Necessary but not sufficient

Brad de Long has an article out at Project Syndicate. Our politicians would do well to read it. The article is about how the Mexican economy has developed in the years since NAFTA was signed.

Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.

This is as expected- Mexico is right next to the world's largest economy, and has tariff-free and quota-free access to the US market. The macroeconomic portents are excellent

We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

The averages, however, mask reality.

But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)

What could be holding the country back?

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

Sounds familiar? This is not to say that we should roll back the reforms we have undertaken. Just that we need to be more cautious, more humble.

Paul Krugman once wrote a famous article that argued that there was no "Asian Miracle"- the tremendous growth that South East Asia saw in the 80s was the result of the backwardness of those economies. Starting from a small base, they could easily achieve tremendous rates of growth, but diminishing returns would inevitably set in.

India is starting from an even smaller base, and our human capital is even poorer. As we grow, we may eventually find that the educated middle class is employed at wages that are comparable to the the rest of the world, and so no longer enjoy any sort of cost advantage, while the teeming multitudes of illiterate, undernourished peasants find themselves wandering outside the nimbus of the Economic Miracle.

Expectations

Edmund Phelps wins the Nobel prize for Economics. Tyler Cowen has a great roundup of his work- which I can only vaguely understand. Edmund Phelps was a prospect in 2004, when the award went to Kydland and Prescott.

Arnold Kling links to an article by Phelps where he discusses the impact of demographics on the dollar. Relevant to my earlier post.

Keep it simple

This years IgNobel prize "for literature" went to Princeton University psychologist Daniel M. Oppenheimer for his paper "Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems With Using Long Words Needlessly," which appeared in the March issue of Applied Cognitive Psychology.

The bottom line:

"It turns out that somewhere between two-thirds and three-quarters of people admit to replacing short words with longer words in their writing in an attempt to sound smarter," Oppenheimer said in an e-mail. "The problem is that this strategy backfires -- such writing is reliably judged to come from less intelligent authors.

I sure hope this result gets about- may save me some painful reading.

Tyler Cowen once blogged about a paper "False modesty: When Disclosing Good News Looks Bad" by Rick Harbaugh and Theodore To. The point is that its marginal performers who have the greatest incentive to reveal good news.

Starting in 1998, Los Angeles health officials began requiring restaurants to post large hygiene grades at their entrances, with a high proportion of grades being an A (see Jin and Leslie, 2003). Why was it necessary to require even A restaurants to disclose their grade? Suppose diners have their own opinions based on experience or reputation, so good restaurants tend to do well even without disclosure. In this case it is the worst restaurants within the A category who have the strongest incentive to prove that they meet basic hygiene standards. Given this incentive, disclosure of even an A grade can be interpreted by diners as a bad sign.

Or consider whether a person with a PhD should use the title “Dr.” In many environments PhDs are relatively rare so using a title is a strongly favorable signal of the person’s professional credentials and we would expect titles to be used frequently. But in other environments, such as research universities,PhDs are quite common. In some fields faculty interact frequently with non-academics so a PhD might still be worth boasting about, but in other fields most interactions are between academics who expect each other to have PhDs. In these fields using a title might then be interpreted not just as redundant, but as a signal of insecurity that the person fears being thought of as unqualified without the title.

Addendum: Another post on counter-signalling.

Demography is destiny

The Economist has a survey on "Talent"- the "world's most sought-after commodity".

Two facts struck me:

the picture in much of the developed world is haunted by demography. By 2025 the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan.

and

RHR International, a consultancy, claims that America's 500 biggest companies will lose half their senior managers in the next five years or so, when the next generation of potential leaders has already been decimated by the re-engineering and downsizing of the past few decades. At the top of the civil service the attrition rate will be even higher.

Wealthy westerners wish to retire, while continuing to live the good life. Countries like India, which have relatively young populations, need to increase output and employment. One natural response would be for the former to invest in the latter, and then use the returns from their investments to purchase goods for consumption in their dotage. Will this happen?

Probably not. As the same article puts it "How can India talk about its IT economy lifting the country out of poverty when 40% of its population cannot read?" India and other pretender economies will be hobbled by their failure to invest in human capital, which can take far longer to accumulate than the physical infrastruture which we are known to lack. In this post, Jane Galt discusses the role of Human Capital in the post-war recoveries of Germany and Japan. In the article mentioned above, the Economist reports

Both India and China are suffering from acute skills shortages at the more sophisticated end of their economies. Wage inflation in Bangalore is close to 20%, and job turnover is double that (“Trespassers will be recruited” reads a sign in one office). The few elite institutions, such as India's Institutes of Technology, cannot meet demand.

So what now? The recent period of high profits is likely to pass as wage bills grow. As profits shrink, marginal businesses will go bust. Older Europeans and Americans will be encouraged, by higher salaries and changed labor laws, to stay on at work for longer than planned. Companies will adapt in many ways: 1. some will simply try to outcompete their rivals on wages. Not a good idea, as it continue to be difficult to distinguish between the ones who are truly worth the new wages, and the marginal employees 2. Others will try and use innovative salary structures to try and ensure that their wages get results 3. In some lines of business, changed organizational structures may become common.

