Tuesday, June 11, 2013


Given the inadvertent success of my previous post, I've decided to take the philosophical route for this next one: My fifteen minutes of quasi-blogosphere fame are almost certainly up and so it's time to resume normal services!

With that in mind, here are some mundane reflections on the last two weeks or so:

1) I wrote what should be my final ever (ever ever) sit down exam at the end of May. The subject was philosophy of science and, despite some frustrations, I enjoyed spending time on something that is outside of my normal field of expertise. I have now effectively completed my coursework requirements for the PhD -- both compulsory and elective credits -- and should be able to concentrate on the research side of things. Basically, I've got two years to finish the remaining two chapters in my dissertation and thus, thankfully, in a pretty good position at the moment.

2) My final article on natural gas and the environment was published at The Energy Collective. Having taken on short- and long-term carbon emissions, followed by demands placed on freshwater resources, this one looked at whether fracking can cause earthquakes? (Short answer: Yes, but you'll hardly notice them.) The issues surrounding natural gas and fracking are obviously very contentious. Important research is ongoing and I certainly don't expect everyone to be fully swayed by my articles and arguments. However, having spent a lot of time researching these matters -- giving primacy to the peer-reviewed scientific literature in the process -- the following paragraph provides an accurate summary of my overall impressions: "The takeaway is consistent with the overarching theme of my series. Yes, there are environmental trade-offs to securing the benefits of fracking and natural gas at large. Placed into the right context, however, these are relatively benign and often much better than the immediate alternative. Economics teaches us that there is no such thing as a free lunch, but fracking looks like a pretty good deal to me."

3) Not everyone was happy with the above article and I was involved in some amusing (not to mention ironic) Twitter spats. I'll summarise one of these for you:
@grant_mcdermott: "Does fracking case earthquakes? (link) Yes, but they're so small that you won't notice them."
@LoveCanal2020: "Whatevs! Shell sponsored that post. You're just a shill!"
@grant_mcdermott: "Ad hominem much? Actually, Shell have nothing to do with the content of my article. By all means though, don't address any facts."
@LoveCanal2020: "Meta-analysis Mumbo-jumbo! LOUD NOISES!"
@grant_mcdermott: "Yes. Science. As opposed to anecdotes, wild accusations and LIBERAL use of CAPITAL LETTERS."
@LoveCanal2020: "Criticize my creative use of capital letters, eh? Typical ad hominem!"
@grant_mcdermott: "Ad hominem?? I criticised your emotional outburst in lieu of actual facts."
@LoveCanal2020: "Still counts as ad hominem. #philosophy101"
@grant_mcdermott: "#philosophy101fail" 

4) I'm spanning the genres for my latest song contributions to www.noondaytune.com: The Meters - "It Ain't No Use" and M83 (feat. Susanne Sundfør) - "Oblivion".

Monday, June 3, 2013

Econ blogosphere comment form

There is no cake-stagnation by Tyler Cowen 

Here. Paul Krugman writes about the virtues of black forest cake versus regular vanilla sponge. While I disagree with Paul on the merits of chocolate chip distribution, I found this to be an enjoyable piece.

Caveat emptor, but do read the whole thing.

PS - Humblane S. Arcadian has written a beguiling book on the bakery practices in pre-industrial Abkhazia. Self-recommending.


Scott Sumner: I thought we had all agreed that if you have not reached your cake eating target, then by definition you are not eating enough cake.

Aziz: In the future, all cakes will be produced using solar-powered 3-D printers.

Greg Ransom: Hayek believed that prices were important because they conveyed information. Note well, cake prices are prices in inter-temporal disequilibrium. Scott writes: "by definition you are not eating enough cake".

Noahpinion. Derpity derp derp. #kthxbye

Unlearning Econ: When you get down to it, Cake Libertarianism is just Cake Marxism without the good bits.

Brad DeLong: Niall Ferguson is the stupidest man alive. Yours, Brad DeLong.

Major Freedom: OMG. LOL. Krugman is such an idiot. He doesn't understand the... [several lengthy paragraphs later] ... human-action axiom.

Lord Keynes: Major Freedom is a risible liar. These figures from Davidson et al. show that Hayek failed in his account to justify a natural cake rising rate. C.f. The arguments of Sraffa (1932).

Major Freedom: LK, why do you hate freedom?

Blue Aurora: Dear Firstname Lastname, have you read Dr Michael Emmett Brady on optimal cake consumption? PS - Did you receive my email?

Bob Murphy: Whaaaat? This is a typical Krugman Kupkake Kontradiction. Look at this recipe from Martha Stewart (link). I'm not saying that the data say I'm right. I'm saying that the data say I'm not wrong in a way that says Krugman is not totally right.

