Saturday, 31 December 2011

Clearing my tabs for 2012

During 2011 I have probably spent about four days waiting for my browser to respond, due to the number of tabs I habitually keep open. Between the four computers I use, I probably have 200 blog posts in tabs waiting for me to comment. Here are a few of them (in no particular order), so my Chrome may enjoy a faster 2012.

  1. A note from Paul Krugman on what makes economics economics. Not a rhetorical discipline but one based on mathematical models. (However, see also Deirdre McCloskey's Knowledge and Persuasion in Economics, which puts forth a persuasive case that it is both. Also, I believe that rhetoric, culture and all forms of speech will one day themselves be modelled within economics - a tantalising prospect).
  2. Talking of persuasion, here is Steve Randy Waldman on market monetarism, and whether we can fix recessions by simply persuading people to change their economic expectations, or whether there are real constraints that can't be solved just by monetary easing. I could plausibly have picked any article on his interfluidity blog as article of the year (if I were doing an article of the year), but this quote alone shows more insight than most entire blogs: "Central banks may significantly shape patterns of consumption and investment by choosing to whom they are willing to lend and on what terms. They may pick winners and losers, not for a brief Paul Volcker Chuck Norris moment but for the indefinite future."
  3. A good overview of Daniel Kahneman's life and work, including the origins of behavioural economics and how Kahneman and Tversky's work has influenced other fields.
  4. The limits of the scientific method in economics (see also part two): an article whose conclusions I don't agree with, but which asks the right question: can economics model (and predict) the behaviour of people whose behaviour is itself influenced by economics? In answer, Roger Martin claims that we can't use deduction or induction to predict the future, only to model the past; to look forward we must use "abduction", or "invent a new hypothesis". This seems a very nihilistic, not to mention impractical, view. He too calls on rhetoric and postmodernism, but unlike McCloskey, who analyses what those things actually consist of, Martin simply attempts to use them as a get-out clause from the anti-scientific logic of his argument.
  5. Mark Thoma's more economics-friendly response to the above. His response to Martin's question, pointing out how the field of rational expectations was invented to answer it, and defending economists' work in coming up with new models as the old ones are proved wrong, is much more to my liking.
  6. An article from the Economist's Blighty blog about behavioural economics - or, more precisely, behavioural social policy and behavioural politics. Despite co-opting Nassim Nicholas Taleb as a behavioural economist - believe me, we don't want him - this piece has some good insights into psychology and why so-called "irrationality" (let's call it "fast heuristics" instead, shall we?) isn't always a bad thing.
  7. Also from Mark Thoma, a quote from Keynes to the effect that society can only build railways and other bits of infrastructure when it participates in a shared illusion that enables it to invest, not consume, the fruits of its wealth.
  8. Why values, as well as resources and incentives, are important in economics. As usual, a thoughtful essay by Tyler Cowen, one of the most open-minded writers on the right. I hasten to add that this degree of open-mindedness is also rather hard to find on the left.
  9. Some excerpts and a review in the New York Review of Books by John Lanchester of Michael Lewis's Boomerang, including possibly the quote of the year: "you have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets". I haven't yet read the book itself, but I'm interested in its attempts to explain economic differences - and similarities - by reference to local culture. As Lanchester says, "The collective momentum of a culture is, for more or less everybody more or less all of the time, overwhelming. This is especially true for anything to do with economics". He draws a broadly downbeat conclusion, but I believe the real need - and opportunity - is to analyse what culture is and how it affects economic behaviour - at which point we might be able to figure out what to do about it.
  10. See if you can boil this FT article about crowds, behavioural economics and neuroscience into nine insightful, factual sentences while ignoring the rest of the silly oversimplifications.
Of course, the time I've spent writing this article far outweighs any browser speedup I am likely to earn over the next twelve months - especially taking into account the forty further tabs I will undoubtedly open over the next week. But I hope you've found the links useful in helping waste some of your own valuable time.

    Thursday, 29 December 2011

    What is "playing"?

