Monday, December 30, 2013

More good music for your listening pleasure

It occurs to me that I haven't mentioned my Noondaytune contributions in ages. Without further ado and including some snippets from my rather lyrical write-ups:

  • Pretty Saro - Bob Dylan. ("Dylan fans are going to be rejoicing in their master’s munificence… and his bountiful back catalogue.")
  • Been There Before - Ghost Beach. ("... a nice reminder that sometimes music doesn’t need to be anything other than fun and instantly accessible.")
  • But We Did - Thomas Dybdahl. ("You’ll find shades of Bon Iver here (with a less annoying falsetto) and maybe even a distant hint of Jeff Buckley.")
  • Indie Cindy - Pixies. ("Comparisons with their early work and sound is probably inevitable at this point. However... if there are any of those famous hard-soft dynamics at play in this song, then the order has been switched. The verses are now abrasive, while the choruses, instead of being explosive, are soothingly melodic.")
  • Working For You - Patrick Sweany. ("... it feels like the world could do with a more generous helping of blues-infused rock. I’m doing what I can to remedy matters with this track.")
  • Girl From The North Country - Secret Machines. ("This cover version manages to do that rare thing: Preserving the essence of a great song whilst reinventing its dynamics. Listening to it feels like being washed over by a storm and then left in the tranquil aftermath of its passing.")
  • Always - Panama. ("... this Sydney-based quartet is helping to erase any lingering Antipodean antipathy I bear as a result of various cricket World Cups. More importantly, if this is where pop music is going, count me in.")
  • I Got Love If You Want It - Slim Harpo. ("Taking his stage name from the harmonica (or “harp”) that he played with such laconic precision, his songs were gratefully adapted by a veritable who’s who of 1960s rock ‘n roll.")
  • California - Mazzy Star. ("It has been 20 years since “Fade Into You” first drifted through the speakers of my night-time radio like a somnambulist’s love song. With this reunion album, Mazzy Star have embarked upon a continuation that is eerily reminiscent... Perhaps a small testament to L.P. Hartley’s famous observation about the past being a different country: they do things differently there.")
  • Nothing To Lose But Your Head - Augustines. ("This latest single comes ahead of their eponymous sophomore album and exudes all the grit, verve and elation that made their last record such a tour de force.")
If I had to pick three favourites from the above list, it would probably have to be Secret Machines, Panama and Augustines. Ask me tomorrow though and that might change. Regardless, the bottom line is that we[*] here at Stickman's Corral are constantly scouring the internet for good music so that you don't have to!

[*] The royal "we".

Publication/dissertation update

After spending nearly a year in Land Economics' publication queue, I'm pleased to say that my joint paper on "Electricity Prices, River Temperatures and Cooling Water Scarcity" is now available online.

I've obviously discussed the paper on this blog and elsewhere before, but there's something ever-so-satisfying about seeing it typeset in official journal format. 

(For those that missed it and can't get passed the subscription paywall, a link to a working paper version and summary for the layman can be found here.)

To recap: We're expected to produce three papers for our PhD dissertation and this paper will obviously form the first of these for me. As for my next paper(s), I've been working on something more climate-related recently. I don't want to give too much away as my ideas are still evolving, but it's very much centered within the Bayesian paradigm and the way in which prior beliefs can affect society's best response to the climate problem. More updates to follow once I get closer finishing up a draft version!

Friday, December 6, 2013

Quote of the Day - Madiba

I was seven years old, and on the day before I was to begin, my father took me aside and told me that I must be dressed properly for school. Until that time, I, like all the other boys in Qunu, had worn only a blanket, which was wrapped round one shoulder and pinned at the waist. My father took a pair of his trousers and cut them at the knee. He told me to put them on, which I did, and they were roughly the correct length, although the waist was far too large. My father then took a piece of string and drew the trousers in at the waist. I must have been a comical sight, but I have never owned a suit I was prouder to wear than my father's cut-off trousers.
 -- Nelson Mandela, "A Long Walk To Freedom"

It has been a raw, emotional morning. Reading through the outpouring of tributes and obituaries has underscored what an extraordinary life this was. While Madiba's years as a revolutionary and statesman may have provided a legion of poignant quotes to choose from, the above passage, taken from his autobiography, is one that always gets me. It cuts to the heart of the humanity that made him such a beloved figure. The ability to affect those closest to us is, in many ways, more meaningful than the power conferred to even the most global of icons.

Thursday, December 5, 2013

Asimbonanga (Mandela)

Asimbonanga (We have not seen him)
Asimbonang' uMandela thina (We have not seen Mandela)
Laph'ekhona (In the place where he is)
Laph'ehleli khona (In the place where he is kept)

Oh the sea is cold and the sky is grey
Look across the island into the bay
We are all islands 'til comes the day
We cross the burning water

Asimbonanga (We have not seen him)
Asimbonang' uMandela thina (We have not seen Mandela)
Laph'ekhona (In the place where he is)
Laph'ehleli khona (In the place where he is kept)

A seagull wings across the sea
Broken silence is what I dream
Who has the words to close the distance
Between you and me

Asimbonanga (We have not seen him)
Asimbonang' uMandela thina (We have not seen Mandela)
Laph'ekhona (In the place where he is)
Laph'ehleli khona (In the place where he is kept)

Steven Biko. Victoria Mxenge. Neil Aggett.
Asimbonanga Asimbonang 'umfowethu thina (We have not seen our brother)
Laph'ekhona (In the place where he is)
Laph'wafela khona (In the place where he died)

Hey wena (Hey you!)
Hey wena nawe (Hey you and you as well)
Siyofika nini la' siyakhona? (When will we arrive at our destination)

