Protecting heterogeneous activity

Freedom is the ability to allocate your resources differently.  The majority allocates their resources in one direction...and you can choose to allocate your resources in a different direction. 

The perfect example is the story of Noah's ark.  Does it bother you that the story is fictitious?  It really shouldn't.  As the story goes...God informs Noah that he's going to destroy the world with a flood.  This information provides Noah with the incentive to use his resources to build a giant boat.  Even though he shares his partial knowledge with others...he's the only one who acts on it.  Everybody else laughs at him because they really doubt the business model.  The majority believes one thing and an extremely small minority believes another thing.  Both groups can't be right.  And in this case, neither can both groups be wrong.  Either the world will be destroyed by a flood...or it won't be.  Despite the fact that each group is certain that the other is wrong...there's no attempt to restrict each other's freedom.  Each group can allocate their resources differently.  The majority takes one path...and the minority takes another path.  It's a good thing that Noah's freedom was not restricted because it turns out that he chose the right path. 

The moral of the story is that heterogeneous activity is essential.  Because the future is uncertain...we should hedge our bets by protecting individual freedom.  Doing so maximizes the variety of economic activity which maximizes discovery which maximizes progress.
 

More here, interesting throughout. Isn't this a great description of Silicon Valley? Worth remembering the next time someone is ready to publish another piece of outrage when some wacky startup like Yo raises a million dollars in financing or someone raises over $50,000 on Kickstarter to make potato salad (the latter is hilarious to me and not reason for mass outrage; consider it either as a mass Duchampian art installation or as an economic transfer from the gullible to the clever).

Cohen wants you to believe that your immediate intuition, sharing is caring, is the correct one.  But in reality, the correct intuition is that recognizing and respecting ownership results in far greater abundance of the things that we value enough to sacrifice for.  Protecting ownership incentivizes people to choose the paths that others have positively valuated or might positively valuate.  If we, as consumers, want a greater abundance of apples...then we have to reward the producers who've chosen to grow apples.  This ties into the idea of value signals...

Here's a summary...

  1. Sylvia discovers a bunch of apples (risk)
  2. Others are willing to pay for her apples (valuation)
  3. If the value signal is bright enough, others will start supplying apples (incentive)
  4. The result is the optimum supply of apples (abundance)
     

It's a long post that delves into many other topics including a discussion of war and its impact on government spending and whether that's an optimal outcome. But what struck a chord with me was the importance of a lack of centralized funding allocation structure in Silicon Valley, and why that's important to protecting heterogeneous activity within the technology sector. It's one of the secrets to the generative nature of this sector.

Pragmatarianism is one of the blogs I recently discovered that made it into my browser toolbar. I'll point you to one last passage from this same post.

Michael Michaud is the author of Contact with Alien Civilizations.  He's under the impression that chances are pretty good that alien visitors wouldn't have discovered that progress depends on freedom.  It shouldn't be a surprise though given that he himself hasn't made this discovery. 

As I've argued in a few blog entries...

...contrary to Michaud, I believe that it's highly unlikely that extraterrestrial visitors wouldn't have figured out that progress depends on discovery...and discovery depends on doing things differently.  You're really not going to get different results by doing the exact same thing over and over.  Thinking otherwise is, according to Einstein, insane. 

Regarding Michaud's specific example...as history clearly proves...a certain amount of progress can be made without understanding that progress depends on freedom.  This is because it's extremely difficult to completely eradicate freedom.  But if Hitler had successfully managed to conquer the world...would the rate of progress have increased or decreased?  The rate of progress would have plummeted because far fewer people would have been free to allocate their resources differently. 
 

Could it be that the premise of almost every movie about our first encounter with extraterrestrial intelligence is flawed? Could the difficulty of traveling through space be an effective filter on war-mongering alien races, and should we instead presume that any civilization enlightened enough to travel light years across space to reach us would understand more than anyone the value of leaving us humans our freedom?

I'd love to see more utopic science fiction movies that use technology as a source of improvements in life. Not all roads have to lead to Skynet, and most probably don't.

The economics of South Korean TV

Fascinating article on the unabashed leveraging of product placement to finance the ever popular South Korean TV dramas.

While details of product placement deals are not disclosed, industry sources say exposure on popular shows costs at least 100 million won ($96,000) and much more for a hit drama featuring A-list stars with a regional following.

The biggest spender of all is Samsung — the world’s largest technology firm by revenue — which sponsors around two thirds of all domestically-produced soap operas, according to Kim Si-hyun, head of 153 Production, a major PPL agency in Seoul.

“It’s a full package, meaning all visible consumer electronics like smartphones, computers, cameras, air conditioners, TVs and refrigerators are Samsung products, from beginning to end,” Kim said.

Commodification of the dramas begins at the earliest stage of production, once a script writer has produced a basic story line listing characters and their professions.

The workplaces that will feature in the show are offered for sale to real companies looking for exposure.

