Steve Reads

Unless I’m missing something major, I knew everything that was going to happen in this book by maybe 1/4 of the way through. There are no cliffhangers, no hair’s-breadth escapes, no Sudden Realizations That The World Is A Far Blacker Place Than Anyone Previously Fathomed.

It starts so promisingly. Inspector Kurt Wallander is called to a farmer’s field where a girl has been standing all day. The farmer has tried unsuccessfully to get her off the field, and finally he’s called the cops. Wallander chases her until, unexpectedly, she douses herself with a can of gasoline and lights herself on fire.

The next day Wallander happens upon a murder victim whose head has been split in two and who’s been scalped.

How could these two ghastly events be connected?

Isn’t that a promising beginning? Yet without cliffhangers or much in the way of actual drama (the initial killing, and subsequent ones, are deployed with a minimum of fuss), what sustains the story? Mankell has left himself few choices: it can’t rest on anything but Wallander’s thought processes. We watch him try to reach the same conclusions that we had reached long ago. Perhaps Mankell hopes that’ll be enough — that we’ll grow tense as Wallander comes closer to the truth. If so, Mankell hasn’t set up enough architecture to make it so. There’s a moment of tension toward the end, and Mankell executes that moment quite competently. But then it’s over. Almost as soon as that climax happens, it’s as though Mankell has grown bored of his own book.

Let’s not even speak of the dialogue, which is dreary and flat. Characters say near-clichés like “…Unless he strikes again” as though reading them directly from a bus schedule.

Just a flat book. Enough energy to sustain you for 400 pages, but just barely. Having put it down, it’s unlikely I’ll remember anything from it a month from now. And I’m not tempted to read any more Mankell.

“Subway-stalking perverts are more likely to attack women riding the Red Line than any other MBTA route, a Herald review of T police reports over the past two years shows.”

It occurs to me that since I read so many books and write so many book reviews, I might could make money from so doing. Where would one start, if one wanted to be a paid book reviewer? Have any of my readers entered that world?

I’ve meant to read the mystery novelist Henning Mankell for years — ever since I read Geoff Pullum’s Language Log post about him.

Over the few years since then, I’ve seen Mankell referred to quite a number of times, and have seen some really handsome editions of his books in various book stores (including the redoubtable Harvard Book Store). Indeed, I think what finally tipped me over the edge is that the covers are so alluring. See in particular the cover to Sidetracked, at right, which I’m about to start tonight.

I picked that one after Prof. Pullum was grateful enough to reply to my unsolicited book-recommendation email. I have a book problem, which I believe I’ve mentioned on here before: if I read one book by the author, and it stinks, I’m unlikely to read any more by him. If I read an amazing first book, though, I will soldier through three or four terrible ones by the same author. That’s kind of how I read Saul Bellow: Herzog is a desert-island book, and I was lucky enough to start with that. (Not sure how: maybe researching Philip Roth?) Next up, I believe, was Dangling Man; I believe some novel that took place in the 1940′s described it as a harbinger of a literary revolution. Dangling Man felt very flat to me; I was supposed to care about the character, but didn’t at all. (My memory says, “Holden Caulfield, home alone during World War II.”) And it lacked the intellectual maturity of Herzog. My third Bellow was The Adventures of Augie March, which everyone likes to stroke. I couldn’t stand it. It very much wanted to be The Great American Novel; our hero was self-consciously the American Everyman, stalking about through the American wilderness. It was too self-absorbed for its own good, and needed a few good whacks with a meat cleaver. I don’t have the cites to back it up, but I think even Bellow realized in his later years that Augie March was too undisciplined.

So by that point in my Bellow career, I was 1 for 3; had Herzog been anything different than it is, I would have surely stopped there. Then I read Mr. Sammler's Planet, which is the natural follow-up to Herzog. Like its predecessor, Sammler is beautiful and intellectual and heartbreaking. So that got me through More Die Of Heartbreak, which felt like the unfortunate spawn of Augie March and Herzog : wishing very much to be intellectual, but ending up with Cargo Cult Intellectualism.

