Inner Economist

Carrot or Sticks?
Carrot or Sticks?

I have seen this book around for a while but didn’t bother to pick it up to read since it didn’t quite seem to be as interesting as the other popular economics books that was published during those times. I decided to borrow it from the library having discovered that I’ve more or less finished the other the popular economics books (though the most recent SuperFreakonomics is out of my reach at the moment). Interestingly, I didn’t realise “Discover Your Inner Economist” is written by Tyler Cowen until I got home and took a good look at the cover page. It was definitely a familiar name since I visited Marginal Revolution before and seen the name lingering around the title of almost all the entries there.

I didn’t jump right into reading the book this time; instead, I went on to read a book review of “Discover Your Inner Economist” before heading to reading. I’ve become more conscious about devoting my time to reading books that wouldn’t contribute much to my intellectual development. In addition, I was exploring exactly how professionals write book reviews (something I’ve been doing and very keen on improving). And to my surprise, Tyler Cowen was trying to make recommendations for people to do efficient reading (or rather maximize gains from reading):

The best sections of the book concern tactics for maximizing one’s cultural consumption, or what amounts to imitating Cowen. He lists eight strategies for taking control of one’s reading, which include ruthless skipping around, following one character while ignoring others, and even going directly to the last chapter. Your eighth-grade English teacher would faint.

Not that I’ve tried that on Tyler Cowen’s book. His book focuses on stuff that makes your life better that have little to do with money or material gains for that matter. Tyler writes as if he is speaking and Inner Economist have been an easy read for me although I have to admit Tyler strays into topics so far from traditional economics that I get lost in his narration about appreciation of culture and the human psyche. It makes me wonder if I might have enjoyed the book better with the rampant skipping about chapters and reading just here and there as he advised since I’d be equally lost anyways.

Did I mention that his last strategy for maximizing cultural consumption is to “Give Up”? I did consider that at some point of time but since I had more time and attention to spare than Professor Tyler I decided not to. Discover Your Inner Economist is very much more about looking at reality from the lens of an inner self who have better grasp of reality and more objectivity than the ‘you’ who participates in this reality. So if you’ve time to spare, do give Tyler a chance.

Nobel Agents

Dynamite Old Man
Dynamite Old Man

In the field of the sciences, research and achievements at the cutting edge is often poorly understood by High School (or Junior College) students. Take for example this year’s Nobel Prize for Physics; it was given to physicist Charles Kao, “for groundbreaking achievements concerning the transmission of light in fibers for optical communication” and two other physicist “for the invention of an imaging semiconductor circuit – the CCD sensor”.

Not many of us actually concern ourselves with the workings of the CCD sensor (it’s something found in digital cameras) nor optical communications and I’m sure pre-college education focuses on none of that. Students who are really interested in Physics might not be able to directly draw links between the inventions and discoveries made by the Nobel Laureates and the stuff he reads or study about. The maturity of a subject like Physics almost definitely ensures that stuff studied at the forefront is highly specialized and in some sense, narrow.

On the other hand, economics is more accessible than it appears to be. The Nobel Prize for Economics this year was awarded to economists (Oliver E. Williamson) “for his analysis of economic governance, especially the boundaries of the firm”; and (Elinor Ostrom) “for her analysis of economic governance, especially the commons”. It is interesting to note that both of these economists are studying workings of important economic agencies (or agents) outside the workings of the traditional market mechanisms.

The prize rightly demonstrates a heightened appreciation of economics as a subject to study cost-benefits and incentives rather than one that scrutinizes money. Posner neatly summarizes Williamson’s work and its implications in his entry while Becker discuss the inherent difficulties in real world organizations on Becker-Posner Blog. It should be easy for a JC student with background in economics to realize the link between Williamson’s work and the stuff he/she is studying after reading Posner’s entry. It is the ability to draw this link that reflects how much of a science the study of economics actually is – the basic principles of incentives, cost-benefits analysis all applies even when there might not be the perfect information or perfect rationality in the real world.

Stressed? Just Smile!

What Stress?
What Stress?

I just finished The Economic Naturalist by Robert H Frank a couple of days back and one of the questions was why managers who believed in achieving improvements in performance of subordinates through threats and reprimand rather than praise and reward were more likely to be able to prove that they are right.

Professor Frank suggests that it was because the performance of people usually varies with time but stays the same on average without special effort to improve or skive. That means that when a person perform badly it could just be his particularly down period and after getting scolded from the manager his performance tend to return towards the mean and result in the improved performance the manager was hoping for. On the contrary, a person may perform exceptionally on an especially good day and get praised for his work only to have his performance return to its mean, which means poorer than before the manager’s rewards/praise. A manager who believes praise and reward yields better returns would thus have little means of proving he is right and so is unfairly proven wrong.