Daniel Kuehn: I'm puzzled by the reference to Wicksillian cake recipes within a Kaleckian framework. This just seems an opportune moment for navel gazing by the Kaldorian's to me.

Steve Keen: What the neoclassical cake theory fails to acknowledge is that Hicks rejected his initial recipe formulation in later life. Minsky taught us that baking is de-baking. Also, I predicted the crisis.

Grant McDermott: It's such a pity to see people neglect the in situ evaluation of cakes. Just ask yourself whether "flour" is the same thing as "a flower"? The answer, I trust, is self-evident.

Sunday, June 2, 2013

Are there any four-minute miles in economics?


Roger Bannister's four laps of the Iffley Road Track on 6 May 1954 have been immortalised in the annals of sporting lore and human achievement. By becoming the first man to run a sub-four minute mile, he had broken the "impossible" barrier and so made clear the importance of mind over matter. Athletes from all over the world would soon replicate Bannister's feat now that he had liberated them from their mental shackles...

Except... no. The problem with this romantic narrative is that it has been hopelessly embellished. The idea of a four-minute "barrier" was almost entirely the invention of the media, which fanned the idea to sell papers as runners increasingly closed in on the mark. Wikipedia (indulge me) puts it quite nicely:
The claim that a 4-minute mile was once thought to be impossible by informed observers was and is a widely propagated myth created by sportswriters and debunked by Bannister himself in his memoir, The Four Minute Mile (1955). The reason the myth took hold was that four minutes was a nice round number which was slightly better (1.4 seconds) than the world record for nine years, longer than it probably otherwise would have been because of the effect of World War II in interrupting athletic progress in the combatant countries.
I was reminded of this yesterday, as my Twitter and Facebook feeds were flooded by excitable and angry complaints about the Dollar-Rand exchange rate breaching the symbolic threshold of 1:10.

Source: Bloomberg

Now, to be sure, the Rand is at it's weakest level for several years following a number of social upheavals, government scandals and political infighting, questionable economic policy, and wider trends in emerging markets. (Here, here and here for more context.) I should also say that I am not endorsing a "weak Rand" strategy here in any shape or form. I am, however, interested in the question of whether a 1:10 exchange ratio is significant in of itself.

Put differently, do we have reason to believe that the Rand's rate of depreciation will accelerate further as a result of having passed this threshold? I must confess that I don't see it. That's not to say that further depreciation can't happen, but rather: a) That would be the result of existing economic fundamentals rather than surpassing some magic metric mark, b) A full-blown currency crisis seems very unlikely from my perspective. (If nothing else, the South African Reserve Bank is on record as saying that they will tighten policy in the advent of further weakening, although that remains very open to interpretation.)

Moving beyond the case of the USD-ZAR exchange rate, the notion of thresholds pervades much of economics and finance... Or, at least, it pervades talk about economics and finance. Consider, for example, some of the headlines from recent weeks concerning the fall of gold prices to below $1,500 and then $1,400 per ounce... or the brouhaha surrounding that Rogoff-Reinhart paper and their fabled elusive "90 percent" cut-off rate for debt-to-GDP ratios and its supposedly dire consequences on economic growth.

Some of this -- let's call it -- threshold affinity in economics and finance could be justified by underlying factors, such as physical laws, regulatory limits, etc. However, most of it is probably just good copy for selling financial news. At worst, it may even be self-referential nonsense designed to confuse lay investors and the general public. Here are two stylised explanations for why "round number" thresholds shouldn't matter in of themselves:
  1. Valuations should ultimately be set according to economic fundamentals. These would not be much different for a stock or trade that is valued at, say, R9.90 versus R10.10.
  2. An alternative reason is that traders don't target levels per se. Rather, they target the levels implied by momentum and trend lines (with predefined margins of safety), or algorithmic strategies (which are similar in principle). There's no a priori reason to think that these implied levels will accord to nice round numbers.
Having said that, market psychology can obviously work very differently to the cool, rational calculations implied by standard theory. "Round numbers" will become important, as long as enough people believe them to be important. More precisely, symbolic levels will gain significance if I believe that other people regard them as being significant. (Ye old beauty contest story.) It should also be said that even standard theory does not suppose that change should evolve in a linear fashion...

Let me end this post by saying that I haven't bothered with any kind of literature research; I'd be interested in hearing about studies investigating this type of phenomena. Alternatively, if not much has been done and someone is interested in looking at it further... drop me a line. Two possibilities for checking the existence of "four-minute mile" numbers is that they should act as focal points or thresholds. For the former, we would expect data to bunch around particular levels from both above and below. For the latter, we would expect a discontinuity in the rate of change for a particular stock or currency valuation (i.e. once a threshold is breached). Several ways of testing this empirically immediately spring to mind.