    In between work on some more serious posts (not to mention the day job), let me post a brief comment on Margaret Robertson's article on gamification, "Can't play, won't play". It was written a year ago, so I'm not expecting to provoke an intense debate, but the same argument could easily be made today and it's worth responding to.

    In short, Margaret claims:
    gamification isn’t gamification at all. What we’re currently terming gamification is in fact the process of taking the thing that is least essential to games and representing it as the core of the experience. Points and badges have no closer a relationship to games than they do to websites and fitness apps and loyalty cards.
    Her preferred vision of games is:
    Games manage to produce [rich cognitive, emotional and social] drivers by being complex, responsive mechanisms. Games set their players goals and then make attaining those goals interestingly hard.
    My involvement and interest in games is much shallower than Margaret's. She's a leading game designer and spends (I imagine) much of her life either playing or creating games. My interest in games is a psychological one - for me, they are a simplified, purified version of the motivations that drive us in real life. They provide a simple domain in which we can either examine, or manipulate and take advantage of, those motivations.

    Undoubtedly Margaret, and the millions of other people who have a sophisticated and detailed experience of many different games, would be unsatisfied with the simple games that might keep me happy. Similarly, a novel which entertains an occasional reader may not provide meaning or interest to a literature graduate. But it doesn't mean it isn't a novel.

    Margaret doesn't agree. She says:
    ...there is no way, not one single way, in which [Nike+] is a game.
    Her distinction is between "gamification" (creating meaningful choices, which change the way you experience the game or the world) and "pointsification" (adding quantitative measures which simply count up your achievements). But I don't see why this is a category distinction - rather, it is a matter of degree. There are simple games - like Nike+, which helps you measure your progress as you run further and faster each day - and complex, subtle games like, I don't know, Portal or World of Warcraft. They can both provide meaning if the player invests it into them; or they can both be mechanistic, boring processes if you're not engaged.

    Perhaps Margaret sees no meaning in the distinction between running 1k and running 5k in Nike+ - but I certainly did, when I "played" it. I was pretty damn proud to get through the 3k and 5k barriers, having started running for the first time a couple of weeks before - and the transformational experience when I first realised I was not forcing my legs to move, but was enjoying running for its own sake, was packed full of genuine meaning. And it would not have happened without Nike+.

    So, no doubt advanced gamers have higher standards. They are no longer satisfied with what entertains us neophytes, and they need more advanced games to engage them and provide meaning. But this doesn't mean the games that entertain me aren't still games. My simple points-based achievements fulfil the same psychological role for me as those meaning-laden choices and consequences do for an experienced game consumer. There are degrees of meaning.

    I suspect it's easy for an advanced consumer of any art form to forget the simple pleasures that inexperienced consumers get. Once you've seen The Wire it's easy to dismiss Cagney & Lacey. When you learn the subtleties of Beethoven you may not think the Spice Girls are real music any more. If you have translated Beowulf into modern English, the crudeness of Dan Brown is ruthlessly exposed. But the commuter who enjoys Dan Brown on the tube will be left equally cold by Beowulf, until they've learned how to appreciate it.

    Games are no different. Until you've invested enough playtime to become familiar with the distinctions offered by the subtler choices and more complex consequences of Minecraft or Skyrim, points, levels and badges still provide a sense of achievement and, yes, meaning, that can be psychologically very powerful.

    Tuesday, 13 December 2011

    A thought experiment: why the ECB should print money...

    ...and why the Bank of England and Fed are right to have done so already.

    I'm not talking about whether the European Central Bank should directly buy eurozone government bonds. This causes a moral hazard problem - it might encourage governments to be profligate and reduce incentives for structural reform. It's, at the very least, debatable. I'm talking about a more general question: why should central banks print money in a recession?

    This post won't have much new to say to macroeconomists, but it attempts to address a concern of many non-economists - won't printing money just cause more inflation?

