Friday, September 29, 2006


I have blogged on how important it is that impersonal mechanisms replace relationship-based transactions. Tim Harford's article in Forbes argues that our increasing standards of living are the result of replacing personal relationships with impersonal networks of producers, which rely on formal mechanisms of enforcement (the police and courts).

Formal or institutionalized trust sounds cold and unpleasant, but it is just as useful as the personal variety, perhaps more so. Our parents might have enjoyed a line of credit from the friendly owner of the local grocery store. We don't get the same personal service, but we get something much more useful--we can run a line of credit pretty much anywhere, from a hotel in Shanghai to a diner in Memphis to a supermarket in Berlin.

Those places don't actually trust us enough to lend us money, but Visa or American Express will, and that will do just as well.

This allows for greater division of labor- with an entire industry emerging just to track the credit histories of Americans- and what Böhm-Bawerk called roundabout means of production. From the article about Böhm-Bawerk

But Böhm-Bawerk's third reason—the "technical superiority of present over future goods"—was more controversial and harder to understand. Production, he noted, is "round-about," meaning that it takes time. It uses capital, which is produced, to transform nonproduced factors of production—such as land and labor—into output. Roundabout production methods mean that the same amount of input can yield a greater output.

Böhm-Bawerk reasoned that the net return to capital was the result of the greater value produced by roundaboutness. An example helps illustrate the point. As the leader of a primitive fishing village, you are able to send out the townspeople to catch enough fish, with their bare hands, to ensure the village's survival for one day. But if you forgo consumption of fish for one day and use that labor to produce nets, hooks, and lines—capital—each fisherman can catch more fish the following day and the days thereafter. Capital is productive.

Thus Harford continues,

Seabright's book, The Company of Strangers, makes this point with reference to the author's shirt: "The cotton was grown in India, from seeds developed in the United States; the artificial fiber in the thread comes from Portugal and the material in the dyes from at least six other countries; the collar linings come from Brazil, and the machinery for the weaving, cutting and sewing from Germany; the shirt itself was made up in Malaysia." It's just a shirt, and even then it is far too complex a product to be facilitated merely by a network of people who know and trust each other personally.

Yet in a place like Somalia, personal trust is all that is available. It is a war-torn country in the horn of Africa which lacks anything we would recognize as a government, and entrepreneurs have to rely on much more local, primitive and less effective forms of trust. Somalis often rely on clans to settle disputes. That can work well if you're arguing with someone from the same clan, but cross-clan disputes are often messy and unfairly resolved. (Anybody who thought Somalia's poverty had to do with a lack of natural resources might take a look at resource-rich Nigeria, a country which is nearly as poor, and then at resource-poor Singapore, one of the richest countries in the world.)

That is a reminder that institutionalized trust might be even better than the touchy-feely type, which simply isn't available to everyone. Personal trust can be benign, but it can also be embodied by the old-school-tie network, political patronage or a criminal mafia.

"Factors which increase trust in society are not necessarily a good thing, because they can increase the bonds between gang members, whose main economic success comes from extorting or coercing other people," explains Seabright.

Trust can also be denied to ethnic minorities: the credit card companies may not be entirely blind to race, sex, color and creed, but I am willing to bet they are much closer than the local bank manager in the 1950s.

Economists Kerwin Charles and Patrick Kline have tried to put their fingers on the arbitrariness of personalized trust by looking at car pooling and race. They argue that car pooling is a good measure of trust: can you trust your fellow travelers not to be late, drive badly or murder you and leave your body in a ditch?

Charles and Kline predict that, for example, African-Americans will find it easier to car pool if they live in an area with lots of other African-Americans. The statistics seem to bear them out. Trust matters, and if you live in an area full of people who look like you, you will enjoy more of it. Perhaps the institutionalized version of trust is not so bad after all.

Meanwhile, experimental research by economists Ed Glaeser, David Laibson and Bruce Sacerdote shows that the way people trust each other simply isn't fair. The researchers organized a "trust game." Two students met ahead of time to size each other up socially, then they played the game. The first student could give up to fifteen dollars to the second student; the experimenters doubled the gift, and then the second student had to decide how much to give back.

The game is a measure of trust because the first player has the power to double the size of the pie, but only at the risk of getting nothing back from the second player. What was striking is how much social factors such as race and status encouraged the second player to be trustworthy.