That leaves me where I am today with Bellow, at 2 for 5. I’ll still gladly read anything available by the man, though I’ve not in a while. Henderson the Rain King is crawling up from the back of my head, and will probably materialize on my shelf soon.

I gave most of that very long setup about Bellow to Prof. Pullum, as background for why it matters quite a lot which Mankell novel I start with. If he’s as good as Prof. Pullum’s partner Barbara thinks, I should read all of his novels, no?

Barbara and Prof. Pullum were generous enough to respond: I should start with Sidetracked. And so I will, tonight. I can’t wait.

There’s an excellent post up on how the left should relate to government, written by Tom Slee of No One Makes You Shop At Wal-Mart fame. The biggest difficulty in responding to anarchists seems to come when they ask, “Sure, we believe that man needs community as well. But why must that be implemented by centralized bureaucrats with the violent power of the state behind them?” Those of us on the left have been in a defensive posture at least since the end of the Soviet Union; according to Slee, it’s been that way for at least thirty years. He asks us why we can’t expand what those of us on the left mean when we talk about “community.”

(Via Cosma Shalizi’s del.icio.us feed.)

Both the reader of this book, and the book itself, wake up once per chapter. For scholarly purposes, it may need all the detail and plodding sentences that it contains, but I can’t imagine that non-scholars will find anything captivating in it. I certainly didn’t.

In general it tells the story of United Fruit Company’s rise to power under a string of Guatemalan dictators. Paul Dosal wants to argue that United Fruit could never have done as well as it did under a democracy: by a succession of bribes, United Fruit managed to control most of the Guatemalan train system and its most important ports. It semi-secretly owned the International Railways of Central America. This ownership allowed it to charge obscene rates to any non-United banana companies. Without government support for that monopoly and its unconscionable rates, United would never have survived.

United owned the Guatemalan government; Sam Zemurray, through his Cuyamel Fruit Company, owned the Honduran. The Guatemalan and Honduran governments often came close to blows in defense of their respective banana barons, particularly at the boundary between the two countries where profitable banana cultivation happened. That dispute was only settled when Cuyamel and United merged, and Zemurray eventually took over the combined behemoth.

If you’re interested in the details of how a company exploited a government, and how a sequence of military strongmen kept 80% of their people illiterate and hungry, by all means read Dosal’s book. Otherwise, I have just given you most of what you’ll learn. You can thank me later.

P.S.: United Fruit became Chiquita Banana, though some of its plantations apparently were sold to Del Monte in the early 70′s. Chiquita solemnly declares that United et al. “made a number of mistakes — including the use of improper government influence, antagonism toward organized labor, and disregard for the environment. These actions clearly would not live up to the Core Values [Chiquita] hold[s] today or to the expectations of our stakeholders.”

You do have to wonder what part of the “Core Values” includes criminally conspiring with Colombian death squads.

P.P.S.: United Fruit was a Boston-based company. Yeah hometown monopoly pride!

I expect much better from Noah Baumbach, the man who brought us Kicking and Screaming. Please take my advice on Margot at the Wedding : unless you enjoy spending 90 minutes in the company of really awful characters, each draining his or her (mostly her) psychological wounds onto his or her (mostly her) siblings, save the money and go see anything else. I regret not having gone to see Cloverfield with my ladyfriend tonight instead; I think she does too.

Apart from having despicable characters, which might be excusable if that’s what the director wanted, Margot at the Wedding is a strung-together sequence of non sequiturs : scenes that make no sense at all and don’t support any future scenes. And then the movie ends on a stub.

The only excuse I can make for this movie is that it’s a prolonged joke. It may be a big joke about the sort of people you meet in it, namely self-involved whiners who diagnose everyone else with whatever Psych 101 taught them. It could be a prolonged caricature. I doubt it. I really doubt it. I suspect it’s just an awful movie.