    First, let's run a thought experiment. Imagine that your national government has decided that profligate use of fossil fuels is a problem. Probably because of the risk of climate change. Instead of using a carbon tax, the government decides to restrict the supply of oil coming into the country. It could allow more oil in if necessary - in fact it has a large reserve stored up for emergencies - but it chooses to limit how much oil its citizens use, by keeping the supply at the level which corresponds to a sustainable quantity of carbon emissions. Aside from this intervention, it lets the market set prices and doesn't regulate who uses the oil or what for.

    Over time, people come to know what the supply of oil is going to be each day, and they know how much they use, so prices adjust to the level that balances supply and demand. Most people have a certain "stock" of oil - petrol in their car, oil in their heating tanks, or - for electricity generators - a reserve of oil to run their power stations for a certain number of days.

    Suddenly there is a disruption to oil supply. Maybe terrorists start attacking oil pipelines and people start to get very worried about whether they will still be able to get petrol. Perhaps a couple of refineries break down and there's a global shortage of refining capacity. Maybe a couple of petrol tankers explode, and 80% of tankers are taken off the roads for a few months until they can be fitted with new safety equipment. What happens now?

    The first thing is, people's demand to hold spare oil reserves will go up. They are aware of the supply risks, and the disruptions to the oil distribution system makes them worry that they won't be able to get petrol when they want it. So people start to hoard oil and petrol. Maybe there are knock-on effects - petrol stations can't get the petrol they need to sell, and some of them might become bankrupt. Probably, the price of petrol would soar. Electricity companies will, if they can, increase prices or reduce the amount of power generated so that they in turn can build up their inventories. Note that all this may happen even if the supply problem is more feared than real.

    People try to buy extra petrol to build up a reserve, while still maintaining their normal lifestyle - but they can't, because there's only so much petrol to go around. So there are shortages at the pump - which of course receive national news coverage. The next day, everyone else shows up to fill their tanks - the gas stations run out within a few hours - and the problem gets worse and worse.

    Everyone is trying to hoard petrol just in case the next person gets in and hoards it first. Of course oil prices might eventually stimulate new distribution channels or new sources of production, but it will take a while. In the meantime, the economy is seriously disrupted because everyone is forced to use less oil and petrol than they are used to, and the country will probably quickly enter a recession, with high unemployment, reduced GDP - and government deficits following automatically.

    What should policymakers do (if anything)?

    Even though the government still regards climate change as a serious risk (and let's say voters agree with this concern), there's a paradox: demand is up but petrol usage is down. All the extra demand is for reserves, not petrol usage.

    I say the government should gradually release its reserves into the market. This will let people build up their stocks of oil and petrol to whatever level they are comfortable with, and usage will go back to normal. Once this happens, the government can stop releasing the reserves and a new equilibrium will be reached. Petrol stations will get back to roughly the level of sales they had before, electricity companies will get the reserves they need and start generating power at normal levels again.

    The story is: a demand has arisen for people to hold more petrol stocks, but not to burn more petrol. The government is the regulator of petrol supply, and has a reserve, so it can open the taps and let people have the stocks they want, without causing any more carbon emissions. Then, if people's worries about supply reduce over time, they will run down the spare petrol stocks, and the government can restrict national supply a little more to balance this out and build up its reserves again.

    To get the timing and the supply just right, the government will have to keep a close eye on petrol prices, but that isn't too difficult to do - the market signals are all available. Opening the reserves seems an obvious solution with no real downside.

    Now you may have figured out where I'm going with this. In this story, replace "oil" and "petrol" with "money", "national oil reserve" with "central bank printing press" and "carbon emissions" with "inflation". Now we have the story of the financial crisis and the recession.

    The government (via the central bank) in normal times deliberately restricts the supply of money to keep inflation under control (interest rates are just another way of doing this). They have a reserve - they can in fact print as much money as they want - but they choose not to use it, because that's their way of managing inflation and maintaining the value of their currency.