"If the first player has a sexual partner, the second player will send back 17% more than they otherwise would have done," observes David Laibson, a professor at Harvard. Since the second player doesn't know about the existence of a boyfriend or girlfriend, Professor Laibson thinks that it's a proxy for charm, status and social capacity.

The second student will also send more money if the first student drinks more beer--suggesting sociability--or if he or she is of the same race. Pure status matters too. Students who have fathers with a college degree, or who don't have to work to fund their studies, receive significantly more money.

"And America is supposed to be a classless society," comments Professor Laibson. Trust matters, but if you really want to bask in its effects, make sure you start at the top of the heap.

That was about the USA, where the original sin was slavery. What about India? How much of political activity in India is about getting people to gang up on those of another caste or religion? And how much of our under-development is because of our inability to put that past behind us?

Wednesday, September 27, 2006

Hot Rhetoric, Cool Facts

Carl Zimmer shares with us a graph depicting global fluctuations in temperature over the past 1 million years. Bjron Lomborg wearily kicks aside Al Gore's new movie. An article in the American Scientist argues that the Gulf stream is not the reason winters are so much warmer on the West Coast of Europe than on the East Coast of North America.
More: Not only is the relative warmth of Western Europe (compared to Eastern USA) not due to the Gulf Stream, this letter from Carl Wunsch of MIT suggests that the Gulf Stream itself is in no danger of being shut down.

Tuesday, September 26, 2006

Some articles on risk

Here are John Kay's article on how we tend to worry about the most salient risks, rather than the most relevant ones, and how that explains why philanthropy beats politics, and an older article by Tim Harford on what to insure.

Economic psychologists have researched how we respond to risk, and discovered that we find it impossible to put our losses into context.

I should recognise that the value of my home fluctuates every hour by more than the value of the mobile phone I am so worried about losing.

It will not be the house price, but the theft of the phone that upsets me. And it is the risk of being upset that mobile phone companies will remind me about next time I am in one of their shops.

That, of course, leads to these pieces by Robert Shiller on livelihood insurance and insurance for house prices.
On livelihood insurance

In my 2003 book, New Financial Order: Risk in the 21st Century, I proposed a different idea, which I called “livelihood insurance.” As the name implies, livelihood insurance is designed to provide more than just a brief respite or a subsidy for retraining. It is aimed at dealing with long-term changes in the labor market, rather than assuring temporary wage levels. It would also rely on the market rather than a government program.

With livelihood insurance, a private insurer would pay a stream of income to a policyholder if an index of average income in the insured person’s occupation and region declines substantially. Moreover, this income stream would continue for as long as the index stays down, not just for a couple of years (or any other arbitrary period). In other words, this insurance policy would protect against lifetime income risks.

One reason why government-run wage insurance programs must have limited duration is that they involve so-called “moral hazard”: the risk that people will get lazy or would take easier, lower-paying jobs and continue to collect insurance that pays them the wage of a more demanding occupation. But this would not apply to livelihood insurance, because its benefits are tied to the rise and fall of income indices, which are beyond the control of individuals.

Livelihood insurance would also have another advantage. Since the premium would be determined by the market, it would be higher in occupations that the market believes to be in danger from outsourcing or technical change. This, in turn, would give workers a tangible warning and an incentive to anticipate job losses before they occur.

On house prices

In the last cycle of real estate busts, real (inflation-corrected) home prices fell 46% in London in 1988-95, 41% in Los Angeles in 1989-1997, 43% in Paris in 1991-98, 67% in Moscow in 1993-97, and 38% in Shanghai in 1995-1999. All of these drops were eventually reversed, and all of these markets have boomed recently. But this does not guarantee that future drops will have a similar outcome. On the contrary, the future real value of our homes is fundamentally uncertain.


A liquid, cash-settled futures market that is based on an index of home prices in a city would enable a homeowner living there to sell in a futures market to protect himself.

If home prices fall sharply in that city, the drop in the value of the home would be offset by an increase in the value of the futures contract. That is how advanced risk management works, as financial professionals know. But the tools needed to hedge such risks should be made available to everyone.

Attempts to set up derivatives markets for real estate have -- so far -- all met with only limited success. In May 2003, Goldman, Sachs & Co. began offering cash-settled covered warrants on house prices in the United Kingdom, based on the Halifax House Price Index and traded on the London Stock Exchange. In October 2004, began offering “hedgelets” on real estate prices in US cities – contracts that pay out if the rate of increase in home prices based on the OFHEO Home Price Index falls within a pre-specified range.