According to Kim from 153 Production, the workplace of a lead character can go for between 500 million and 1 billion won.

That was how the female lead in “The Heirs” — a teenage romance that was a huge hit in Asia last year — ended up working for Mango Six.
 

More of note within, including just how effective such placement can be.

The South Korean TV industry is a machine. In the time a US studio takes to make one 24 episode season of television, South Korea will have produced two or more 30 to 50 hour K-dramas. Some of that relies on some brutal filming schedules as I've heard from some of my film school classmates that have worked in Korea, but it also comes from a heavy reliance on story archetypes, simplified lighting setups, and a stable of goto actors that cut down casting lead times. It's a formula, but thus far it hasn't exhausted its millions of devoted viewers throughout Asia.

Miscellany

  1. Fewer Harvard MBA's took jobs in finance this year than last. That might be a good sign for the stock market according to one theory.
  2. Don't like the idea of the Miami Heat's Big Three taking pay cuts to lure in Carmelo Anthony to form a Big Four super team? Perhaps the solution is a radical one: remove the ceiling on individual player salaries. There is no small measure of poetic justice that the a team in which its top three stars took a discounted salary to allow their owner to sign other strong players (the Spurs) just defeated a team in which the top three stars took the maximum salary possible, leaving the rest of their roster very undermanned (the Heat).
  3. We're living in an art market boom. I'm saving up for my first Jeff Koons'. I may have to settle for stealing a kleenex after he blows his nose in it.
  4. The wonderful economic test beds that are multiplayer video games. “A multiplayer game environment is a dream come true for an economist. Because here you have an economy where you don't need statistics. And elaborate statistics is what you use when you don't know everything, you're not omniscient, and you need to use something in order to gain feeling as to what is happening to prices, what is happening to quantities, what's happening to investments, and so on and so forth. But in a video game world, all the data are there. It's like being God, who has access to everything and to what every member of the social economy is doing.”

Detroit's urban decay as seen on Google Street View

A Tumblr dedicated to showing the decay of Detroit over just a short period of time, from 2009 to 2013, through a series of Google Street View photos of the same address. 

James Griffioen refers to houses that have been reclaimed by nature as feral houses.

I love Google Street View's Time Machine capability, though this is a more poignant view through its eyes. We only have a handful of years with which to look back now, but future generations will have such a precise visual and textual record of so much that it may change their understanding of human history. Think about how much of history we're taught today feels just like narrative. Think of how differently we conceive of historical figures whom we can see in video and photos as compared to those who we only see in paintings.

There's a version of Wall-E to be made in which the robot is replaced by a self-driving Google Maps Street View car,  still cruising up and down streets of abandoned streets documenting the slow decay of civilization, humanity having long since fled to outer space.

[via Web Urbanist]

Why the internet is all cats and lists

The Allen-Alchian theorem explains why places with high-quality produce (Allen and Alchian had in mind apples in Seattle, which is where apples come from in the US) nevertheless do not always get to consume that same high quality (they pointed to the market for apples in New York city, where no apples grow) because of the relative costs faced by consumers in each case (for New York consumers, a high-quality apple, once you account for transportation costs, was actually relatively cheaper than a low-quality apple compared to relative prices in Seattle). Hence the market sent the high-quality apples to New York.

You’re still with me? It’s all about relative costs. When you move something, or impose any fixed cost, the higher-quality item always wins, because it now has a lower relative cost compared to the lower-quality item.

The interesting idea is that this also applies in reverse – namely when we remove a fixed cost. The internet does this: it removes a cost of transport, and it does so equally for high quality and low quality content. Following the Allen-Alchian theorem, this should mean the opposite. Low-quality items are now relatively cheaper and high-quality items are now relatively more expensive. This idea was first explained by Tyler Cowen, but the upshot is that the internet is made of cats.
 

Intriguing. Combine the Allen-Alchian theorem with the death of homepages and the rise of social networks consisting of short bits of text like status updates and tweets and you can probably explain much of why the internet is made up of cats, lists, and linkbait/clickbait.

Of course, we're talking about the average. For those of you with taste, the internet has enabled access to some of the great works of high culture in ways my childhood self couldn't have imagined.

Liquidation preference

If I put a hundred million dollars into Snapchat today at a 3 billion dollar valuation, three things can happen:

Scenario A – BIG WIN

At some point in the future, Snapchat IPOs or gets purchased for more than 3 billion dollars. I reap the rewards through an appreciation of my stock price.  That’s what happened to everyone who invested during Facebook’s long run up.

Scenario B – SMALL WIN

Snapchat gets bought or IPOs for less than 3 billion dollars, but more than I invested in the company.  I’d actually do just fine. It’s not the result I was hoping for, but it’s actually not bad.  I get a hundred percent of my money back (assuming I’m the most senior investor) plus I also earned interest on my money every year.  While the interest rates vary, often they are as high as 8%.  So basically, my investment in Snapchat looks more like an interest bearing bond than anything else.

