommend the video to all of you (and, yes, some of you recommended it to me before, but I didn’t get around to it until a few days ago).

But I would be wary about getting overly awed by market capitalization numbers. For example, Galloway says that after Amazon announced that it was purchasing Whole Foods, Amazon’s market cap went up by more than the cost of the acquisition, and to Galloway this says that the acquisition was “paid for.” But having a higher stock price does not give Amazon more capital to deploy. It makes it cheaper to float new stock, but unless and until they do that, I do not think you can say that they acquired Whole Foods for nothing.

There is a disconnect between Amazon’s share value and its near-term profit prospects. It will be interesting to see how this plays out. To me, it looks like a consensual-hallucination Ponzi scheme. Galloway thinks otherwise. In any case, Amazon certainly refutes the notion that having to answer to shareholders necessarily creates “short termism.”

Continue reading →

Martin Gurri update

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1. In a recent talk, he says,

The question has been posed at this conference whether we are witnessing the rise of authoritarian or fascist governments. Among the old democracies at least, I believe the opposite is closer to the truth. Democratic governments are terrified of the public’s unhappiness. They know that heroic actions are expected of them, but also that every initiative will be savaged and every failure amplified. Their behavior is the opposite of authoritarian. It’s a drift to dysfunction: to paralysis.

Look at the Republicans on Obamacare.

Other provocative passages:

Rhetorical aggression defines the political web. By embracing Trump in significant numbers, the public has signaled that it is willing to impose the untrammeled relations of social media on the fragile forms of American democracy.

Information, it turned out, has authority in proportion to its scarcity – the more there is, the less people believe.

I recommend the whole thing.

2. Read his account of the controversy over allowing a representative of a far-right German party to speak at the conference.

3. I continue to recommend The Revolt of the Public more often than any other book. But I also recommend my review of it. Near the end of my very long review, I wrote,

The dominant strategy of the outsiders is to focus on the negative, exposing and denouncing the failures, imperfections, and corruption of the insiders. On the left, this means heaping blame on the institutions of capitalism and free markets. On the right, this means heaping blame on the institutions of government. Neither side will propose, much less implement, an effective reform agenda.

I could have included academia and professional media as institutions disparaged by the outsider right.

Maybe a publisher would want to produce a print version of the book, with my review as an introduction.

On law, legislation, and Leoni

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From my latest essay.

The legal setting differs from the market setting in that the legal setting is an arena of conflict. If I need someone to fix my car, I enter the market arena. The mechanic and I agree on a price, and ordinarily both of us walk away happy: my car is fixed, and the mechanic has been paid. The transaction involves mutual satisfaction.

But suppose that my car is still not working properly when I go to the mechanic to pick it up. The mechanic claims to deserve to be paid, and I claim otherwise. Now we are in the arena of conflict. The legal system is there to provide a peaceful, fair way to resolve this conflict.

This means that a key virtue of a legal system is legitimacy. The legal system does not need to be perfect. What it needs is acceptance, so that a court ruling ends the conflict, peacefully. So you cannot prove that common law is superior to legislation, or conversely. You cannot know until you know which system has the most public acceptance.

The wisdom of Jean Tirole

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I promised a longer report on Economics for the Common Good, and here it is.

There are two books that I would like from Tirole. One is on the peculiar features of the French economy. The other is on the role of imperfect information in industrial organization, finance, and regulation. Perhaps the latter can be found in one or more of the books he has already written.

Relative to what I would like, this latest book has interesting sections that are too terse and uninteresting sections that are too long.

If you are willing to wade through the entire book, you will find some really nice passages. For example, on p. 22-23, he writes,

diverging perceptions of medicine and economics are easy to explain. In medicine, the victims of secondary effects are for the most part the same people who are being treated. . .In economics, the victims of secondary effects are rarely the same people who received the original treatment. . .An economist is obliged to think about invisible victims as well, and so the public sometimes accuses the economist of being indifferent to the sufferings of the visible victims.

Yes, this is the “seen and the unseen,” but it helps to explain the hostility toward standard economic analysis of the minimum wage, rent control, and price gouging.

More excerpts to tantalize you below the fold. Continue reading →

My recent reading

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1. The Captured Economy, by Brink Lindsey and Steve Teles. I don’t think I have much more to say about it than what I wrote here.

2. How to Think, by Alan Jacobs. The topic of political emotionalism is something of a well-squeezed orange these days, at least among people who are not too overcome with political emotionalism to be disturbed by it. Jacobs gets some juice out of the orange, and I have drafted an essay that uses his book as a jumping-off point. I particularly like his emphasis on thinking as a social phenomenon, and the way that he works through what that implies.

He emphasizes that that he straddles two separate worlds–religion and the academy, and he thinks that this helps with being able to empathize with different points of view. I can remember at a very early age feeling that I straddled two separate worlds. In 4th and 5th grade, my street in suburban St. Louis was white trash* (except for my college professor father), but some of the other streets that fed my elementary school were middle-class professional. The children were very different, and I was one of the few kids with friends of both types.

*You might think I’m exaggerating. But there was a lot of fighting and roughness among the kids, and even among the adults. The most dramatic incident was when Steve Stella’s mom grabbed a woman by her hair and banged her head against the curb. That’s not the sort of thing that middle-class kids encounter these days. (No, Steve Stella is not anyone famous, or anyone I’ve kept track of. I feel free to use his name on the theory that he did not grow up to be anyone you know.)

3. Economics for the Common Good, by Jean Tirole, a review copy of which was sent to me. At close to 500 pages of translated-from-French prose, this will not be an easy one to get through. So far, the main thing I have against it is the title. Something like “What economics can do for public policy” would go down more easily. I’ll let you know more when I am done–not necessarily finished–with the book.

4. The Second World Wars, by Victor Davis Hanson. This not for a WWII neophyte, since it offers no chronology. Nor does it offer the currently popular “how it looked to the ordinary grunt” perspective (at least so far–I am not finished reading). The book is primarily a vehicle for the author to offer his opinions about why things played out as they did.

He is unfashionably Anglophilic. Also, he emphasizes the industrial might of the United States and the Soviet Union. This in turn leads him to attribute the Axis defeat to the folly of Hitler’s choice to invade Russia, Japan’s attack on Pearl Harbor, and Hitler’s decision to declare war on the U.S. Interestingly, I skimmed through the chapter on Pearl Harbor in Churchill’s third volume, and it makes no mention of Hitler’s decision to declare war. It reads as if Pearl Harbor automatically put the U.S. in the war against Germany.

VDH provides provocative and credible evaluations of the cost-effectiveness of various military tools. American submarines and Soviet tanks receive high marks. Paratroops and battleships receive low marks. He argues that Britain and the U.S. learned from mistakes and improved tactics and machinery (such as faulty torpedoes on American submarines when the U.S. first entered the war) more quickly than did their enemies.

Recommended for World War II buffs. Also, after I wrote this post but before I scheduled it to appear, Tyler Cowen reviewed the book very enthusiastically.