…is, nearly cover to cover, really enjoyable:

• Adam Gopnik’s piece on Nicolas Sarkozy’s love affairs is really nicely arch. I think this was my favorite part:

  Those who loved the dignity and the sporadic secrecy and the sudden intimacies of traditional French civilization are bound to long for the days when President Mitterrand would go on long walks alone to old bookstores, and then make love to his mistress on the way home to his wife, patting his love children on the head while making sonorous pronouncements about life and destiny.

• George Packer’s comparison of Obama and Clinton is essential reading for anyone who will be voting in 2008.

• “Last Session” by John Kenney is a fun little Shout And Murmur about the difficulty of leaving your longtime therapist. (Think Woody Allen here. It’s not as yuppie as it sounds.)

• I’ve heard amazing things about Jill Lepore for years. Scott Sandage told me years ago that I should go right out and read her books A Is For American and The Name Of War. I’ve not done so yet, because I am a terrible listener.

  Lepore’s piece this week on Ben Franklin, on historians’ attempts over the years to rescue the real Franklin from the old fuddy-duddy of Poor Richard's Almanack, is probably enough to send me running, finally, to read her books. The piece is an absolute joy.

  While I’m at it: how could you finish Lepore’s piece and not want to read Carl Van Doren’s biography of Franklin? It’s impossible, I say.

• Anthony Lane is Anthony Lane. You really can’t go wrong with any of his writing. So it is with this week’s review of Cloverfield and 4 Months, 3 Weeks and 2 Days. Of the two, Lane makes the latter sound the more intriguing. I’ll probably end up watching both.

Noam Chomsky at one point mentioned an essay on Nozick:

One fine philosopher and social theorist (also activist), Alan Graubard, wrote an interesting review years ago of Robert Nozick’s “libertarian” response to Rawls, and of the reactions to it.

That paper appears to be

“Liberty and/or Justice for All,” Working Papers for a New Society 3 (Summer 1975): 57-59, 73-77.

So says “Government by Insurance Company: The Antipolitical Philosophy of Robert Nozick”. The quote that the latter paper gives from the former is intriguing:

“[A] libertarian theory like Nozick’s is a ‘clean hands’ theory. That is, there is no way to make political mistakes … [U]nder libertarian theory, since there is never any public policy, there can never be any mistakes.”

If anyone has access to this paper, I’d love to read it.

What follows is as brief a synopsis as I can come up with for The Conscience of a Liberal. Still, it’s 1500 words long. That says a lot about Krugman, and about my wordiness.

At the close of the Hoover administration, it was clear that a Democrat would be elected to the presidency. It was by no means clear, though, that we’d get FDR and the New Deal. Out of catastrophe we got protection for the unemployed, for the elderly, and for the poor; and got job relief. The going was hard, but FDR did it. As he said in his speech at Madison Square Garden on the eve of the 1936 election, after the first four years of his administration:

We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

(There’s a recording of FDR delivering the speech, embedded within that last link. Give it a listen. It’s a remarkable speech, and the wind builds in FDR’s sails as he goes along.)

Stop and ponder that excerpt for a moment, if you please. Just try to envision the hell that Obama or Clinton would bring down on themselves if they spoke like FDR. Labeling them “Communist” would be the least of their worries. The military-industrial complex, about which Eisenhower warned us, would never stand for the phrase “war profiteering.” The candidate would be crushed before his or her next speech.

For a few years the forces of reaction tried desperately to roll back the New Deal. Out of that we got McCarthyism, whose purpose wasn’t to root out Communists but rather to reverse the New Deal. As Richard Hofstadter put it:

What I believe is important, however, to anyone who hopes to understand the impulse behind American anti-intellectualism is that this grievance against intellectuals as ideologues goes far beyond any reproaches based on actual Communism or fellow-traveling  . . .  The truth is that the right-winger needs his Communists badly, and is pathetically reluctant to give them up. The real function of the Great Inquisition of the 1950’s was not anything so simply rational as to turn up spies or prevent espionage (for which the police agencies presumably are adequate) or even to expose actual Communists, but to discharge resentments and frustrations, to punish, to satisfy enmities whose roots lay elsewhere than in the Communist issue itself.  . . .  McCarthy’s bullying was welcomed because it satisfied a craving for revenge and a desire to discredit the type of leadership the New Deal had made prominent.

