Wednesday, 29 December 2010

Links: Cities, inequality and the ghost of Keynes

Some recent interesting articles:

A Physicist Turns the City Into an Equation is a description of an ambitious project by Luis Bettencourt and Geoffrey West at the Santa Fe Institute to develop mathematical models of the behaviour of cities (and earlier, of the physiology of living organisms). They claim to have found some strong correlations in both cases. For instance, a city that doubles in size increases its productivity and economic activity per capita by 15%. And animals that grow larger become more efficient users of energy. However, it's not clear whether they have a real model which explains these phenomena, or just some statistical correlations.

Paul Mason went to the LSE and conducted a whimsical interview with the ghost of John Maynard Keynes. As fits someone who changes his mind with the facts, he has grown out of Keynesianism and is seeking a new model which can handle fiat currencies and global finance. An excellent challenge.

Another challenge comes from Tyler Cowen, in The Inequality That Matters. He deals first with (what he considers to be) popular myths about inequality, and concludes that outside of the top 1% of the population, inequality has not increased at all. And even within that 1%, the issue is not inequality itself - Cowen's life is much more similar to that of Bill Gates than would have been the life of an equivalent 1900 college professor to that of Rockefeller. The issue here is the intrinsic tendency of smart people in finance to take risks. As he says:
The first factor driving high returns is sometimes called by practitioners “going short on volatility.”...There’s a second reason why the financial sector abets income inequality: the “moving first” issue...We have to find a way to prevent or limit major banks from repeatedly going short on volatility at social expense. No one has figured out how to do that yet.
Well, there can't be much that's more calculated to provoke a blogger than an assertion like that. So I'll just suggest that the anti-correlation proposal which I and others have made might be a step in this direction. I need to write this up in more detail - but it's a way to encourage banks to take risks which are uncorrelated with other risks - and therefore less likely to go wrong all at once.


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PunditusMaximus said...


The problem isn't some esoteric concept of risk -- it's massive and regularly rewarded fraud. Prosecute fraud, and people will have a much harder time inventing and selling stupid risk.