My former student Allan Weiss and I have been campaigning since 1990 for better risk management institutions for real estate. In 1999, we co-founded a firm, Macro Securities Research, LLC, to promote the development of such institutions, working with the American Stock Exchange to create securities that would allow people to manage real estate as well as other risks.

These will be long-term securities that pay regular dividends, like stocks, whose value is tied – either positively or negatively ­– to a real estate price index. Early this month, the Chicago Mercantile Exchange announced that it will also work with us to explore the development of futures markets in US metropolitan-area home prices. We hope to facilitate the creation of such markets in other countries as well.

Because even many financially sophisticated homeowners will find direct participation in derivative markets too daunting, the next stage in the development of real estate risk management will be to create suitable retail products. For example, the derivative markets should create an environment that encourages insurers to develop home equity insurance, which insures homeowners not just against a bust but also against drops in the market value of the home. Such insurance ­should be attractive to homeowners if it is offered as an add-on to their existing insurance policies.

Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home’s value drops. Such products should appeal to homebuyers when the mortgage is first issued. Insurance companies and mortgage companies ought to be willing to offer such products if they can hedge the home-price risks in liquid derivative markets.

Monday, September 25, 2006

Clean hands

This article by the Freakonomics team, in the New York Times, on a campaign to get doctors at the Cedars-Sinai Medical Center to wash their hands, has some startling passages.

In its 2000 report “To Err Is Human,” the Institute of Medicine estimated that anywhere from 44,000 to 98,000 Americans die each year because of hospital errors — more deaths than from either motor-vehicle crashes or breast cancer — and that one of the leading errors was the spread of bacterial infections.

While it is now well established that germs cause illness, this wasn’t always known to be true. In 1847, the Hungarian physician Ignaz Semmelweis was working in a Viennese maternity hospital with two separate clinics. In one clinic, babies were delivered by physicians; in the other, by midwives. The mortality rate in the doctors’ clinic was nearly triple the rate in the midwives’ clinic. Why the huge discrepancy? The doctors, it turned out, often came to deliveries straight from the autopsy ward, promptly infecting mother and child with whatever germs their most recent cadaver happened to carry. Once Semmelweis had these doctors wash their hands with an antiseptic solution, the mortality rate plummeted.

But Semmelweis’s mandate, as crucial and obvious as it now seems, has proved devilishly hard to enforce. A multitude of medical studies have shown that hospital personnel wash or disinfect their hands in fewer than half the instances they should. And doctors are the worst offenders, more lax than either nurses or aides.


These results were delivered to the hospital’s leadership by Rekha Murthy, the hospital’s epidemiologist, during a meeting of the Chief of Staff Advisory Committee. The committee’s roughly 20 members, mostly top doctors, were openly discouraged by Murthy’s report. Then, after they finished their lunch, Murthy handed each of them an agar plate — a sterile petri dish loaded with a spongy layer of agar. “I would love to culture your hand,” she told them.

They pressed their palms into the plates, and Murthy sent them to the lab to be cultured and photographed. The resulting images, Silka says, “were disgusting and striking, with gobs of colonies of bacteria.”

.Reminded me of the controversy in Kerala over a campaign to get people to wash their hands.

Sunday, September 24, 2006

Against easy answers

Swami Aiyer has a characteristically intelligent article on Laloo Yadav and the demographic dividend. Its about time we buried "Hum do, hamare do". The Economics of this slogan were always dubious- the assumption seemed to be that the national output was created in some centralized fashion (by the government, perhaps?), and then distributed, so that people who had more children were somehow getting more than their "fair share". In reality, of course, people consume what they produce so that, as the population grows, so does output. (A simplification, but closer to reality than the Malthusian nightmare). Of course, how productive the kids are when they grow up depends on the education that they receive.

How much education is required? The answer to that question is another assault on the conventional wisdom. Not much, is what the research indicates. Its probably sufficient if we can at least ensure that everyone can read, write, and do sums.

Tuesday, September 19, 2006

The educated suicide bomber

I don't know how I missed this "Economic Scene" essay by Austan Goolsby, on selection bias and why some people, born and educated in the West, are willing to die to bring down the society they know best.. His point is that "some economists argue that we need to think about what makes a successful terrorist and they warn against extrapolating from the terrorists we catch."