Scenario C – LOSS

It goes bankrupt or sells for less than the amount I invested in the company.  I lose my money along with everyone else.

***

And now things start to look a lot more sane from an investment perspective.  With acquisition offers already rumored around 3 billion dollars from Facebook, it’s hard to imagine a world in which Snapchat dies so dramatically such that that the acquisition value dropped below a hundred million dollars.   I won’t say it can’t happen – but that’s effectively the bet I’m making as a late stage investor.

So now you can see why these valuations get so high.  It’s because the risk profile of the last money in is actually pretty low.  They can afford to get into these bidding wars because they have the confidence that they are likely to at least get their money back, and yet they still get upside exposure if things go extremely well.
 

Good explanation of liquidation preferences and how they influence technology investors' tolerance for high valuations. Generally, if you can play any financial game where your downside is getting your money back and your upside is many times your investment, that's a good game to play. Your average retail investor is shut out of that game, however.

Economics of dystopian landscapes

In the budget of a video game or a movie, writing is a very small wedge of the pie. The money all goes into other wedges. In both games and movies the production of visuals is very expensive, and the people responsible for creating those visuals hold sway in proportion to their share of the budget.

I hope I won’t come off as unduly cynical if I say that such people (or, barring that, their paymasters) are looking for the biggest possible bang for the buck. And it is much easier and cheaper to take the existing visual environment and degrade it than it is to create a new vision of the future from whole cloth. That’s why New York keeps getting destroyed in movies: it’s relatively easy to take an iconic structure like the Empire State Building or the Statue of Liberty and knock it over than it is to design a future environment from scratch. A few weeks ago I think I actually groaned out loud when I was watching OBLIVION and saw the wrecked Statue of Liberty sticking out of the ground. The same movie makes repeated use of a degraded version of the Empire State Building’s observation deck. If you view that in strictly economic terms–which is how studio executives think–this is an example of leveraging a set of expensive and carefully thought-out design decisions that were made in 1930 by the ESB’s architects and using them to create a compelling visual environment, for minimal budget, of a future world.
 

From an interview with Neal Stephenson.

That's an interesting theory about why futuristic landscapes in sci-fi movies are so often degraded versions of existing landscapes, but I'm skeptical. It seems just as likely to me that showing the wreckage of a recognizable landmark like the Statue of Liberty gives the audience a faux-realistic through line from the contemporary age to the date the movie is set in. The aging of the shared cultural landmark serves as a form of visual carbon dating, removing the need to rely on showing a specific year in a text preamble or overlay.

Any visual effects folks out there who know if Stephenson's theory is true, feel free to leave a comment.

Piketty and his critics

Nate Silver explains why we should be skeptical of both Piketty and his skeptics.

Piketty’s data sets are very detailed, and they aggregate data from many original sources. For instance, the data Piketty and the economist Gabriel Zucman compiled on wealth inequality in the United Kingdom for their paper “Capital is Back: Wealth-Income Ratios in Rich Countries, 1700-2010″ contains about 220 data series for the U.K. alone which are hard-coded into their spreadsheet. These data series are compiled from a wide array of original sources, which are reasonably well documented in the spreadsheet.

This type of data-collection exercise — many different data series over many different years, compiled from many countries and many sources — offers many opportunities for error. Part of the reason Piketty’s efforts are potentially valuable is because data on wealth inequality is lacking. But that also means his numbers will not have received as much scrutiny as other data sets.

...

What error rate is acceptable? The right answer is probably not “zero.” If researchers kept scrubbing data until it were perfect, they’d never have time for analysis. There comes a point of diminishing returns; that Hack Wilson had 191 RBIs during the 1930 season rather than 190 ought not have a material impact on any analysis of baseball player performance. At other times, entire articles or analyses or theories or paradigms are developed on the basis of deeply flawed data.

I don’t know where Piketty sits on this spectrum. However, I think Giles (and some of the commentary surrounding his work) could do a better job of describing Piketty’s error rate relative to the overall volume of data that was examined. If Giles scrutinized all of Piketty’s data and found a handful of errors, that would be very different from taking a small subsample of that data and finding it rife with mistakes.
 

It's striking how much discussion of Piketty's book has happened already. As Silver notes, this is peer review happening live and in the open.

That makes the book itself, which sits in my Kindle, already somewhat dated. I'd love for the Kindle or some other ebook service to evolve to be a platform for living books. You could see the original text, but the book itself would accumulate references and edits and notes from both the author and readers.

When I think of books as a social platform, I don't think of Goodreads, I think of living texts. That would be truly exciting, and the first book platform to support that would achieve some serious network effects. It's odd that in the age of the ever-living web page that our e-books are still so static and rigid in form. I'm still not sure why I can't leave notes on passages in books for friends and followers to discover when they open the text in their e-reader.