September 2012 – Page 3 – artdiamondblog.com

Economists Have “the Tools to Slap Together a Model to ‘Explain’ Any and All Phenomena”

(p. 755) The economist of today has the tools to slap together a model to ‘explain’ any and all phenomena that come to mind. The flood of models is rising higher and higher, spouting from an ever increasing number of journal outlets. In the midst of all this evidence of highly trained cleverness, it is difficult to retain the realisation that we are confronting a complex system ‘the working of which we do not understand’. . . . That the economics profession might be humbled by recent events is a realisation devoutly to be wished.

Source:
Leijonhufvud, Axel. “Out of the Corridor: Keynes and the Crisis.” Cambridge Journal of Economics 33, no. 4 (July 2009): 741-57.
(Note: ellipsis added.)
(Note: the passage above was quoted on the back cover of The Cato Journal 30, no. 2 (Spring/Summer 2010).)

Economists Optimistic that Economy Can Adapt to Climate Change

Source of book image: http://www.bibliovault.org/thumbs/978-0-226-47988-0-frontcover.jpg

(p. 222) Efficient policy decisions regarding climate change require credible estimates of the future costs of possible (in)action. The edited volume by Gary Libecap and Richard Steckel contributes to this important policy discussion by presenting work estimating the ability of economic actors to adapt to a changing climate. The eleven contributed research chapters primarily focus on the historical experience of the United States and largely on the agricultural sector. While the conclusions are not unanimous, on average, the authors tend to present an optimistic perspective on the ability of the economy to adapt to climate change.

For the full review, see:
Swoboda, Aaron. “Review of: The Economics of Climate Change: Adaptations Past and Present.” Journal of Economic Literature 50, no. 1 (March 2012): 222-24.

Book under review:
Libecap, Gary D., and Richard H. Steckel, eds. The Economics of Climate Change: Adaptations Past and Present, National Bureau of Economic Research Conference Report. Chicago: University of Chicago Press, 2011.

People “Reward the Providers of Dangerously Misleading Information”

(p. 262) As Nassim Taleb has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid. However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty.
The social and economic pressures that favor overconfidence are not (p. 263) restricted to financial forecasting. Other professionals must deal with the fact that an expert worthy of the name is expected to display high confidence. Philip Tetlock observed that the most overconfident experts were the most likely to be invited to strut their stuff in news shows. Overconfidence also appears to be endemic in medicine. A study of patients who died in the ICU compared autopsy results with the diagnosis that physicians had provided while the patients were still alive. Physicians also reported their confidence. The result: “clinicians who were ‘completely certain’ of the diagnosis antemortem were wrong 40% of the time.” Here again, expert overconfidence is encouraged by their clients: “Generally, it is considered a weakness and a sign of vulnerability for clinicians to appear unsure. Confidence is valued over uncertainty and there is a prevailing censure against disclosing uncertainty to patients.” Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors, who are better able to gain the trust of clients. An unbiased appreciation of uncertainty is a cornerstone of rationality–but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Behaviorally Modern Humans Emerged at Least by 44,000 Years Ago

“CAVE RELICS; Clues to relatively modern behavior 44,000 years ago in Africa.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. D3) In the widening search for the origins of modern human evolution, genes and fossils converge on Africa about 200,000 years ago as the where and when of the first skulls and bones that are strikingly similar to ours. So this appears to be the beginning of anatomically modern Homo sapiens.