The truth seems more complex than just that. As this article from Harvard Business Review suggests, sensitivity to the anger or happiness of the manager or boss depends partly to the stress levels experienced. So from the perspective of the employer or manager, it is wise to inject more praise and rewards during high stress periods. Never mind the low stress periods when employers are slacking around.

Human behaviours and the motivations behind them are great subjects to study. This gives me the chance to introduce the publication, Psychology Today, which recently featured something really useful for people working in the business world (and perhaps even in academia). Confidence in yourself and your ideas really counts when it comes to presentations. So you will really have to work on yourself to get your ideas accepted. Check out the publication site for more of such tips to help discipline, aid and make sense of your mind.

Irreducible Uncertainty

The Straits Times caught my attention again the week before with a particular article by Robert Skidelsky, which was a contribution to Project Syndicate. In Keynes versus the Classics: Round 2, Skidelsky highlighted the problem with today’s Keynesians being unwilling to work out the implications of irreducible uncertainty for economic theory. The article was essentially a response to the two economist, Krugman (his article) and Cochrane (his response here and here) who are engaging in an academic quarrel of sorts.

Krugman started out criticising the love for elegant economic theories of classical (implicitly speaking, Chicago school) economists. And Cochrane shot back, arguing that to attribute excessive fluctuations in the market to ‘irrationality’ is theoretical nihilism. And we all know that all that buying and selling has got motivations behind them even if these were results of false information, pure emotional preferences. I like Skidelsky’s analogy about the theater on fire (which might have been used previously by other economists as well):

It’s like what happens in a crowded theater if someone shouts “Fire!” Everyone rushes to get out. This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty.

I’m not sure if Robert Skidelsky is a Post-Keynesian like Hyman Minsky but his extensive research into John M Keynes has brought him to write several volumes about this economist once touted as a saviour of capitalism. In any case, I believe Keynes simply sprinkled some important ideas that are pertinent to our study of the economy and there is definitely a need for further studies into the insights of Keynes about our modern capitalist economy and possible save it from itself once again.

Positive Feedback

Hold it right there!
Hold it right there!

The economy doesn’t (always) tend towards equilibrium as classical economics textbooks suggests. But things are worst when things tend towards an equilibrium that doesn’t benefit the society in general, many social phenomena that I’ve described in a previous post. The social/market forces are pushing the situation towards something no one wants; without an authority mandating stuff, no one have the incentive to help reach the collectively beneficial outcome.

In a recent article by James Surowiecki in The New Yorker, he discusses how success of big banks builds upon success and bring about the mega big banks that results in a concentrated banking system. It is thus possible that we allowed banks to grow big and stay so because the market naturally tends towards that and we have problems assessing the welfare gains from increasing bank sizes, as suggested by Surowiecki:

The trouble is that the “market” for banking is so distorted—by switching costs, by government subsidies and guarantees, and by the banks’ market power—that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions.

The only problem that we know with the concentrated banking system is that they increase financial risk. That being said, regulations will have to start moving towards managing the risk that is contained in the financial system and if this really do result in policies that have to limit the size of banks then so be it. The government is the only one who can act as a dam holding up the floodwaters of market forces.

New Mail

More Boxes!
More Boxes!

This week’s package of video, audio and reads is a little more on the lighter side, starting with a short 3-minute talk by Dr Laura Trice about asking for praise. After that you might like to listen to Dan Ariely‘s talk on our buggy moral code, a topic I’ve always been interested in.

In news, you might be encouraged to understand that Genius and talent is overrated and social forces can manipulate the motivations to create genius sheerly through encouragement as argued by Steven Levitt in SuperFreakonomics.

I’ll like to take the chance to introduce Knowledge@Wharton, which offers high quality content as well as podcast on economics and business issues of the day. You might like to listen about questions posed on Net Neutrality.

Once again, enjoy your weekends!

This is a Coffee Cup

This is not Coffee
This is not Coffee

Too often, we underestimate ourselves and overestimate others; and in so doing we end up looking stupid despite the contrary. We’ve a colleague who loves to carry his cup around so that he can make coffee conveniently in the office. Because his cup is issued by the company, it looks like the ones on many of our desk. This is the same cup we use as a pen holder at many desks.

Once, we saw an extra cup on our main desk with words written, “This is a Coffee Cup”. We figured out that it must be this colleague’s cup and he wrote that with his marker because he knew most of us used the cup as penholders and he didn’t want people to put their stationery into his cup when he leaves it empty on a desk unattended.

Everyone was praising the creativity of the statement and the interesting intention behind the writing when he came along and so I asked him about it. He replied that he was just trying to decorate his cup and act creative by imitating some “Stating the Obvious” series where you have tote bag that says “This is a Tote Bag” and T-Shirts that says “This is a Tee”.

Monopoly on Monopoly

Yes, it's Mine!
Yes, it's Mine!