In their new study, “Attack Assignments in Terror Organizations and the Productivity of Suicide Bombers,” two economists, Efraim Benmelech of Harvard University and Claude Berrebi of the RAND Corporation, set out to analyze the productivity of terrorists in the same way they might analyze the auto industry. But they defined the “success” of terrorists by their ability to kill.

They gathered data on Palestinian suicide bombers in Israel from 2000 to 2005 and found that for terrorists, just like for regular workers, experience and education improve productivity. Suicide bombers who are older — in their late 20’s and early 30’s — and better educated are less likely to be caught on their missions and are more likely to kill large numbers of people at bigger, more difficult targets than younger and more poorly educated bombers.

Professor Benmelech and Dr. Berrebi compare a Who’s Who of the biggest suicide bombers to more typical bombers. Whereas typical bombers were younger than 21 and about 18 percent of them had at least some college education, the average age of the most successful bombers was almost 26 and 60 percent of them were college educated.

Experience and education also affect the chances of being caught. Every additional year of age reduces the chance by 12 percent. Having more than a high school education cuts the chance by more than half.

Of course, at least for terrorists who have grown up in the West, the education probably acts as a signal of greater intelligence, rather than actually being the cause of that intelligence. In the cases where the terrorists are from the Middle East, however, the education may actually act by making comfortable with the culture of their intended targets.

Anyway, it appears the terrorists organizations are aware of these facts.

Among Palestinian suicide bombers, the older and better-educated bombers are assigned to targets in bigger cities where they can potentially kill greater numbers of people. That same idea means that the terrorists assigned to attack the United States are probably different from the typical terrorist. They will be drawn from people whose skills make them better at evading security

And what lesson can we draw from all this?

It’s only natural that terror groups would recruit native English speakers when people are clamoring for extra airport scrutiny of Arabs from the Middle East. It does not imply that the Muslim community is a more fertile ground for terrorists in Britain than in other countries.

Think of the extreme case. One of the people arrested in the liquid explosives plot (albeit on a minor charge) was a woman with a baby. London newspapers have speculated that she was planning to carry her baby onto a plane with liquid explosives in his bottle. Even if true, that does not mean we should all start suspecting that women with babies are closet terrorists. That would be rather egregious selection bias. Objectively, we should be much more suspicious of other people. We see only the mother because the terrorists have an overwhelming incentive to find the one unusual terrorist who will outsmart our defenses.

Monday, September 18, 2006

On virtue

Oriana Fallaci died on September 15. Obituaries by the London Times and The Guardian. She was clearly a very brave woman. The New Yorker profile says

Fallaci’s interview with Khomeini, which appeared in the Times on October 7, 1979, soon after the Iranian revolution, was the most exhilarating example of her pugilistic approach. Fallaci had travelled to Qum to try to secure an interview with Khomeini, and she waited ten days before he received her. She had followed instructions from the new Islamist regime, and arrived at the Ayatollah’s home barefoot and wrapped in a chador. Almost immediately, she unleashed a barrage of questions about the closing of opposition newspapers, the treatment of Iran’s Kurdish minority, and the summary executions performed by the new regime. When Khomeini defended these practices, noting that some of the people killed had been brutal servants of the Shah, Fallaci demanded, “Is it right to shoot the poor prostitute or a woman who is unfaithful to her husband, or a man who loves another man?” The Ayatollah answered with a pair of remorseless metaphors. “If your finger suffers from gangrene, what do you do? Do you let the whole hand, and then the body, become filled with gangrene, or do you cut the finger off? What brings corruption to an entire country and its people must be pulled up like the weeds that infest a field of wheat.”

Fallaci continued posing indignant questions about the treatment of women in the new Islamic state. Why, she asked, did Khomeini compel women to “hide themselves, all bundled up,” when they had proved their equal stature by helping to bring about the Islamic revolution? Khomeini replied that the women who “contributed to the revolution were, and are, women with the Islamic dress”; they weren’t women like Fallaci, who “go around all uncovered, dragging behind them a tail of men.” A few minutes later, Fallaci asked a more insolent question: “How do you swim in a chador?” Khomeini snapped, “Our customs are none of your business. If you do not like Islamic dress you are not obliged to wear it. Because Islamic dress is for good and proper young women.” Fallaci saw an opening, and charged in. “That’s very kind of you, Imam. And since you said so, I’m going to take off this stupid, medieval rag right now.” She yanked off her chador.