Had the Great Inquisition been directed only against Communists, it would have tried to be more precise and discriminating in its search for them: in fact, its leading practitioners seemed to care little for the difference between a Communist and a unicorn.

McCarthy lost. The Republicans made their peace with the New Deal after beating up on Truman for a while (Korea and all that). Out of this accommodation came Eisenhower. The New Deal was by now far too popular to overthrow, so Republicans and Democrats came together for 30 years or so. They really were “Republicrats” in that interval — parties without many essential differences on policy. There was even a marriage of convenience between Northern Democrats, who supported greater rights for blacks, and Southern Democrats who obviously didn’t. But the South derived a lot of benefit from the New Deal (read especially volume 1 of Robert Caro’s LBJ bio, on the electrification of rural Texas), so they clung to the party. It didn’t hurt that the South had always been Democrats, since Republicans had been the party of Lincoln.

The New Deal, and especially the tax policies that went along with it, led to greater income equality than the U.S. had seen in half a century. Political moderation went along with economic leveling.

But the legacy of slavery tore apart the Democratic party. LBJ’s signing of the Civil Rights and Voting Rights Acts was the death knell. The Dixiecrats had enough. They split off and became Republicans. The GOP exploited this. Republicans became more and more extreme, using all the codewords of race (“states’ rights” and so forth) to disguise what they were really after. Today the GOP is dominated by two wings: the businessmen, who wish for more immigration (cheaper labor) and lower taxes; and the rural, conservative Christian wing that is afraid of blacks and immigrants.

The GOP is corrupt and has become the party of cronyism. This cronyism is at its worst in the Iraq War: we elected people who explicitly wish to destroy government, so we shouldn’t expect that they’d put their hearts into governing. They especially wouldn’t be able to run a war. Wars call for shared sacrifice and for increased taxes, two things that Republicans are loath to defend. The GOP’s utter failure in the Iraq War will cut out one of its fundamental pillars, namely that it’s strong on defense. Its constant accusations that Democrats are the party of taxing and spending should have died long ago.

The weakness of unions plays a crucial role in all of this. Republicans gutted unions in the 70′s and 80′s, starting with Goldwater. It didn’t have to happen this way, and contrary to popular belief it has nothing to do with a postindustrial economy: European nations, and Canada, have by and large maintained their unions’ strengths; only the U.S. and Britain — dominated by Reagan and Thatcher — have lost significant union membership, because conservatives looked the other way while companies illegally fired union-organizing employees.

Hence Democrats find themselves poised at a crucial moment. With all the momentum and much of the power, they could reinstate the New Deal. They could succeed where Truman and Nixon failed, and institute national health insurance. In so doing, they could prove to Americans that government can work. We know that national health insurance can work, because it does work in every other advanced industrialized nation. With health care successful, we could reclaim a progressive nation and finally take the country back from the reactionaries. And we could re-empower unions, giving power back to the people and taking it away from the robber barons.

So it should be obvious: the Republicans will not have this. They know that single-payer health insurance will work. They know that allowing it to succeed — which it would, left to its own devices — would spell the end of movement conservatism. The fight over health insurance means substantially more than it may appear at first glance. The GOP will stop at nothing to destroy it. The 2008 presidential campaign may turn out to be the dirtiest, ugliest, most straightforwardly fraudulent campaign we’ve ever seen.

All of these are Krugman’s observations. In this book he is essentially the anti-Obama. Compromise with the GOP, says Krugman, is impossible. It was impossible during the New Deal, and it’s impossible now. We won then because the public overwhelmingly wanted what FDR offered. We will win now — if we fight like hell — because universal health insurance is what the public wants. We cannot compromise with those who seek the destruction of all we stand for. As Kissinger put it in A World Restored (and Krugman quoted in The Great Unraveling):

For powers long accustomed to tranquility and without experience with disaster, this is a hard lesson to come by. Lulled by a period of stability which had seemed permanent, they find it nearly impossible to take at face value the assertion of the revolutionary power that it means to smash the existing framework. The defenders of the status quo therefore tend to begin by treating the revolutionary power as if its protestations were merely tactical; as if it really accepted the existing legitimacy but overstated its case for bargaining purposes; as if it were motivated by specific grievances to be assuaged by limited concessions. Those who warn against the danger in time are considered alarmists; those who counsel adaptation to circumstance are considered balanced and sane, for they have all the good “reasons” on their side: the arguments accepted as valid in the existing framework. Appeasement, where it is not a device to gain time, is the result of an inability to come to grips with a policy of unlimited objectives.