Overall, though, I am sure we will see more of the same- at least as far as Economics is concerned. How the decline and aging of the west will affect global politics is a different matter.

The dead legionnaire

I came across this story in Daniel Dennett's book "Freedom Evolves". Its about the far-from-straightforward concept of causation, and is a classic from the law schools.

Everybody in the French Foreign Legion outpost hates Fred, and wants him dead.

During the night before Fred's trek across the desert, Tom poisons the water in his canteen. Then, Dick, not knowing of Tom's intervention, pours out the (poisoned) water and replaces it with sand. Finally, Harry comes along and pokes holes in the canteen, so that the "water" will slowly run out.

Later, Fred awakens and sets out on his trek, provisioned with his canteen. Too late he finds his canteen is nearly empty, but besides, what remains is sand, not water, not even poisoned water. Fred dies of thirst.

Who caused his death?

Tom did not, because even if he had not poisoned the water, Dick would have poured the contents of the canteen out. Dick did not, because even had he not replaced the water with sand, the water would still have been poisoned, and Harry would have poked holes in the canteen, and so on.

More here.

Fissile material

The Economist reports that a researcher I had never heard of- Milind Watve - toiling in obsurity in a college I had never heard of-Abasaheb Garware College, in Pune, India- has published a very nice paper in the Proceedings of the National Academy of Sciences. The work is on the principles behind cellular division, and has shades of Economics.

The Disposable Soma Theory asserts that we age because organisms have limited resources and so need to balance the needs of keeping their bodies in good repair against those of reproduction. The resulting compromise

maximizes reproduction over a lifetime at the expense of the body's gradual deterioration

Now,

Until recently, it was assumed that the theory did not apply to unicellular organisms such as bacteria, since they have no soma to dispose of, merely a single cell that creates the next generation by dividing in two. But recent discoveries have suggested that bacteria, too, face compromises between maintaining themselves and reproducing.

Examination under a microscope shows that, sometimes, the mother cell divides her resources more or less randomly between the daughter cells, but not always. Occasionally, one of the daughter bacteria inherits nice, shiny parts from the mother, while the other gets the old parts that have been used by the mother.

Dr Watve constructed a computer model to explore the circumstances under which each strategy will be optimal, and found that the answer depends on available food.

When Dr Watve ran the model, he discovered that the main determinant of whether symmetrical or asymmetrical division was favoured was the amount of food around. In impoverished environments (in the real world, that might include lakes and oceans), the slower-growing daughters of symmetrical divisions had the upper hand because they used what little resources were available more efficiently. That was because the runts tended to die before they could reproduce, thus wasting the food that they had already eaten. In richer places, fewer runts died, and the daughters with shiny, new bits grew and divided very rapidly indeed. And that fits with the finding that bacteria inside the nutrient-rich human gut grow rapidly and in an asymmetrical manner.

Don't put all your eggs in one basket?

Trust

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?

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.

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.

and

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, Hedgestreet.com 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.

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.

And

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.

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.

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.

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.

Poems

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.

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.

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.

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.

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.

Monty Hall again

John Kay offers a surprising solution, though no resolution, to the Monty Hall paradox.

The extraordinary feature of the two-box problem is that there is a strategy that seems better than always switching or always sticking, one that beats random choice even in a situation of almost total ignorance.

Well, it is a remarkably simple strategy.

Nicely done

Chris Dillow has an excellent post on when it is efficient for a society to have property rights.

Monism?

Via Edge, an editorial and an article in the New Scientist on Loop Quantum Gravity. Loop Quantum Gravity hypothesizes that the elementary particles are braids made of space-time, thus dissolving the difference between space-time and the matter that "warps" it in the General Theory.

The origins of loop quantum gravity can be traced back to the 1980s, when Abhay Ashtekar, now at Pennsylvania State University in University Park, rewrote Einstein's equations of general relativity in a quantum framework. Smolin and Carlo Rovelli of the University of the Mediterranean in Marseille, France, later developed Ashtekar's ideas and discovered that in the new framework, space is not smooth and continuous but instead comprises indivisible chunks just 10-35 (Rajeev: 10 to the power of -35) metres in diameter. Loop quantum gravity then defines space-time as a network of abstract links that connect these volumes of space, rather like nodes linked on an airline route map.

From the start, physicists noticed that these links could wrap around one another to form braid-like structures. Curious as these braids were, however, no one understood their meaning. "We knew about braiding in 1987," says Smolin, "but we didn't know if it corresponded to anything physical."

Some models developed in the 1970s hypothesised that the elementary particles (electrons, photons, neutrinos, etc.) are made of smaller particles they called preons, which carried charge and interacted with one another. The models were abandoned when it was discovered that these preons would ave more energy than the particles that are built up of them. Sundance Bilson-Thompson approached the problem differently.