Thursday, November 14, 2013

McDermott and Shleifer double-team Taleb and Kahneman

Not really. But I still enjoyed reading the following passage from Andrei Shleifer's review of Daniel Kahneman's (superb) Thinking, Fast and Slow:
The fourth assumption of Prospect Theory is quite important. [i.e. In assessing lotteries, individuals convert objective probabilities into decision weights that overweight low probability events and underweight high probability ones.] The evidence used to justify this assumption is the excessive weights people attach to highly unlikely but extreme events: they pay too much for lottery tickets, overpay for flight insurance at  the airport, or fret about accidents at nuclear power plants. Kahneman and Tversky use probability weighting heavily in their paper, adding several functional form assumptions (subcertainty, subadditivity) to explain various forms of the Allais paradox. In the book, Kahneman does not talk about these extra, assumptions, but without them Prospect Theory explains less.  
To me, the stable probability weighting function is problematic. Take low probability events. Some of the time, as in the cases of plane crashes or jackpot winnings, people put excessive weight on them, a phenomenon incorporated into Prospect Theory that Kahneman connects to the availability heuristic. Other times, as when investors buy AAA-rated mortgage-backed securities, they neglect low probability events, a phenomenon sometimes described as black swans (Taleb 2007). Whether we are in the probability weighting or the black swan world depends on the context: whether or not people recall and are focused on the low probability outcome. [Emphasis mine.]
This exactly the issue I was trying to point out here. Sometimes people greatly overweight the risks of low probability events (as suggested by Kaheman and Prospect Theory)... other times they completely underestimate them (as suggested by Taleb's black swan metaphor). As a result, we should be cautious in trying to make generalisable statements about human behaviour from either one of these theories alone.

You may also recall that -- for my temerity in pointing out this apparent tension between Kahneman and Taleb's theories -- I was labelled an "idiot" by none other than Taleb himself. As I coyly suggested in that second post, Taleb's affinity for labelling others as idiotic meant that I was at least likely to be in good company. I am sure of that now having read Shleifer's article.

Wednesday, November 6, 2013

Why economists love auctions

Some background first: South Africa's power market is utterly dominated by (a) coal and (b) Eskom, the parasitical parastatal monopoly. In a bid to encourage both fuel diversification and competition, the government has determined that 3,725 MW of new capacity up until 2030 should consist of renewable sources operated by independent power producers (IPPs). This translates to roughly 10,000 GWh of actual future electricity generation.

Ignoring the fact that this is small potatoes in the scheme of things -- less than 5% of the country's current 240 TWh annual electricity consumption -- the point that I want to make here is mostly about how those IPPs are chosen.

Having played with various schemes, authorities eventually settled on something called the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). This is effectively a competitive bidding process, whereby applicants submit a guaranteed price that they are willing to accept for electricity that they generate in the future. In other words, it looks a lot like the idealised auction market advocated in economic textbooks.

So how have things turned out? Well, the results from the third round of bidding have just come in. (The previous bidding rounds were held in 2011 and 2012, respectively.) It would appear that things are progressing rather well:
The six successful solar PV bidders, which shared an allocation of 435 MW, were particularly aggressive with their pricing. Fully indexed prices using April 2011 as the base year showed that the average solar PV price fell from R2.75/kWh in bid-window one to 88c/kWh in the third round.
[...]Similarly, the price of onshore wind fell from R1.14/kWh in round one to 89c/kWh in round two and to only 66c/kWh in the latest round. A total of 787 MW was allocated across the seven wind projects
[...]Prices for the two 100-MW-apiece CSP [concentrated solar power] projects declined from R2.68/kWh in the first window to R1.46/kWh. 
We must of course be careful not to draw too many conclusions from the above figures. For one thing, the average price that South Africans currently pay for electricity remains lower than any of the above bids. Although, it is scheduled to approach (and even exceed, in the case of wind) them in coming years:

Even then, just because a small portion of wind or solar energy is expected to "reach grid parity" within the next five years, doesn't mean that the game is up for fossil fuels. There are major problems with peak balancing, intermittency and load-following constraints that renewables need to overcome, which I and many others have discussed at length before.

However, a 68% drop in the bid price of solar PV since 2011 -- say nothing of wind and CSP bids falling by nearly 45% -- is clearly impressive. Many people will see this as a evidence of how quickly renewable technologies are progressing. I wouldn't dispute that, but I also see it as a vindication of the auction system that was used for determining the winning bids.

It is something that South Africa's electricity sector could use a lot more of.

Bad science: Paleo diet edition

A while ago, I wrote a post praising the scientific approach that advocates of the paleo diet appeared to be adopting in arguing their case. In particular, the language used by people like Gary Taubes in discussing dietary health seemed to show a keen appreciation for the key principles underpinning the scientific method. This includes separating causation from correlation, controlling for placebo effects and selection bias, etc, etc.

However, apparently not all paleo advocates are such sticklers for good scientific practice. For example, see this blog post by Jacques Rousseau, which skewers a new "occasional study" by Tim Noakes.[*] There is a lengthy follow-up post that also well worth reading when you have time.

The short version is that Noakes is a very prominent sports scientist in South Africa. He also happens to be an extremely vocal proponent of the low-carbohydrate-high-fat (LCHF) paleo diet, having undergone a Damascene conversion in recent years. The occasional study in question was published in the South African Medical Journal and details 127 unsolicited responses that Noakes received from people who have followed his advice in switching over to LCHF. These correspondences tell of all manner of dietary miracles and health wonders that have followed as a result, from substantial weight loss to curing "incurable" diseases like type II diabetes.

The problem with this study should be all-to-obvious to anyone who understands anything about scientific practice -- more on that in a minute.  Furthermore, a lot of people are (rightly) up in arms about how it managed to get through the peer-review process and into the country's flagship medical journal. Cynical observers have not been shy in suggesting that this is almost entirely down to Noakes' status within the local research community and very little to do with the scientific merit of the study itself. (To be fair, I'm not sure that a double blind submission would have been possible in this case.)

Now, Jacques does a very good job in explaining the manifold problems of the study. He also points out that Noakes' position on the necessity of such anecdotal evidence is very inconsistent. (If we had proper, scientifically validated evidence about the benefits of LCHF then we wouldn't require anecdotal evidence on top of that. To argue otherwise is to suggest that the scientific evidence in favour of LFHC is not actually particularly strong.) However, I think some of the commentators actually do a better job of pinpointing exactly why this study does not belong anywhere near a reputable scientific journal. For instance, "Chris" writes:
[...]You could prescribe or promote absolutely anything, and you would see some people benefit. The key point is that the sample you have is self selected from those who benefited enough that they felt the need to contact you. That is likely to be a small number of the total number of people who did indeed benefit. And we have no idea what proportion of the total number of people to have tried LCHF those people are. The fact that there are 127 people who've shown a benefit is evidence of one thing, and one thing only: those people's ability to write you an email. Can you tell me exactly what their dietary regimes were, down to the last macronutrient? Can you assure me that the change in their diet was not simply a catalyst for them to become more active, thus they expended more energy? Can you tell me that there were no other outside influences that could potentially act as a confounding variable? You can't, and you say so yourself in the article. Which begs the question of why did it get published? If we can't say anything other than these people got amazing results and said they were on LCHF then what exactly can we say?[...]
Emphasis mine. A follow-up contribution by another commentator (who was actually involved in one of the cases that Noakes cites) is equally worth reading here.