In a recent e-mail, Fallaci said of Khomeini, “At that point, it was he who acted offended. He got up like a cat, as agile as a cat, an agility I would never expect in a man as old as he was, and he left me. In fact, I had to wait for twenty-four hours (or forty-eight?) to see him again and conclude the interview.” When Khomeini let her return, his son Ahmed gave Fallaci some advice: his father was still very angry, so she’d better not even mention the word “chador.” Fallaci turned the tape recorder back on and immediately revisited the subject. “First he looked at me in astonishment,” she said. “Total astonishment. Then his lips moved in a shadow of a smile. Then the shadow of a smile became a real smile. And finally it became a laugh. He laughed, yes. And, when the interview was over, Ahmed whispered to me, ‘Believe me, I never saw my father laugh. I think you are the only person in this world who made him laugh.’ ”

To her credit, she was also an enemy of power

Fallaci’s journalism, at first conducted for the Italian magazine L’Europeo and later published in translation throughout the world, was infused with a “mythic sense of political evil,” as the writer Vivian Gornick once put it—an almost adolescent aversion to power, which suited the temperament of the times. As Fallaci explained in her preface to “Interview with History,” a 1976 collection of Q. & A.s, “Whether it comes from a despotic sovereign or an elected president, from a murderous general or a beloved leader, I see power as an inhuman and hateful phenomenon. . . . I have always looked on disobedience toward the oppressive as the only way to use the miracle of having been born.”

However, she was incapable of analysis or subtlety. In fact, she appears to have been practically unhinged, and intemperate, and not merely in terms of her Islamophobia. The Guardian obituary has this to say about her relationship with Alexandros Panagoulis, a Greek anarchist.

In her book A Man (1977) - the memoir she wrote to Panagoulis after he was killed in May 1976 in a car crash she believed was assassination - she tells how she lost the baby she wanted so badly after Panagoulis had kicked her in the stomach. She also describes the endless battles to dissuade him from suicidal guerrilla attacks. She dubs herself Sancho Panza to his Don Quixote but she comes across more as nanny to a juvenile delinquent. However, there was no doubt that he was her soulmate ("My lover, my husband without contract, my political comrade, my friend").

Deidre McCloskey's James M. Buchanan Lecture, discussed the political virtues. She pleads that

A case can be made that a flourishing human life must show seven virtues. Not eight. Not one. But seven. The case in favor of four of them, the “pagan” virtues of courage, justice, temperance, and prudence, was made by Plato and Aristotle and Cicero. In the early 13th century St. Albert the Great summarized Cicero’s claim that every virtuous act has all four: “For the knowledge required argues for prudence; the strength to act resolutely argues for courage; moderation argues for temperance; and correctness argues for justice.”....The other three virtues for a flourishing life, adding up to the blessed seven, are faith, hope, and love. These three so-called “theological” virtues are not until the 19th century regarded as political.

She deplores the classical Economic Program of reducing all other virtues to "Prudence"Alas, very few of us will ever come close to ever having all the virtues- some, like Ms Fallaci will have just one. Many will have none.
Hence Alex Tabarrok's response to McCloskey's lecture.

In the lecture, McCloskey elided the difficult problems of the transcendent virtues especially as they apply to politics (I expect a more complete analysis in the forthcoming book). Faith, hope, and love sound pleasant in theory but in practice there is little agreement on how these virtues are instantiated. It was love for their eternal souls that motivated the inquisitors to torture their victims. President Bush wants to save Iran...with nuclear bombs. Faith in the absurd is absurd. Thanks but no thanks.

Since we can't agree on the transcendent virtues injecting them into politics means intolerance and division. Personally, I'd be happy to see the transcendent virtues fade away but I know that's unrealistic. The next best thing, therefore, is to insist that the transcendent virtues be reserved for civil society and at all costs be kept out of politics. The pagan virtues alone provide room for agreement in a cosmpolitan society, a society of the hetereogeneous.

I agree with him that the transcendent virtues need to be kept out of politics- that is the only way to keep people like Ms Fallaci (and her opponents) out of power. However, to live without them, is that even possible?
And that statement by the Ayatollah's son, that he had never seen his father laugh, says all we need to know of the man, and his type.

Friday, September 15, 2006


Aubades: John Donne's The Sun Rising and Larkin's Aubade.