But it is the essence of a revolutionary power that it possesses the courage of its convictions, that it is willing, indeed eager, to push its principles to their ultimate conclusion.

Krugman has long asserted that the Bush administration is, in Kissinger’s sense, a revolutionary power, and that the public’s mistake is to believe it amenable to Democratic reason.

The question is whether Democrats have the leadership to bring us what we deserve.

One of the big questions in The Conscience of a Liberal is: what changed between the 1950′s and now, such that income inequality has increased so drastically? One of the answers is that unions have become substantially weaker, but then there’s also the question of how CEO pay grew so remarkably.

There’s an interesting point in Krugman’s answer. Let’s first try the free-market answer, which Krugman rejects. The idea here would be that there’s a market for CEOs, and that CEOs will go to whoever values them the most. So in some sense the CEOs are “worth” several hundred million dollars.

A more plausible answer rests on the fact that CEOs control their boards of directors, who decide what their salaries are. And then there’s a social norm: CEOs used to keep their salaries in check, out of fear that the public — and their unions — would grow outraged.

That leaves, in part, a social-norm question: why is the public less outraged than it used to be?

What I find interesting about this is that it actually gives insight into market pricing more generally. How, for instance, did it happen that it became perfectly sensible to charge $4 for a cup of coffee? Sure, it’s espresso, and there’s some milk, and a bit of labor time, but it’s still a cup of coffee. And 30 years ago, it would have been considered ridiculous to charge that much. Once Starbucks set the standard, coffeeshops nationwide followed.

Shifting the question to social norms is possibly more vague than relying on supply and demand, but it’s likely to be more fulfilling and deeper in the long run. For one thing, depending on what you mean by “free market,” you’ll still need to answer the question of why prices change. The Econ 101 assumption about the free market is that there are infinitely many sellers and infinitely many buyers, so that no one seller or buyer has any appreciable impact on the price of the good. If that’s the case, then how do prices ever change? Why does inflation happen? (Credit Sam Bowles’s magisterial microeconomics textbook for that realization.) You’re obligated, then, to weaken the price-taking assumption. You need to explain how prices change. You can maybe look for external shocks, like a drought in South America that kills lots of coffee trees. But does that really explain why a cup of coffee is now consistently in the $4 range? The marginal cost of the inputs (coffee beans, milk, coffeeshop employees) has almost surely not risen that much. Something has changed, and “social norms” seems as good a label as any for that something.

This may lead to more particularity than to high theory, which may not be a bad thing. If you want to explain high CEO pay, you need to hunt down the norms and institutions governing that pay. Unions will be part of that story. Unions will not be a part of the coffee-price story; for that you’ll maybe need to look at the spillover effects of marquis brands, like Starbucks, onto nearby coffeeshops. Burying your nose in the details of the world seems like a valuable pursuit.

Note also that the Starbucks story, and many others, will turn out to be stories about trademark law, and more generally monopolistic competition. No company wants to be competing in a market for undifferentiated commodities; all companies want to segment their brand such that they pretty well own the market. Coke and Pepsi advertise mercilessly to make you think that there’s a big difference between their products. So do Post Raisin Bran and Kellogg’s Raisin Bran. The last thing these companies want is to be competing in a market for “Cola-flavored soda water” or “raisin-spiked bran flakes.” The fewer practical competitors they have, the more they can charge.