Intellectual Property is becoming an important area of contention that needs to be closely studied by lawyers, economists and governments around the world. Every IP case have deep implications for the general welfare of the society (for important innovations and inventions), the meaning of property and the ways laws can protect them. From Free Exchange Blog at The Economist, I learnt the story of Ralph Anspach’s battle against Parker Brothers, the owners of the world famous Monopoly game.

Professor Ralph invented Anti-Monopoly, a game much like the Monopoly with its principles somewhat reversed where in its original version, players start off with monopolies and try to get to the free market state. In the latest version of the game, players get to choose to be either free-marketters or monopolist. In any case, he spent a lifetime battling Parker Brothers and researching the origins of the true, original Monopoly game (and how the capitalists were indeed true to the principles of the game).

Governments have to engage in design of laws that allows for Intellectual Property rights to be enforced but in a way that allows further innovation so that there are incentives to make improvements to existing innovations or discover mash-ups that utilizes stuff under IP protection. Economists have to consider the balancing of these incentives and how different ways of enforcing IP laws would alter the innovation patterns of the environments governed. Joseph Stiglitz happened to pen some of his musings on this issue on Project Syndicate.

It is interesting to note, as the Free Exchange Blog entry mentioned, that board games are countercyclical products. This is true for comfort foods as well, ranging from chocolates, candies to lollipops and other treats for those with a sweet tooth as mentioned in the recent Fortune Magazine.

What I Know Is

Changes Everything? Not sure about that.
Changes Everything? Not sure about that.

What I Know Is this book took me almost a year to finish but in actual days, I only spent a week or so reading it. Wikinomics by Don Tapscot and Anthony Williams was published in 2006 more or less as a study of this new emerging business model that surrounds most of Google’s free products, social tools like Facebook and Twitter as well as other more business-oriented networks where mass collaboration is used to produce products, free or commercial.

The book definitely isn’t an easy read and after reading the first half of the book I got pretty sick of the fact that the authors were merely packaging the case studies into different categories of models and repeating their theory of how mass collaboration is going to change the way goods are produced all around the world. That explains the gap of so many months before I picked the book up a week ago and continued from where I left it. The case studies were mostly fascinating, like the story of Goldcorp Mining and InnoCentive but others seem to be overly used, like for the case of Second Life and that makes the author seem like they’re overhyping the phenomenon.

As the Wikipedia entry for the book quoted from Harvard Business Review, “like its title, the book’s prose can fall into breathless hype.” Indeed, the hype over mass collaboration seems a little overwhelming and when one is more of the skeptic the book becomes quite a disaster, especially when the book was first published in 2006 and 3 years on, you don’t quite see how the subtitle ‘How Mass Collaboration Changes Everything’ manifest itself in the real world at all. Yes I know mass collaboration did help people and changed things but then it wasn’t that breathtaking and mostly, life just went on as usual. Perhaps more important was the fact that this Subprime Financial Crisis seemed to be the working of a ‘mass collaboration’ of stupid people. In other words, Tapscott and Williams thought nothing of the risk of Groupthink in mass collaboration.

The prose is rather academic, starting with their ‘hypothesis’, which is the subtitle of the book somewhat and then the authors goes on to show how mass collaboration is being played out in different sectors, industries, different markets and such. To be fair, Wikinomics is a business sort of book, it focuses on the methods to harness the benefits of mass collaboration, possibly the mechanics of motivation that drives this phenomenon and discuss the success of these various means. It’s the business sort of academic compared to what I generally prefer, the intellectual sort of academic. I believe students of A Levels would be way more intrigued by Wisdom of the Crowds by James Surowiecki, which I gladly finished almost a year ago.

The book discusses Coase’s Law, which is basically an explanation of why firms expand to organize transactions within the firms. The Nobel Laureate for Economics in 2009, Oliver Willamson got his prize through his study and refinement of this theorem by Ronald Coase.

Wikinomics is definitely a book for business students and businessmen interested in working on projects that involves profiting from mass collaborations and setting up of networks. It is likely that some projects are more adapted to mass collaboration than others and some products will forever be provided by traditional manufacturing or services.

Tech Updates

Charging Up
Charging Up

Just a couple of updates the field of practical science, Albert Mihranyan from Sweden built a thin lightweight battery from cellulose that holds 1 volt of electricity. It is interesting to note that the battery would then be essentially like a piece of paper and The Economist concludes suggesting how the invention “would represent a neat reversal of the idea that technology will lead inevitably to the paperless office”.

For other battery geeks, check out the BC-900 that gets you working smart with rechargeables.

The news of artificial black holes reported both on Popular Science and New Scientist reflects how different the 2 sites/magazines are. While Popular Science covered briefly the scientific aspects of the invention and the potential applications, New Scientist offers details of the theory behind this artificial black holes and the developments building up to this invention.

In the area of environment, I always thought that Global Warming is going to cause more extreme weathers and thus stronger winds but things turned out to be a little different from what was expected.

Anyways, just as an after note for students studying for the A Levels, having enough sleep does contribute to your studies.