To underscore something that Jacques and many of his commentators try to make abundantly clear; criticism of this particular study does not amount to criticisms of LCHF in of itself. The outcry is entirely about sloppy scientific reasoning and misuse (absence?) of the scientific method. Proponents of LCHF and other paleo-style diets may well be correct in identifying the causes of our modern dietary ills. I personally know more than a few people who credit it with helping them to shed weight and improve their overall sense of well-being. On the other hand, I can say exactly the same thing about friends who have converted to veganism. (You see the problem with anecdotal evidence!)

To conclude, if paleo advocates want to maintain scientific credibility, they need to distance themselves from this type of research. At the very least, they should not try to defend it.
[*] You may recall that I actually mentioned Prof. Noakes at the beginning of my previous post. Rousseau is a senior lecturer at the University of Cape Town, whom it should be said took me for an introductory philosophy and business ethics course during my undergrad.

Monday, October 28, 2013


I mentioned the other day that I acted as moderator for the recent TEDxBergen conference. Videos of the various talks have now been posted online, but here are two that I particularly enjoyed as a sample.

1) Mads Nordmo gave a talk on moral psychology, which challenges the traditional "transactional" view of behaviour -- as is favoured by a lot of economic theory.

Mads is actually doing a PhD with me -- albeit in the strategy department -- and also has a degree in clinical psychology. His opening remark about showing that "it wasn't just beginner's luck" was in reference to a quip that I made about him winning a 'Best lecturer' award from NHH bachelor students. (Link in Norwegian.)

He used various examples to underscore his points, including the growing popularity of CrossFit and the paleo diet.[*] For instance, a purely transactional view provides us with very little insight into why people pay such exorbitant sums of money to join CrossFit gyms. The exercises mostly require far less equipment than ordinary gyms and we could all do as many sit-ups and push-ups as we want at home (for free!). However, Mads argued that these "movements" actually constitute a quasi-religious experience -- much like we would encounter at a rock concert or sports match -- where the sense of communal spirit and exaltation actually enable participants to achieve some kind of transcendence.

In the Q&A afterwards (not shown), I suggested that economics would normally explain the high membership fees paid to crossfit gyms as a commitment device. Mads agreed that this too is an important psychological driver. However, there is at the least no reason to regard such phenomena as mutually exclusive. (Interestingly, he also said that psychology is moving closer to economics... not simply the other war around, as is often asserted in some heterodox circles.) Anyway, he is a smart and funny guy, and I think that both traits are evident in his talk. Check it out:

2) The Grammy-nominated violinist, Peter Sheppard Skærved talked about reinvention and finding new purposes for old tools. Peter is a fascinating person -- the Library of Congress has described him as a polymath -- and I thoroughly enjoyed chatting to him about a range of topics, from anthropology to haptic technology, over the course of the day. In this video, he not only makes a compelling case for preserving "museum pieces" by actively using them as much as possible, but also treats the audience to a range of music pieces from across the ages.

[*] As someone who has a number of friends into (at least one of) CrossFit and the paleo diet, I freely admit that I am predisposed towards finding this discussion both amusing and enlightening.

Monday, October 21, 2013

Joe Romm's cognitive dissonance on renewables, nuclear and shale gas

I used to be an avid reader of Joe Romm's "Climate Progress" blog. However, my enthusiasm has waned dramatically over the years due to his selective presentation of facts and data, stark intolerance for any opposing ideas and dogmatic stance on nuclear power. (On the plus side, his blog remains an excellent repository for climate news and he can be great fun when mocking the likes of Christopher Monckton.)

Probably the biggest problem that I have with Romm, however, is that he appears to suffer from acute cognitive dissonance. For example, the overriding theme of his blog is one of impending climate doom, yet he regularly proclaims that renewables are already at grid parity, getting cheaper by the second and ready for mass deployment. So, problem solved surely? Frustratingly, this is a recurrent theme on many green blogs, where Cassandra complexes are hard to square with wildly overstated -- or misleading at best -- claims about current renewable energy performance.

Such cognitive dissonance is again on display in one of Romm's recent posts, entitled "Major Study Projects No Major Long-Term Benefit From Shale Gas Revolution". The study in question is by Huntington et al, (2013) and contains projections from a broad suite of integrated climate models. In addition to GHG emissions, the researchers looked at the wider economic impacts of shale gas and their conclusions are rather more nuanced than Romm's excitable headline would suggest. In short, the final projections depend on a complex set of model assumptions and variable interactions. This is evident from the following paragraph that Romm actually cites from the study (emphasis his):
…this trend towards reducing emissions becomes less pronounced as natural gas begins to displace nuclear and renewable energy that would have been used otherwise in new power plants under reference case conditions. Another contributor to the modest emissions impact is the somewhat higher economic growth that stimulates more emissions. Reinforcing this trend is the greater fuel and power consumption resulting from lower natural gas and electricity prices.
Does anyone else see the irony here? Romm is lauding a study which questions the climate credentials of shale gas... and yet that largely depends on whether cheap gas displaces nuclear power -- a technology that he maligns at every opportunity.

More importantly, to say that shale gas confers no long-term climate benefits (in of itself) is extremely misleading. It all depends on whether it is complemented by a carbon price, as anyone interested in this debate (at least that I am aware of) readily acknowledges. You get a sense of this from the very figure that Joe Romm chooses to include in his blog post:

Comparison of low shale scenario (light blue), high shale scenario (dark blue), and a scenario depicting a reference case combined with a carbon price (green). This reference case is in between the low and high shale scenarios, while the carbon price starts at $25/tonne in 2013 and increases at 5% each year. Source: Huntington et al. (2013).