Part of the story that we should have been told in Econ 101, but weren’t, is that all the companies that are ostensibly fighting it out to sell commodity widgets are fighting tooth and nail, at the same time, to make you think that Company X’s widget is different from Company Y’s, and to encourage you to develop a brand preference for Company X’s.

Setting prices for products is a substantially more interesting process than Econ 101 ever allowed. I hope that focusing on norms and institutions helps give a richer story to price-formation, and helps draw in people from a lot of other disciplines (psychology, sociology) who wouldn’t have realized that their takes on the world could inform an economic picture.

…ever since I read this week’s New Yorker.

Article included below.

(more…)

Just a tiny thought, inspired by a puff piece about Wal-Mart: any individual store, such as Wal-Mart, may oppose insuring its employees, but that’s only because it suffers a competitive disadvantage if it does. If every one of its competitors were likewise required to insure its employees, I suspect that Wal-Mart would object much less.

There’s a race to the bottom, in this way, on the benefits that Wal-Mart and its competitors offer to their employees. Which is exactly the opposite situation to that experienced at higher-paying companies: they often fight one another to offer cushier benefits to draw more employees.

The way to stop the race to the bottom is to establish a floor above which everyone has to stay.

Attention conservation notice: 1,500 words, trying to put together in a messy way all my guesses about the subprime collapse, mixed in with the little bit I know about economics and statistics. Likely to be valuable only to those who enjoy watching elephants draw with crayons.

Paper Of The Moment is the above-named, by Brad DeLong et al. I picked up the recommendation via Richard Thaler‘s excellent and very readable paper on “The Law of One Price in Financial Markets”. Thaler has made something of a career out of exploring — and poking good fun at — what economics considers paradoxical or anomalous. The big anomaly in “One Price” is that sometimes financial markets get into a weird state where the market assigns facially ridiculous prices to securities and holds them there for a long while. Shares of 3Com, for instance, were for more than a month being assigned a negative price. The big law in economics is that under reasonable assumptions about market structure, this can’t happen, or at least not for long — and the more fluid the capital market is, the more quickly this should disappear. The story goes that rational people will step in when they see a systematic irrationality and profit from it. So long as irrationality persists, where the price of a stock is different from what the fundamentals say it should be, rational people will move in and make quick money. They will buy shares of 3Com at the implicit negative price, for instance, then wait a while for the market to correct itself, then sell and make a quick profit. This will continue until all the irrationalities have been driven out of the market.

Why does that fail? Thaler goes through a few possibilities, then finds cases where none of those possibilities hold and yet the market’s irrationality continues.

Hence we come to DeLong’s paper. The abstract is clear enough:

We present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders’ beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than do rational investors. The model sheds light on a number of financial anomalies, including the excess volatility of asset prices, the mean reversion of stock returns, the underpricing of closed end mutual funds, and the Mehra-Prescott equity premium puzzle.

I’m looking forward to digging into it.

As I’m sure a lot of people are doing right now, I’m trying to get my head around the subprime bubble. Again assuming a lot of different stories, the bubble can be made to look paradoxical. Why were Moody’s et al. asleep at the switch? (“Standard and Poors cut the credit rating of ACA Financial Guaranty Corp from AAA (the best possible) to CCC (just about the worst kind of junk) in one move.”) And does their failure here say anything broader about market irrationality? A lot rides on the safety grade that the ratings agencies give to individual mortgages. Surely it’s unreasonable to expect any single institution to handle this properly; normally we hope for an entire market to weigh in on something like this in its collective, Central Limit Theoremy way. So first off: why do we rely on Moody’s, S&P and a few others to do this big job?

I assume there’s some good reason for offloading risk measurement onto them. Assuming that we’re stuck with a few large institutional risk measurers, smart regulation would seem to be vital; we need the government here because, for whatever reason, we’ve decided that the market itself can’t measure this kind of risk.