Meanwhile telephones
crouch, getting ready to ring
In locked-up offices, and all the uncaring
Intricate rented world begins to rouse.
The sky is white as clay, with no sun.
Work has to be done.
Postmen like doctors go from house to house.
Larkin: Wilfully wrong, life-denying, what a poet.

That was unthinking, reflexive writing. "Life-denying" is inadequate. I got to thinking about this poem as I was reading an essay on "Last Things in the poetry of WB Yeats and Philip Larkin" in "Finders Keepers: selected prose 1971-2001" by Seamus Heaney. He contrasts Larkin's "Aubade" against "Man and the Echo", a late poem by Yeats.

As I read re-read Aubade, its meaning changed for me- from being a long, musical whine about death and dissolution, to a gentle, human-sized poem about the need for human contact. Hence the last line.
Postmen like doctors go from house to house
Yeats' poem, on the other hand, seems to be about the need for action, in spite of the pain that will follow from that action

That were to shirk
The spiritual intellect's great work,
And shirk it in vain. There is no release
In a bodkin or disease,
Nor can there be work so great
As that which cleans man's dirty slate.

However, it ends when pain intrudes into his thoughts.
Up there some hawk or owl has struck,
Dropping out of sky or rock,
A stricken rabbit is crying out,
And its cry distracts my thought.

Thursday, September 14, 2006

Now lets get rid of the Manhole covers

A comment on this post in Marginal Revolution reminded me of this article I read long ago in the New York Times, on an experiment in Road Design in the Dutch city of Drachten. Oddly enough, its not behind the paywall.

To make communities safer and more appealing, Mr. Monderman argues, you should first remove the traditional paraphernalia of their roads - the traffic lights and speed signs; the signs exhorting drivers to stop, slow down and merge; the center lines separating lanes from one another; even the speed bumps, speed-limit signs, bicycle lanes and pedestrian crossings. In his view, it is only when the road is made more dangerous, when drivers stop looking at signs and start looking at other people, that driving becomes safer.

"All those signs are saying to cars, 'This is your space, and we have organized your behavior so that as long as you behave this way, nothing can happen to you,' " Mr. Monderman said. "That is the wrong story."

The Drachten intersection is an example of the concept of "shared space," a street where cars and pedestrians are equal, and the design tells the driver what to do.

"It's a moving away from regulated, legislated traffic toward space which, by the way it's designed and configured, makes it clear what sort of behavior is anticipated," said Ben Hamilton-Baillie, a British specialist in urban design and movement and a proponent of many of the same concepts.

Sounds a lot like India to me, and thats the problem. I suspect the good people of the Netherlands ahve so internalized the rules of the road that they hardly need reminders. In the absence of these shared values, the result is not "emergent" order, but mere chaos. Introduce a few dozen Indian bus drivers, and the burghers will scream for the traffic cops. John Keay makes a similar point about Financial Regulations in an old article of his.

The globalisation of financial markets has been a major force behind the move to more explicit, more formal, regulation. Self-regulation, for long the key to effective supervision of financial services, requires that the participants share common values and assumptions. Common service in the Swiss National Army underpins the tacit values of the Swiss business community as common hardship in a public school underpinned the tacit values of the English financial community. But on the latter, at least, you can no longer rely. Nick Leeson went to a comprehensive. And a foreigner might not even notice the rising of the eyebrows of the Governor of the Bank of England, far less interpret its significance.

Wednesday, September 13, 2006

India's Car Boom

I am not sure this is an unblemished good, considering the likely impact on the Environment, but India's automobile sector is beginning to accelerate. The New Economist links to an article in the International Herald Tribune.

Of course, Maruti is not "jointly controlled by Nissan and Suzuki of Japan".

Look at the data

Daniel Gross' "Economic View" column in the New York Times

Yet labor economists, who prefer sifting through reams of yesterday’s data to parsing today’s headlines, detect a seemingly counterintuitive trend. During the last few decades, job stability and job tenure for the typical worker don’t seem to have changed much, if at all.

Ann Stevens, an associate professor of economics at the University of California, Davis, has looked through a time series — interviews with men between the ages of 58 and 62 conducted by the Bureau of Labor Statistics and other research groups at intervals from 1969 to 2002.

She found that in 1969, the average tenure of the longest job a man had held in his career was 21.9 years. In 2002, the figure was only marginally smaller: 21.4 years. In both 1969 and 2002, about half of those interviewed had spent more than two decades with a single employer.