But evidence for the emergence of behaviorally modern humans is murkier — and controversial. Recent discoveries establish that the Homo sapiens groups who arrived in Europe some 45,000 years ago had already attained the self-awareness, creativity and technology of early modern people.
. . .
In their research, Dr. d’Errico and colleagues re-examined organic artifacts from Border Cave and their refined radiocarbon ages, concluding that “key elements of the San material culture” place “the emergence of modern hunter-gatherer adaptation, as we know it,” to more or less 44,000 years ago.
Previous discoveries revealed that other cave dwellers in southern Africa were experimenting with pigment use, body adornment, and advanced stone and bone tools more than 75,000 years ago, but that many of these artifacts seemed to disappear by 60,000 years ago. Dr. d’Errico’s group said this suggested that “modern behavior appeared in the past and was subsequently lost before becoming firmly established.”
. . .
In an earlier paper written with Dr. Stringer, Dr. d’Errico said that in his view, present evidence “does not support a gradualist scenario nor a revolution scenario, but a nonlinear process during which key cultural innovations emerge, are lost and re-emerge in different forms before being finally adopted.”
This process, he continued, “does not happen everywhere at the same time,” and the material culture at Border Cave is “not necessarily valid elsewhere.”

For the full story, see:
JOHN NOBLE WILFORD. “Artifacts Revive Debate on Transformation of Human Behavior.” The New York Times (Tues., July 31, 2012): D3.
(Note: ellipses added.)
(Note: the online version of the article is dated July 30, 2012.)

The 2012 academic publication by d’Errico et al can be found at:
d’Errico, Francesco, Lucinda Backwell, Paola Villa, Ilaria Degano, Jeannette J. Lucejko, Marion K. Bamford, Thomas F. G. Higham, Maria Perla Colombini, and Peter B. Beaumont. “Early Evidence of San Material Culture Represented by Organic Artifacts from Border Cave, South Africa.” PNAS 109, no. 33 (2012): 13214-19.

Macaulay Argues that a Limited Government that Protects Property Will Promote Economic Growth

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

Source:
Macaulay, Thomas Babington, Lord. “Review of: Robert Southey’s “Sir Thomas More; or, Colloquies on the Progress and Prospects of Society”.” In Critical and Historical Essays Contributed to the Edinburgh Review. London: Longman, Green, Longman, and Roberts, 1830.
(Note: the quote above appeared on the back cover of The Cato Journal 30, no. 1 (Winter 2010); Macaulay’s full review, including the quote, can be viewed online at: http://www.econlib.org/library/Essays/macS1.html )
(Note: the online version does not give page numbers, but gives what I think are “screen” numbers. The passage quoted is all of “SC.96” which appears at the very end of the essay.)

Renaissance Florence: “A Really Vibrant, Flexible, and Free-Market City”

Source of book image: http://covers.booktopia.com.au/big/9781421400594/the-economy-of-renaissance-florence.jpg

(p. 176) Chapters 4 and 5 deal with manufacturing, by far the main source of employment in the city. The Florentine textile industry had developed thanks to the Arno River, which provided water and power, and had become a market leader in Europe for high-quality products. Production was based, as everywhere in Europe, on a putting-out system–but strictly confined to the city. The author describes the organization and its changes over time, stressing, as for international banking, the flexibility of firms and their high turnover. Workers were organized in guilds, but the author stresses their nature as political associations rather than their economic role. Florentine guilds did not restrict the access to profession nor stifle innovation. Chapter 6 describes the banks catering for urban market–including local branches of international banks as well as smaller local firms, plus pawnbrokers, both Catholic and Jews. Local banks appeared thoroughly modern in their business and the resort to banking services was quite widespread. Artisans and workers were routinely paid with checks and had bank accounts. And the whole system worked well with almost no state intervention, at least until the late sixteenth century.
. . .
. . . , the author argues that Florentine society was very upwardly mobile, at least for the standard of the time and that the distribution of wealth by household according to the 1427 Catasto was fairly equal (although inequality increased in the next century).
(p. 177) As a whole, at the end of the book one has the impression of a really vibrant, flexible, and free-market city. The standard of living was undoubtedly high and not only for the wealthy, as witnessed by the art treasures of the city, but also for the working class. Literacy and numeracy was very common, and the majority of children attended a primary school.

For the full review, see:
Federico, Giovanni. “Review of: The Economy of Renaissance Florence.” Journal of Economic Literature 48, no. 1 (2010): 175-77.