Financial companies are sitting on the top of a giant pile of abstractions, but Cosma has convinced me that there’s nothing particularly concrete about the lowest levels of this pile of economic objects: much as we might wish for it, the phrase “the value of a house” is itself a massive abstraction, resting on the same shifting sands of supply and demand. Besides: if you actually had some surefire way to measure “the value of a house” that didn’t involve just asking the market what it would pay for that house, you could make virtually unlimited money (again assuming some things about how long it takes the market to realize the error of its ways and price the house in line with your understanding, how much it costs you to hold onto the house in the meantime, and how willing banks are to loan you money). So while there does seem to be a problem of insane abstraction, it’s not clear that we can get rid of that abstraction by (somehow) forcing companies to buy and sell only mortgages rather than collateralized debt obligations.

If I’m not mistaken, my picture of the whole problem took a turn for the surreal today, upon reading a fascinating interview with a hedge-fund manager (via Chris Young, via Jason Kottke, via snarkmarket, via Points of Note). Arbitrageurs execute many trades automatically — algorithmically. They do this to subtract the human element of fear and panic from their trades: while everyone else is freaking out, goes the story, your algorithm is patiently examining fundamentals and buying securities that the market has underpriced; it’s snapping up 3Com when the market says the stock has a negative value, for instance. Again, this is supposed to lead to greater efficiency: once all the irrationality has been swept out of the market, what will be left are stock prices that reflect the true value of the underlying asset.

But again, this seems to rest on some assumptions about many independent economic actors all moving in an uncoordinated way. And the point of the interview with a hedge-fund manager is that they’re not moving in an uncoordinated way: when you open up the black boxes, all the algorithms are basically behaving the same way, because the people who programmed them all share basically the same assumptions about the world, all got their MBAs from the University of Chicago or CMU or Harvard, etc.

So then one quick question is: how has market volatility changed over time? Have robot traders moving in lockstep made the market more volatile? Doesn’t the Efficient Market Hypothesis (our story about the disappearing arbitrage opportunities, above) imply something about decreasing volatility? If the market’s ruthless discipline is always forcing the prices of assets to their true values, wouldn’t you expect those true values not to change very rapidly? My suspicion is that a truly rational market wouldn’t be a very volatile one. I recall reading somewhere (probably in “Market force, ecology, and evolution”) that price shifts are quantifiably far more volatile than the new information in the market would justify.

There’s a curious algorithmic question around the black boxes, too: why weren’t the various interacting black boxes prepared for the possibility of other black boxes moving in the same way? The study of how to behave in the presence of other agents who are pursuing their own ends is called game theory, and some of the world’s smartest people have been working on it for at least 64 years. Or were the black boxes indeed modeling the other agents, just very poorly? Economics is like any other mathematics-based discipline: garbage in, garbage out. If you don’t model others properly, don’t blame the math when you fail to predict how they’ll act.

I’d love to dig into those black boxes. One wonders if this is another case of people designing exceedingly complex models when something simpler but more robust in the face of an uncertain world would have done a better job.

I’m hoping to get some clarity about the broader market by understanding the subprime collapse; I think it’ll be very instructive. The collapse seems to have laid bare how a lot of the parts interact: government regulators, hedge-fund traders, the auditors who are supposed to be watching over us while we sleep, the ostensible rationality of the actors, and the ostensible super-rationality of the computers.

Kind of a cool article about Paul and Patricia Churchland, neuroscientists and philosophers. (Cached.) It’s a bit shallow, and makes me want to go read the Churchlands themselves; Cosma Shalizi recommended Patricia Churchland’s The Computational Brain a while back in an unrelated context.

The speculative part at the end, about the possibility of brains merging, seems to ignore something obvious: aren’t brains connected by newspapers, blogs and suchlike? The mechanism could very well be similar to propagation across neurons: you absorb some idea that you read somewhere, and you read it from a few other places. Each place where you read it has a certain reputation attached. When the total reputation of a given idea exceeds a critical threshold, you accept it. You then broadcast the same idea to everyone you know; they repeat the same model of propagation. This would then be similar to your basic McCulloch-Pitts neuron.

Granted, I know next to nothing about neuroscience, and indeed Cosma recommended the Churchland book in response to a vaguely-worded question similar to my idea above. I’ll check out her book and see if anything cool comes of it.