The dramatic reduction in emissions due to a carbon price is clearly evident. However, the above figure is still not really comparing apples with apples, since the carbon price is not adapted to the high shale scenario. (It is applied to a reference scenario that is somewhere in between the high and low shale cases.) Luckily, the data that would allow us to make the correct comparison is available here. I have therefore reconstructed the above graph, this time adding a new column that specifically combines the high shale scenario with a carbon price.

Based on Figure 13 of Huntington et al. (2013). The figure now includes a fourth column (purple) where a high shale scenario is combined with a carbon price.

This updated graph makes perfectly clear that the shale revolution can be fully compatible with deep long-term emission reductions, as long as it is complemented by a carbon price. To his credit, Romm does mention this briefly in the article and has also commented on the issue previously. Yet, by continuing to disparage shale gas and pretend that its supporters ignore the need for a carbon price, he simply serves to further polarise the climate debate.

THOUGHT FOR THE DAY: Adapting to the threat of climate change will require a broad suite of interventions. Nobody should claim that the proliferation of shale gas is a sufficient development for de-carbonising the global economy. However, together with a carbon price and other technological breakthroughs, it will likely form a very necessary component.

PS - It probably goes without saying that the economy also benefits from cheap and abundant shale. Huntington et al. state as much in their report (p. 7):
Higher shale resources reduce the costs of natural gas development and expand opportunities throughout the economy. Relative to its path in the low-shale case, [real GDP] is higher in all models that track the economy’s aggregate output. The cumulative aggregation of these GDP gains over all years is significant standing at $1.1 trillion (2010 dollars).
Showing this in graphical form is a little trickier, since some of the models actually take economic growth as an exogenous assumption, or don't extend all the way until 2050. Nonetheless, here is a graph showing a selection of models that compare changes in real GDP up until 2035.

Thursday, October 17, 2013

Manufactured controversy and the "hockey stick": A football analogy

Even if you're only vaguely aware of the climate change debate, then you will probably have heard of the "hockey stick". You know, this bad boy:

Source: Mann et al. (1999).
This famous depiction of global temperatures going back into time has generated a lot of controversy. It doesn't seem to matter much to sceptics that the initial hockey stick(s) -- i.e. those produced by Mann, Bradley and Hughes (19981999) -- have since been replicated by multiple studies using different lines of evidence and computational procedures. No, we are invariably told that the hockey stick is a fraud and has been debunked by the likes of Steve McIntyre and Ross McKitrick.

The problem with these debates is that they are necessarily technical and involve concepts that are very unfamiliar to most people. Whenever I tried to explain things to my friends and family, I could see their eyes glazing over as soon as I mentioned the words "principal component analysis". So here is a sports analogy that captures the essence of what critics like McIntyre and McKitrick got wrong.

Tuesday, October 15, 2013

Obligatory comment on the 2013 Nobelists

Seeing as it is very de jour to comment on this sort of thing in the econ blogosphere, here is a quick personal take:

I know that this year's laureates have raised eyebrows -- not least of all because people think that Fama and Shiller are at complete odds with one another. This doesn't strike me as especially correct. (Hansen is really the odd one out in this triumvirate, but we'll get to him in a second). For starters, and as pointed out many times over the last two days, Fama was one of the first people to publish results that ran counter to EMH predictions. Mark Thoma is exactly right in pointing out the EMH remains a really useful benchmark/framework for thinking about markets in an empirical sense. I've used it a fair bit when looking at energy and commodity markets for my own research and also when asked to to advise/comment on market trends. 

Shiller has played less of a formal role for me personally, though his housing index and his "dividend returns" data have been extremely handy tools in the blogosphere. The former is better known, but the latter is especially useful when, say, debating your average goldbug. (E.g. When dividends are taken into account, U.S. stocks have enjoyed inflation-adjusted returns of +/-1,000% since 1974. Gold, on the other hand, has yielded a rather more modest 130% over the same time period...)

The 2013 Nobelist who has had the most relevance for me, however, is Lars Peter Hansen. I suspect that this is true for many people working in economic research today, simply because the tools that he bequeathed us are so widely used in modern empirical work. Alex Tabarrok has one of the best "layman" explanations of GMM that I've seen here. Guan Yang has a more wonkish (but still accessible to anyone who is familiar with basic econometrics) exposition here.

Predictable Nobel Prizes in the Economic Sciences?

The subject line is taken from an email sent around my department by one of the finance profs. Here's the email itself:
A curiosity: In the very first edition of their textbook Financial Theory and Corporate Policy (Addison-Wesley, 1979), the authors Thomas E. Copeland and J. Fred Weston dedicated the book to 15 named “pioneers in the development of the modern theory of finance”. Out of these 15 pioneers, eight have since been awarded the Nobel Prize (viz. Debreu (‘81), Modigliani (‘85), Miller (‘90), Markowitz (‘90), Sharpe (‘90), Merton (‘97), Scholes (‘97), and Fama (‘13)), one was already a Nobel laureate (Arrow (‘72)), and three are dead and thus not eligible (Lintner, Black, Hirshleifer). So what about the chances of the three remaining finance pioneers Michael Jensen, Richard Roll, and Stephen Ross? By the way, this year’s laureates Hansen, Shiller, and Fama (a well as the previous laureates Engle, Lucas, Arrow, and Samuelson) are all among the twelve elected Fellows of the American Finance Association, recognized as having made a distinguished contribution to the field of finance.
So I guess it's even money on Jensen, Roll and Ross then...

PS - Here's the evidence.

Wednesday, October 9, 2013

Quote of the Day - Privacy

"At a moment of austerity and with a general sense that our state's ability to guarantee prosperity for its citizens is in retreat, that same state is about to make the biggest advance ever in its security powers. In public, the state is shrinking; in private, it is shrinking until it gets just small enough to fit into our phones, our computers, our cars, our fridges, our bedrooms, our thoughts and intentions."
- Taken from a long, but very worthwhile (and disconcerting) article by John Lanchester.

Monday, October 7, 2013

Why a functioning electricity grid is crucial to economic development

... in two graphs:

THOUGHT FOR THE DAY: Decentralised power is a nice ideal -- and in some cases is the best option -- but it remains a poor alternative to the grid for the moment.

PS - I've previously written about why the electricity grid is best viewed as a (regulated) natural monopoly here.

Saturday, October 5, 2013

Links and happenings

Busy times for yours truly over the last two weeks. Here is a list of things that I've been doing, plus one or two items that I spotted on ye olde internet.