“I’m not convinced there has been a dramatic change,” said Professor Stevens, who presented her findings in a National Bureau of Economic Research working paper.

That conclusion may seem surprising, given the heightened media and political attention to outsourcing, corporate overhauls and layoffs — and given the peculiar dynamics of the late 1990’s, when low unemployment, significant job growth and technological advances led many people to switch jobs voluntarily.

“In those years, companies couldn’t hold on to workers,” said David Neumark, a professor of economics at the University of California, Irvine.

Recent evidence indicates that jobs aren’t any more or less disposable than they were in the past. According to the Bureau of Labor Statistics, the median job tenure for all workers at their current jobs rose to 4 years in January 2004 from 3.5 years in 1983. In the same period, the percentage of workers older than 25 with job tenure of more than 10 years fell only modestly, to 30.6 percent from 31.9 percent.

But there are subtle shifts underneath the headline numbers, says Steven J. Davis, the William H. Abbott professor of international business and economics at the University of Chicago. As they have become more entrenched in the work force, women have seen their average job tenure rise, to 3.8 years in 2004 from 3.1 years in 1983. In the same period, the figure declined for men — particularly for those ages 45 to 54, whose average tenure in 2004 was 9.67 years, down from 12.8 years in 1983.

Job tenure has declined “among both blue-collar and white-collar male workers,” Professor Davis said. “White-collar jobs, which were historically dominated by college-educated men, are no longer quite as secure as they were a generation ago.”

So what accounts for the public concern over job instability? Professor Davis notes that job stability at publicly held companies — large, brand-name businesses like Intel that make news when they restructure — has decreased markedly. “But such companies only account for about one-third of all business employment,” he said. Among privately held companies — a much larger sector — job stability has actually been on the rise in recent years.

Tuesday, September 12, 2006

Inch by Inch

An interview with Thomas J Holmes on Wal-mart's strategy, with great video, via Marginal Revolution. Some great comments, esp Robert Schwartz, eddie, empiricist, and rvman.
Also, an old article by Kenneth Rogoff on the same topic.

Consider the following stunning fact: together with a few sister “big box” stores (Target, Best Buy, and Home Depot), Wal-Mart accounts for roughly 50% of America’s much vaunted productivity growth edge over Europe during the last decade. Fifty percent! Similar advances in wholesaling supply chains account for another 25%!
The notion that Americans have gotten better at everything while other rich countries have stood still is thus wildly misleading. The US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.

Holmes says

The key thing to note, however, is that if Wal-Mart had done something different—if it had jumped ahead to Minnesota before it had built out its network—it wouldn't have been Wal-Mart. It would have been undercutting the strategy that made it successful in the first place.

However, I am not too happy about this statement

Americans, in turn, must think about where the proper balance lies between aesthetics, community, and low prices.

What does that mean? Individuals think. "Americans" (a collective) cannot- Walmart is the creation of its owners, employees, financiers, and certainly its customers. It is not the creation of "Americans", and I can't see any legitimate way to prevent its spread other than to avoid shopping there.

Monday, September 11, 2006

Claude Shannon, Speculator

David Warsh at Economic Principals reviews "Fortune's Formula", a new book by William Poundstone on

three men who shared a vivid interest in making money by beating financial markets, though each expressed it in a slightly different way. They are Claude Shannon, the engineer who founded modern information theory at Bell Laboratories; Edward Thorp, a mathematician who collaborated with Shannon when they overlapped for a time at the Massachusetts Institute of Technology, before setting out on a long career as an investor; and John Kelly Jr., a Bell Labs physicist who came up with a controversial formula for betting (or investing, if you prefer) that since has become known as the Kelly criterion.

The book is populated with colorful incidental characters, as well: horse-race tout sheet pioneers John Payne and Moe Annenberg; mobsters Longy Zwillman and Ben "Bugsy" Siegel; G-man J. Edgar Hoover and US attorney Rudolph Giuliani; economists Paul Samuelson and Robert Merton; science fiction authors L. Ron Hubbard and Arthur C. Clarke; conglomerateurs Emmanuel Kimmell and Steve Ross (they built Time-Warner); filmmakers Robert Evans and Mario Puzo; and hedge fund operators Ivan Boesky and John Meriweather (of Long Term Capital Management). All mix and mingle in his pages.

Who would have though that Shannon is said to have had a rate of return of about 28 per cent on his portfolio for about 30 years, compared to 27 per cent for Warren Buffet.