Speaking of my difficulty giving authors a second chance after a bad first impression, I really hated Edmund Wilson’s To The Finland Station. But here’s a dude from The Nation declaring that

just as [Art] Tatum’s multivolume The Complete Pablo Solo Masterpieces is one of the summits of piano jazz, the Library of America’s new two-volume issue of Wilson’s essays and reviews from the 1920s, ’30s and ’40s is one of the summits of twentieth-century literary criticism.

(via Cosma Shalizi’s del.icio.us feed; hyperlinks mine)

P.S.: The whole series of which The The Finland Station is a part is designed beautifully. In fact, I’m pretty sure it was the design more than the subject that initially drew me to To The Finland Station. The cover is beautiful, but it doesn’t begin to suggest the deliciousness of holding the book in your hand and turning the pages. Sometimes book designers just get it right (like those who redid Jan Tschichold’s Penguin Classics).

I wish people would remember, on Martin Luther King Day, that he was in many ways socially unacceptable. Like revolutionaries of many stripes, he was widely hated in his time; he was, after all, assassinated. This was a man who declared that the war in Vietnam was inseparable from the struggle for civil rights; that as a Christian, he was commanded to love his enemy as much as he loves his friend; and that a revolution would be required to build our society on love of our fellow-men rather than love of wealth.

Jason Smith excerpted one of the most powerful parts of King’s Vietnam speech a couple years ago. The whole speech is worth listening to.

I tried reading Paradise Lost some years ago, and eventually abandoned the undertaking. This is the book about which Samuel Johnson famously said that “None ever wished it longer than it is.” (I can’t find the source for that quote; if anyone knows it, please let me know.) It’s one of those books that I felt like a rube for disliking.

But Milton is far more than Paradise Lost. In particular, my faint historical understanding says that he was an important part of the Puritan Revolution in England, for instance, and that among many other things he was a politician: Areopagitica was just one of his political tracts.

Or so I understand. I know very little about Milton. I have this problem, where if I dislike my first taste of an author, it’s extremely unlikely that I’ll come back for seconds — whereas if the first was great and the second, third, and fourth were only so-so, I’ll come back for fifths and sixths. That is, first impressions really matter for me.

But I’m willing to give Milton a second try. Does anyone know him well enough to tour me through his work?

P.S.: Ah. The Johnson quote is from the “Life of Milton”, which appears to be an essay within a larger work either entitled Lives of the Poets or Lives of the English Poets and a Criticism of their Work. Here’s the quote in context:

Here is a full display of the united force of study and genius; of a great accumulation of materials, with judgement to digest and fancy to combine them: Milton was able to select from nature or from story, from ancient fable or from modern science, whatever could illustrate or adorn his thoughts. An accumulation of knowledge impregnated his mind, fermented by study and exalted by imagination.

It has been therefore said without an indecent hyperbole by one of his encomiasts, that in reading Paradise Lost we read a book of universal knowledge.

But original deficience cannot be supplied. The want of human interest is always felt. Paradise Lost is one of the books which the reader admires and lays down, and forgets to take up again. None ever wished it longer than it is. Its perusal is a duty rather than a pleasure. We read Milton for instruction, retire harassed and overburdened, and look elsewhere for recreation; we desert our master, and seek for companions.

The danger in inviting someone like Eddie Izzard onto The Daily Show is that he’s going to try to out-funny you. So you have to keep a tight rein on him. But then why bait him into a monologue about American history when his standup routines are all free-associations off world history? Don’t make no sense.

…but the thrill has very much gone away. I was in the dentist’s office yesterday, having foolishly left the book I’m reading at home, so I thumbed through the latest SciAm. It’s been maybe 15 years since I’ve read it. Back then, it was a respectable publication — somewhere between Discover and Nature. Sadly, those days are long past.

In support, I cite only an article called “Evonomics,” which I won’t deign to link to directly. Instead, I’ll link to a Google search where “Evonomics” comes up #1. If you can make any sense of that article, and if it is anything other than a sequence of non sequiturs, let me know.

As a friend puts it, SciAm has “gone all Discover.”