1) I moved apartments! More or less the same size as our old place, but more comfortable and modern. Here is a little photo taken from the (car-free) route that I cycle to school everyday. Not too shabby, eh?

2) I had the pleasure of acting as moderator for the inaugural TEDxBergen conference. (My school has actually been hosting TEDx events for a while, but they've now expanded to include the other educational institutions in the city.) The speakers were all very interesting, with two or three in particular being excellent. I believe the video(s) for the event will be made available shortly, so I'll link to them then.

3) I gave a lecture on shale gas (and fracking) to the master's class in Petroleum Economics this week. My slides are here!

4) On a more prestigious note, two Nobel laureates recently gave lectures at my school. (i) As I pointed out on Twitter, Chris Sims is sounding an awful lot like an MMTer /Post-Keynesian lately. (ii) Finn Kydland makes a provocative claim that we are more resilient to energy price hikes today than we were in the past. His argument is that the adverse economic effects of the 1970s' oil shocks largely manifested themselves as inefficient tax rises due to the monetary and fiscal systems of the time. This in turn caused investment and employment to fall. I'm entirely not sure about this story -- the declining energy intensity of our economies would seem to play a bigger role -- but it's an interesting idea.

5) As predicted, some people are using the terrible events at the Westgate Shopping Mall in Nairobi to disparage "interventionist" foreign policy. I'm not saying that they don't have a point -- although, the ongoing anarchy in Somalia is certainly destabilising to the area and has negatively affected Kenya's economy. I'm saying that if blowback is the measure by which policy is to judged, then consistency dictates that one should make equally narrow arguments against (say) liberal immigration policy, subsidy revocation or economic austerity. What's sauce for the goose, is sauce for the gander after all.

6) To my American friends that have to suffer through the asinine politicking of the Republican party and the twilight-zone-thought-vacuum of Fox News, you have my sympathies.

Thursday, September 12, 2013

China to reduce coal consumption?

I've tried to emphasise the importance of relative concepts many times on this blog. However, there are occasions when relative measures can also be more than a little misleading. Case in point: This article from Reuters, which describes how China plans to reduce its coal consumption to 65% of primary energy by 2017.

This policy prescription is primarily motivated by desire to improve the country's terrible air pollution. Of course, a reduction in coal will also bring climate benefits. (I have previously talked about the "co-benefits" of climate policy and local air pollution measures here.)

However, despite being a tentative step in a right direction, this is hardly a watershed moment. In fact, the US Energy Information Agency (EIA) was already forecasting a drop in Chinese coal consumption to 65% of total energy by 2017 (from 69% in 2012) in the reference scenario of its International Energy Outlook, which was published earlier this year.

More importantly, this relative decrease glosses over the fact that the absolute consumption of coal is forecast to increase by nearly 20% over the same period... Up from 79.2 quadrillion Btu in 2012 to an eye-watering 94.1 quad Btu in 2017!

Source: EIA data tool

THOUGHT FOR THE DAY: Be wary of anyone who tells you that China is leading the race in de-carbonising their economy, or winning the battle on renewables for that matter. There may be an element of truth in such statements, but the bigger picture is far more sobering.

Wednesday, September 4, 2013

How methane emissions could actually be good for the climate

This was the title of a post I wrote last week for the Recon Hub.

It may seem like I am merely trolling for viewer hits here. However, the logic behind this counter-intuitive statement is based on the political factors that shape people's opinion on climate change. (E.g. Rather depressingly, support for the theory of man-made climate change increases when the weather is hotter.)

The other important thing to realise is that methane is a much more powerful greenhouse gas than CO2 over the short-term. Yet, it's potency fades the further we look into the future, whereas CO2 remains in the atmosphere for millennia.

Here's the take-home:
Tying everything together, a move to natural gas might conceivably benefit the long-term climate in two ways. First, there is simply a direct elimination of carbon emissions due to the switching away from coal. This obviously presumes that fugitive methane leakages are not high enough to offset those gains. However, even that runs parallel to a second point which has been the focus of this post: Methane emissions in the present will drive up temperatures (but not over the long-term) in a way that likely encourages political action and hopefully helps to establish a coherent climate policy. 
To conclude, I’d rather see global temperatures follow a concave path over the coming decades, than a convex one. In less technical terms: Accepting an acceleration in near-term temperatures in order to secure the political will necessary to enact long-term climate policy, seems an acceptable trade-off from my perspective.

The more you read about ABCT... the more you read about ABCT

Chris responded last week to my previous post on the empirical (ir?)relevance of ABCT. I've been too busy to reply properly until now. (To be honest, I think that my original points remain intact.) I should also say that neither of us can afford to keep this dialogue going on for much longer. Still, here are some excerpts from his latest post, followed by my comments.

First, on the challenge of trying to distinguish between business processes that are fundamentally short-term in nature versus those of the longer-term:
My dad’s business, for instance, does multiple short-term contracting projects within long-term property development projects. In the normal production structure distribution his irrigation installations would be classified near the consumer level as it sits very close to final consumption, but he prices projects at the outset of long-term investment projects when the developer begins to plan and commence his project. My dad’s business therefore adjusts prices early in the business cycle at the same time that projects more remote of the consumer do, and will continue to price for projects throughout the period of the long-term project.
Unlike Chris' initial post, where he was bemoaning the use of statistical indices, I regard this as a more interesting observation. Yes, it is true that firms with short-term production horizons will in some sense be dependent on the activity of (other) firms with longer-term production horizons. However, I still don't regard this as a decisive barrier to an empirical investigation into ABCT.[*] First note, however, that Chris' objection could be seen as theoretical critique of ABCT as much as an empirical one. For if his remarks hold true, then it is extremely difficult even in principle to distinguish the way in which, say, products closer to the end consumer are made less attractive by a fall in interest rates. The mechanics of the classic (naive?) Hayekian triangle begin to unravel, since the underlying distortions -- the switch into capital goods at the expense of consumption goods during an initial period of credit expansion -- may not even occur in a qualitative sense. Indeed, if processes all along the chain of production benefit from credit expansion then we are closer to a theory of economic growth than of business cycles.