    When the credit crunch happened in 2007-08 - a couple of banks went bust, so people naturally became concerned that the supply of money and loans was going to shrink. Everyone wanted to hang onto more money, just in case. Banks stopped lending to each other in order to keep more of their money in reserve - and because they were worried that the other banks couldn't repay them. People cut back on spending not because they didn't want as much stuff any more, but in order to keep some spare cash just in case they lost their jobs. And of course, these actions feed off each other - when the whole population cuts spending, people do lose their jobs. When all banks stop lending to each other, they don't end up with more money - they end up with less.

    We have a situation where there is high demand for money - not because people want to spend more, but because they want to save more. To stop this from causing a recession, the central bank has to "open the taps" - by printing more money. Normally this would be the equivalent of cutting interest rates - but when interest rates get to zero, it needs to be done in other was.

    This will not cause inflation if they only release just enough new money to let people increase their reserves to their new "safety level". And later, when people are reassured and don't need to hold as much spare cash any more, the central bank can reduce the money supply again and/or increase interest rates to soak up the money back into the reserve.

    Just as with the oil reserve, there are different ways of doing this. The government could give out petrol directly to individual households. Or it could sell it to the oil companies (at market prices) and let them sell it on - this would probably result in it going more accurately to where it's needed, but the oil companies would make a profit too, so it might not be politically popular. No doubt you can see the parallel again - some people would like the central bank to just give money directly to citizens, but instead they normally do this by "selling" money to banks (by buying government bonds from the banks) and let the banks lend it out, again making a profit. This is a more economically sound way of getting the money to where it's needed, but the banks will make a profit on it - because distributing money is, after all, their business.

    If the political situation calls for it, perhaps the government will impose a windfall tax on the oil companies/banks to compensate for the extra profits they are deemed to have made while helping to solve the problem.

    It turns out the Federal Reserve, Bank of England and Bank of Japan have been doing just this throughout the last few years. While it hasn't resulted in those economies returning to full health, it has probably helped stop them going back into recession. Many economists think they just haven't released enough reserves, and should do a bit more; though there is also an argument that some of the economic slowdown would have happened anyway, while the economy rebalances away from housing and finance, towards other industries.

    The one major central bank that has not done it is the European Central Bank. They have cut interest rates - though probably not enough - and loaned a bit of extra money to some of the banks to tide them over (imagine giving the petrol companies enough extra reserves to help them stock up their spare petrol tankers, but not enough to satisfy the demands of the population itself).

    And now there's a new twist: imagine that eurozone governments themselves use a lot of oil (money), and now they can't get enough petrol (money) to fuel their own operations. With petrol (money) prices soaring, some of them have used up their internal reserves and may have to shut down some of their operations. This in turn would cause more problems for the economy, making things even worse for the citizens who are short of both oil (money) and the government support they partly rely on.

    The ECB's job now is to open the reserves. An infusion of money into the Eurozone would help cure the capital problem that the private banks are suffering from, restoring economic growth and automatically improving the financial position of Eurozone governments. It would help prevent or soften the recession that is currently expected in Europe, making it more likely that Italy, Spain and Greece will be able to finance or refinance their debts, which in turn will let them borrow at more reasonable rates.

    The ECB does not need to buy the bonds of those countries directly, if it is concerned about setting a bad precedent - just as the oil reserve would not need to be issued on credit to unstable petrol companies. Just increasing the supply to the good companies (good banks, creditworthy eurozone countries) will have a knock-on effect on the others.

    Because the problem has been allowed to get this bad, there is now a risk that the money (petrol) will not get to where it is most needed. To help fix this, other steps might be needed. In the petrol scenario, the government might part-nationalise some of the weaker petrol companies, or subsidise investment in new pipelines to make sure the petrol gets to all parts of the country. In the Eurozone, some big capital investment programmes in southern Europe might be a better way to distribute money than simply giving it directly to the Italian, Portuguese or Greek governments. But these are less important than the emergency response.

    It's time to open the taps - or as Doug Saunders put it the other day: Mr Draghi: TURN ON THAT PRINTING PRESS!