Book under review:
Goldthwaite, Richard A. The Economy of Renaissance Florence. Baltimore, MD: The Johns Hopkins University Press, 2009.

Big Firm CFOs Were Confident about Their “Worthless” Stock Forecasts

(p. 261) For a number of years, professors at Duke University conducted a survey in which the chief financial officers of large corporations estimated the returns of the Standard & Poor’s index over the following year. The Duke scholars collected 11,600 such forecasts and examined their accuracy. The conclusion was straightforward: financial officers of large corporations had no clue about the short-term future of the stock market; the correlation between their estimates and the true value was slightly less than zero! When they said the market would go down, it was slightly more likely than not that it would go up. These findings are not surprising. The truly bad news is that the CFOs did not appear to know that their forecasts were worthless.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Some Cultures Really Are Barbaric

“The mummy of a sacrificed Inca girl was found in Argentina in 1999.” Source of caption: print version of the NYT article quoted and cited below. Source of photo: online version of the NYT article quoted and cited below.

(p. D3) Dr. Dávalos and Dr. Corthals and their colleagues report their findings in the journal PLoS One.

The researchers discovered the mummy, along with those of two other sacrificed children, in 1999.
“They were buried in a tomb, and the tomb was packed solid with volcanic ashes and covered in snow, so they did not desiccate,” Dr. Corthals said. “Their entire bodies were sealed and perfectly preserved.”
The sacrificed youths probably made a journey of as many as 1,500 miles from Cuzco, the capital of the Inca empire, to the summit, Dr. Corthals said. “The girl actually had gray hair, so I think they knew their fate,” she said. “And the little girl and boy also had their teeth ground down.”

For the full story, see:
SINDYA N. BHANOO. “OBSERVATORY; Disease Diagnosed in a 500-Year-Old Mummy.” The New York Times (Tues., July 31, 2012): D3.
(Note: the online version of the article is dated July 30, 2012.)
(Note: the online version, quoted above, corrects the mistaken “3,000 miles” number in the print version. It also replaces “Argentine researchers” with “The researchers.”)

The academic publication being summarized can be found at:
Corthals A, Koller A, Martin DW, Rieger R, Chen EI, Bernaski M, Recagno, G, Dávalos, LM . (2012) Detecting the Immune System Response of a 500 Year-Old Inca Mummy. PLoS ONE 7(7):e41244. doi:10.1371/journal.pone.0041244

Information Technology Enables Massive Process Creative Destruction

(p. 2) . . . I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential — it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.
. . .
(p. 5) Now this second, digital economy isn’t producing anything tangible. It’s not making my bed in a hotel, or bringing me orange juice in the morning. But it is running an awful lot of the economy. It’s helping architects design buildings, it’s tracking sales and inventory, getting goods from here to there, executing trades and banking operations, controlling manufacturing equipment, making design calculations, billing clients, navigating aircraft, helping diagnose patients, and guiding laparoscopic surgeries. Such operations grow slowly and take time to form.
. . .
(p. 6) Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep qualitative change that is bringing intelligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end.
. . .
I think that for the rest of this century, barring wars and pestilence, a lot of the story will be the building out of this second economy, an unseen underground economy that basically is giving us intelligent reactions to what we do above the ground.

Source:
Arthur, W. Brian. “The Second Economy.” McKinsey Quarterly, no. 4 (Oct. 2011): 90-99.
(Note: ellipses added.)
(Note: I first saw the passages quoted above on pages 243-244 of Timothy Taylor’s “Recommendations for Further Reading” feature in The Journal of Economic Perspectives 26, no. 1 (Winter 2012).)

Mitt Romney on Innovation and Creative Destruction

Source of book image: http://mittromneycentral.com/uploads/No-Apology1.jpg

(p. 108) Innovation and Creative Destruction

The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited–in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.
The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It’s sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such “creative destruction,” recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.
Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America’s new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.

Source:
Romney, Mitt. No Apology: The Case for American Greatness. New York: St. Martin’s Press, 2010.
(Note: bold in original.)