Nevertheless, what really matters in this case is the change in relative prices. If you buy the insights provided by ABCT, then it seems extremely implausible that conditions inherently favourable to long-term production processes could benefit short-term processes to a near (or even greater) extent, merely through the creation of auxiliary demand. This is particularly true if the economy is operating at anywhere near full capacity, as is typically emphasised as the starting point for their analysis by Hayek and Mises... i.e. Any increase in capital goods production must increasingly come at the expense of consumer goods.[**] The focus of Lester and Wolff (2013) was the changing nature of such relative prices. It therefore seems a perfectly valid approach from my perspective and, moreover, the failure of the data to conform to the theory's broad predictions, or show signs of economic/statistical significance, is indeed cause for scepticism of ABCT's relevance. A final point on this matter is that L&W trace the evolution of these relative prices over time, which further accounts for the dynamic shifts between sequential processes in the economy.

Chris also made a few other remarks that I thought were worthy of comment, so here are some brief(ish) observations on other parts of his post:
Of course we have only have had around 5/6 business cycles since 1972 that to my mind can’t produce any statistically significant results either.
Okay, and how many monetary policy interventions have we had in that time? Again, I would think that this reflects rather poorly on a theory that places central bank interventions at the (inevitable) heart of all swings in the business cycle.
ABCT does not claim to be a theory that can explain all observed economic phenomena,which is what Grant thinks it claims to do.
Strawman. I have been very clear -- directly following the paper by L&W -- that this was entirely a question of how relevant ABCT is for explaining observed business cycles in the macroeconomy. Nothing more, nothing less. (Although, one wonders about the usefulness of a theory on business cycles if it seemingly fails to achieve that primary goal.)

On the subject of cycles, here is a beautiful example of circularity:
Let me emphasize that the relevance of the Austrian theory can only increase the more one engages and learns about[...] Austrian theory.
I love this sentence and have re-worked the title of my post in its honour.

On theory versus data:
So to Grant’s point, it is more than just a tendency of Austrians to dismiss empirical ‘evidence’ that runs counter to ABCT and related concepts, because their theories are not built on empirical data but on rigorous logical deduction.
Firstly, I challenge anyone to show me that ABCT follows solely and directly from the action axiom alone. The list of subsidiary axioms and assumptions becomes enormous once we reach the full scope of the theory. This idea of an immaculately conceived business cycle theory, of pure logical cogency and free of any auxiliary pillars is, to be frank, so fanciful that not even the most zealous praxeologist could believe it. More importantly, the "choice" between theory and empirics is a false dichotomy. The above paragraph betrays a misunderstanding of how theory in mainstream economics (or elsewhere) is developed and exactly why it is mutually reinforcing to empirical observation. All economic theory is essentially deductive in nature. You start with some primary axioms or propositions and work through to the implications and consequences. Yet, how do we arbitrate between competing theories or measure their importance? Well, the same way that we do for any scientific field; we test them using data from the real world. Rejection of empirical scrutiny, validation and testing means that we are no longer debating economics or any kind of science for that matter. We are now in the realm of religion.

Chris ends his post in decidedly Churchillian mode:
But Grant should know, in our professions as economists and in the practice of economic forecasting, we are continuously, nay, every week, refining and enhancing our forecasting methods and theories based on what’s available and recent experience. Economic theory and economic forecasting are, of course, very different things.
Typing up that final paragraph must have been difficult whilst holding a bowler hat over his breast and staring defiantly into the distance. Just kidding, bud. I agree with the sentiments here. I ask only that theory shape our forecasting efforts and that we avail ourselves of the opportunity to reconsider these theories when the facts do not match the predictions.

[*] As a technical point, there is also some confusion about data classification in the above paragraph. The PPI stage-of-process data is classified by commodities, not firms. Chris' dad's business -- hi Len! -- could therefore have goods classified in various stage-of-process categories, depending on where and who the end consumer was.

[**] This is analogous to an argument made by Tyler Cowen on the co-movement of investment and consumption over the business cycle. See pp. 8-9 of Daniel Kuehn's paper on the Hayekian version of ABCT, which I also mentioned in my previous post.

Tuesday, August 20, 2013

Empirical evidence and the relevance of ABCT

A new study by Lester and Wolff (2013), hereafter L&W,  is set to cause a bit of a stir in Austrian circles. [HT: Daniel Kuehn]

The paper, which was published in the Review of Austrian Economics no less, finds that Austrian Business Cycle Theory (ABCT ) is not particularly relevant from an empirical standpoint. In short: The unique predictions made by ABCT, concerning the relative price and output changes of goods in different stages of production, are not borne out by the data. It is therefore very difficult to argue that such dynamics are driving the business cycle of the macroeconomy.

I've read through the paper and think that it is a very thorough and technically sound piece of analysis. More importantly, it fills a gap in the literature by using good data to ask the right questions. The conclusion closely matches my own view on ABCT, which is that it constitutes an internally consistent framework for the most part, yet has limited relevance as an overarching macro theory. (That said, L&W also acknowledge that Austrians emphasise a number of concepts, from the coordinating role of market prices and the inter-temporal allocation of resources, that are very valuable to broader economics. Mainstream macro is certainly richer for incorporating these insights.)

Arguing with Austrian-types is something of a side hobby for yours truly and I sent a copy of the paper to Chris Becker, my friend since school days and staunch proponent of all things ABCT. He has written a thoughtful blog post on what he sees are the "flaws and shortcomings" of the study. However, I am not persuaded by his arguments.

Chris starts out by calling into question the various data and metrics used by L&W. For instance, he says that PPI is "only a proxy" for actual economic activity and market prices as "no statistical measure is 100% accurate". Wait a minute, that is simply a tautology. Statistics are by definition imperfect representations of the true state of nature based on probabilistic laws and frequency distributions. To claim that this invalidates their use in scientific research is to a) betray a misunderstanding of how statistics actually works and b) discard a great majority of scientific discoveries and technological advancements since before even the Enlightenment. All that really matters in this case is that these indexes constitute accurate representations of the underlying variables and populations that they refer to. I see no reason to think that they are biased in a manner that systematically renders them uninformative (or misleading) -- particularly if the proposed dynamics were truly the main drivers of large swings in economic activity. I should also say that Chris' objections here would strike me as more convincing if I didn't see Austrians constantly referring to PPI, money supply data, etc. in support of their own arguments.

Next, Chris walks through the various monetary policy variables used in the study and what he perceives as their shortcomings. For the record, L&W use the Federal Funds Rate (FRR) as their main monetary policy variable, while a number of other metrics (M0, M1, M2, etc ) are utilized for robustness checks. In each case, these various monetary policy variables return the same broad set of results that ultimately fail to find vindication for ABCT. (That's the point of running robustness checks after all; they should produce results that are consistent with each other.) Chris does seem to agree with L&W in regarding the FFR as the most appropriate variable to proxy for changes in monetary policy. He even writes: "It is instructive that distortions of the FFR provide the most significant response in favour of ABCT, as it is the divergence between this interest rate and the natural rate of interest that sets in motion the business cycle, according to the Mises-Hayek theory." Except it isn't really instructive at all, because even if some of the coefficients have the same sign as predicted by the theory, they are almost uniformly insignificant from an economic and statistical perspective! L&W are very clear about this and make the point several times throughout their paper. For example (and with emphasis added):
It is critical to note that the results lack statistical significance. In each IRF [Impulse Response Function], the 80 % confidence interval bands suggest that none of the four IRFs demonstrate impact or dynamic responses which differ significantly from zero for more than a few months. This point is particularly relevant when ABCT would otherwise rely on the large shifts in capital to drive business cycle dynamics
Once again, we are trying to discern whether ABCT is a plausible candidate for explaining the business cycle at large. According to this evidence, that doesn't appear to be the case.

Chris continues his discussion on monetary policy variables by describing ways in which they may or may not be directly relevant to ABCT, and how the theory can ostensibly accommodate findings that run counter to predictions made by the standard ABCT model. I won't go into too deeply into these issues except to say that I think he runs dangerously close to describing ABCT in pseudoscientific terms. As Popper correctly pointed out many years ago, a theory which claims its strength is to account for any possible outcome is no real scientific theory at all. On the flipside, to say that there are other factors that mitigate how the dynamics of ABCT play out in the economy, is tantamount to admitting that it has limited relevance for explaining observed economic phenomena! (Further, given that the dataset runs from 1972 to 2011 and the empirical analysis tracks variables over a 60-month period following a policy shock, I personally don't think that appealing to "credit injection points" and "historical contingencies" holds much water.)

The post ends with a helpful (ahem) reading list. I have taken the liberty of noting down the respective page numbers for each of the books that Chris recommends: "To really understand ABCT, one should read Ludwig von Mises’ “Human Action” [924 pages] , Friedrich von Hayek’s “Prices and Production” [594 pages], Murray Rothbard’s “Man, Economy, and State” [1,441 pages], and Jesus Huerta de Soto’s “Money, Bank Credit, and Economic Cycles.” [777 pages]". Now, I know that people like to make fun of some Austrians for inevitably referring them to incredibly lengthy treatises during internet debates (often in lieu of making actual arguments). I don't usually think of my friend as falling into that category, but come on... 3,736 pages! If that's what it takes to truly understand ABCT, then I sincerely doubt that anyone has a coherent grip on it.

Allow me to conclude by making two general observations:

1) I may be wrong, but I can't quite escape the feeling that econometrics is seen by many as the preserve of academics and government. That couldn't be further from the truth. Econometrics and statistical analysis has been fundamental to virtually every private company and industry that I have ever worked in, with or am aware of... from the energy sector to finance to consulting to media. If empirical methods were truly misleading, then surely the evolutionary dynamics of the market would have brought about their demise long ago?

2) As with any scientific field or theory, no single study -- no matter how well done -- is enough to invalidate an entire research programme. Similarly, I am hardly claiming that econometrics and empirical studies are infallible. (In addition to discussing the vexing problems of identification many times on this blog, I have also argued that theory and data are mutually reinforcing so that one acts as a check on the other.) However, I do wonder what evidence would be sufficient for Austrians to reconsider their theories. I detect a remarkable tendency to dismiss any empirical evidence that runs counter to ABCT and its related concepts. It should be said that all major schools of economic thought have had to face up to the challenges presented by the data... And are better for it. Keynesians made significant adjustments to their theories in the face of 1970's stagflation, as well as the intellectual challenges of the Lucas Critique and microfoundations movement. For their part, recent events have forced Monetarists to confront the limitations of Friedman's quantity of money supply rule and the potential ineffectiveness of monetary policy at the zero lower bound. Theory cannot advance if it is impervious to data.

PS - An ungated version of the L&W paper can be downloaded here.
PPS - Those interested in this subject should also read Daniel's excellent overview of Hayek's version of ABCT, which I believe is forthcoming in Critical Review.

Saturday, August 3, 2013

Advocacy and climate research

The latest furore to erupt in the climate blogosphere concerns whether climate scientists undermine their credibility by engaging in advocacy? (For some responses, see James Annan, Gretchen Goldman and HB&H.)

As it happens, I recently wrote a term-paper on this exact issue for my philosophy of science class. I've decided to make it available here for those who are interested in this debate!

To summarise, I don't see anything inherently wrong with scientists engaging in political advocacy, as long as they are explicit in their intentions... and the scope of their expertise. (E.g. I often see physical scientists make strong pronouncements about economic matters and that makes me uncomfortable.) One climate scientist whom I feel always struck a good balance on these issues and quote in my term-paper is the late Stephen Schneider. To channel Schneider: Our response to climate change must be underpinned by scientific facts, but it should ultimately also be reflective of society's value judgements -- including those of our scientists.

Some brief points/caveats:
  • This was a “pass/fail” essay, aimed at gaining admission to sit the exam, and I hope that you’ll evaluate the material accordingly. That said, the emphasis on citations and quotations probably means that it provides a good overview of the issues.
  • Apart from scientists working on the physical basis for climate change, I also tried to pay special attention to the role of economists. The Stern Review, which many people regard as the archetypal blend of economics and advocacy, therefore comes in for special attention.
Click to read the term-paper.

UPDATE: I've just finished listening to a very interesting discussion between the climate scientists, Gavin Schmidt, Richard Betts and Judith Curry, on this precise topic. I am again struck by something that was very clear to me whilst researching my essay: The various sides all seem to agree on the principles (i.e. being open about one’s area of expertise and clear on your value judgements when advocating for policy). The real sticking point appears to be one of application.

Friday, August 2, 2013

July playlist

My fellow contributors have outdone themselves with some very cool song choices during the month of July. I say this with some authority as it was my turn to go through them and select eight favourite tracks for an end-of-the-month playlist. Here it is!

(In addition to the opening track of the above playlist, my own recent contributions include Nick Cave & The Bad Seeds and Mikhael Paskalev.)

Wednesday, July 31, 2013

Inflation-targeting, CPI measures and the poor

In a bid to get back to regular blogging, below is a comment that I've just left under a Daily Maverick column by Paul Berkowitz, entitled "Who benefits from inflation-targeting?" It includes the following provocative graph on the relative inflation levels faced by different consumer groups in South Africa.


There are a number of legitimate reasons to critique an inflation-targeting regime. Further, the relatively high inflation burden felt by poorer segments of society certainly merits attention in of itself. That said, there are some persistent misconceptions among the public about inflation-targeting: What are its goals and what are the (theoretical) mechanisms by which these are achieved -- particularly w.r.t. a central bank's chosen CPI measure? My gripe with this article is that it may perpetuate such misconceptions by failing to acknowledge an important principle of inflation-targeting.

Rather than simply being an end in of itself, an inflation target is also seen as a means of stabilising the output gap (and ultimately smoothing of the business cycle). Theoretical justification for this so-call "divine coincidence" -- which implies no trade-off between the twin goals of stabilising inflation and maintaining optimal economic output -- is derived from the standard new Keynesian DSGE models favoured by a large segment of macroeconomists. See Blanchard and Gali (2005), or as Blanchard has written elsewhere:
This is a really important result. It implies that central banks should indeed focus just on inflation, and can sleep well at night. If they succeed in stabilizing inflation, they will automatically generate the optimal level of activity. (p. 3)
The upshot is that, if we are going to criticize the representativeness of headline CPI for all income groups, then we should at least acknowledge it's (intended) wider role in stabilising the output gap. (The CPI basket is chosen, after all, because it corresponds to average purchases within the economy as a whole.) You can certainly argue about the conditions under which "the divine coincidence" is satisfied, as well the theoretical underpinnings of the DSGE models. However, closing the output gap is probably very much in the poor's interest as well.

On a final and related note, there are severe drawbacks to the SARB targeting a predominantly commodities-based basket that would more closely accord with the average purchases of low-income families. Most obviously, the SARB is more or less powerless to control the inherent volatility of commodity groups, not to mention the potential for causing very counterproductive amplifications in the consumption cycle. (See here, esp. end of point 4.)

Saturday, July 27, 2013

Personal note

I'm not normally one for broadcasting personal information and relationship updates on social media, but, hey, this a big one.

Very pleased, then, to say that I am recently returned from a trip to Veneto, Italy, engaged to the beautiful Miss LB. (Soon to be Mrs LM, although a rose by any other name...)

My five-year charm offensive has obviously paid dividends. 

In other news, Daniel Kuehn was kind enough to remind me on Facebook that I shouldn't make the mistake of thinking that my probation period is now over... Sage advice.

Sunday, July 7, 2013

Music updates

My latest contributions to Noondaytune are a mix of classic rock and Nordic lo-fi (complete with a youth choir). Something for everyone!

1) Crosby, Stills, Nash & Young - "Almost Cut My Hair"

2) Mr Little Jeans - "Oh Sailor"

Friday, July 5, 2013

It's not every day that you're called an idiot by Nassim Taleb

Or a "bloggist" for that matter.

Here and here.

To be fair, Taleb has charged that many minds superior to my own are beset by idiocy, so I'm in reasonable company. More seriously, he did at least tone down his bombast when I pointed out that he had misunderstood what I was asking.

The background is this post, where I wondered (quite respectful like!) what Taleb made of the research that shows people have a tendency to overestimate the likelihood of low-probability events if they were framed in highly dramatic terms. This seemed to run counter to a recurring theme in his writings, which is that people are blind to "black swans"... basically that they consistently underestimate low-prob, high impact events.

Taleb pointed me towards a short paper on "binary" (up vs down) versus "vanilla" (+500 vs +5,000,000 vs -5,000,000) outcomes, which was supposed to refute the relevance of such studies. However, I remain rather unconvinced. Consider the key figure in my previous post:

Perceived versus actual fatalities. Adapted from Lichtenstein et al. (1978).

As I wrote back then: What we see here is that people have a clear tendency to overstate -- by an order of several magnitudes -- the relative likelihood of death arising due to "unusual and sensational" causes (tornadoes, floods, etc). The opposite is true for more mundane causes of death like degenerative disease (diabetes, stomach cancer, etc).

Now, I certainly agree with Taleb that it is important to distinguish between between binary and continuous outcomes. Asking whether a stock will go up/down is a much less interesting (and less complex) question to ask than whether it will go up/down by a certain amount. You are clearly not comparing apples with apples if you say that a stock will go up by 5% or 500%. In short, binary and continuous ("vanilla") outcomes are incommensurable in terms of evaluating payoffs.

However, the studies that I linked to are interesting exactly because they are comparing the *same* outcome (i.e. death). It makes no sense to say that death by tornado equals five times death by stroke. They are obviously equivalent. The "payoff" is thus the same because the outcome is the same. Further, I'm not claiming that the insights from these particular studies are fully generalisable to all other low probability, high-impact outcomes (especially those in finance). Yet they do show that underestimation of black swan events is hardly a universal phenomenon either... In fact, people here are shown to rely on heuristics that lead them to a diametrically opposite conclusion! I was ultimately interested in hearing from Taleb whether he thinks these heuristics are efficient or not. I didn't get an answer unfortunately, so I guess we'll have to judge for ourselves.

A final observation is that I disagree with the paper's assertion that "binary is limited to probability". (In other words, that binary outcomes say nothing about the size of a payoff.) This is certainly true in many cases -- again, especially in finance -- but not always. In some instances, binary outcomes imply payoffs directly. The obvious example is the one that we have been discussing in this very post, i.e. death. Indeed, I would think that Taleb probably agrees with me, given that one of his favourite analogies is that of a turkey being fattened up in preparation for Thanksgiving.

What Taleb calls his "classical metaphor". A turkey on his way to becoming dinner. (Source)

With apologies to Monty Python, you might say that the prospect of becoming an ex-turkey implies a very obvious payoff indeed.

UPDATE: Andrei Shleifer agrees.

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 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.