Instead of thinking of preons as particles that join together like Lego bricks, he concentrated on how they interact. After all, what we call a particle's properties are really nothing more than shorthand for the way it interacts with everything around it. Perhaps, he thought, he could work out how preons interact, and from that work out what they are.

To do this, Bilson-Thompson abandoned the idea that preons are point-like particles and theorised that they in fact possess length and width, like ribbons that could somehow interact by wrapping around each other. He supposed that these ribbons could cross over and under each other to form a braid when three preons come together to make a particle. Individual ribbons can also twist clockwise or anticlockwise along their length. Each twist, he imagined, would endow the preon with a charge equivalent to one-third of the charge on an electron, and the sign of the charge depends on the direction of the twist.

The simplest braid possible in Bilson-Thompson's model looks like a deformed pretzel and corresponds to an electron neutrino (see Graphic). Flip it over in a mirror and you have its antimatter counterpart, the electron anti-neutrino. Add three clockwise twists and you have something that behaves just like an electron; three
anticlockwise twists and you have a positron. Bilson-Thompson's model also produces photons and the W and Z bosons, the particles that carry the electromagnetic and weak forces. In fact, these braided ribbons seem to map out the
entire zoo of particles in the standard model.

Smolin, Bilson-Thompson and Fotini Markopoulou then used a radical version of quantum mechanics which Fontini was working on, which treats the Universe as a giant Quantum computer.

In Markopoulou and Kribs's version of loop quantum gravity, they considered the universe as a giant quantum computer, where each quantum of space is replaced by a bit of quantum information. Their calculations showed that the qubits' resilience would preserve the quantum braids in space-time, explaining how particles could be so long-lived amid the quantum turbulence.

Smolin, Markopoulou and Bilson-Thompson have now confirmed that the braiding of this quantum space-time can produce the lightest particles in the standard model - the electron, the "up" and "down" quarks, the electron neutrino and their antimatter partners

So, once again, we return to the idea that existence is a computation.

Meanwhile, Markopoulou's vision of the universe as a giant quantum computer might be more than a useful analogy: it might be true, according to some theorists. If so, there is one startling consequence: space itself might not exist. By replacing loop quantum gravity's chunks of space with qubits, what used to be a frame of reference - space itself - becomes just a web of information. If the notion of space ceases to have meaning at the smallest scale, Markopoulou says, some of the consequences of that could have been magnified by the expansion that followed the big bang. "My guess is that the non-existence of space has effects that are measurable, if you can only see it right." Because it's pretty hard to wrap your mind around what it means for there to be no space, she adds.

Right.

Intelligent leaders

This week's issue of the Economist has a letter from a professsor at HEC Lausanne

It might interest you to know that not a single serious study has ever been able to demonstrate a link between “emotional intelligence” and leadership effectiveness. The most robust and consistent single predictor of leadership effectiveness is, simply, intelligence. Emotional intelligence sells well, but scientific evidence supporting it is almost as solid as that supporting the effectiveness of homeopathy.

I don't know the details of the studies which led to this conclusion, but I wonder if they suffered from a version of the Sample Selection Bias described by Michael Stastny at Mahalanobis. Tyler Cowen once referred to a paper by Shane Frederick to the effect that

Expressed loosely, being smart makes women patient and makes men take more risks

Most senior managers are men. Intelligent men take greater risks than less intelligent men. Men who take risks will be either exceptionally successful or spectacular failures, while men who avoid risks will perform middlingly. If there is Sample selection bias, it will then appear that intelligence correlates with management ability. Just thinking aloud.

On Terrorism

Nitin Pai brought this article to my attention. Interesting read, but I could not agree with the thesis:

1. Taleb is wrong when he says

"you may believe, say, that financial markets will probably go up, while you behave, sensibly, as if they will go down. The reason? Because you think it very likely that they will go up a little, but, in the unlikely event that they go down, you think they will go down a great deal."

After all, markets have a bottom- they can go down to zero, but not below that. However, they can go up to infinity. The conventional explanation for why people behave this way is that they maximize expected utility, rather than expected wealth, and that this leads to risk aversion. Indeed, this is the very issue that led Bernoulli to come up with the idea of utility.However, even this is seriously controversial.

2. "successful suicide bombings became even slightly more common, can we really be confident that other fundamentalists would not copy that behaviour". This is quite correct- we should be preventing these attacks, but we also need to realize that there are other serious problems. If its really our intention to save lives, rather than simply political PR, we should see where our efforts can actually save most lives. By all means, prevent these attacks, but prioritize.

3. People are tough. I have seen half-dozen attacks on Mumbai. The latest was the train atrocity. People are back on the trains now. I can't imagine the terrorists believe they are any closer to their objectives because of their crimes. That must be pretty frustrating for them, and that should help prevent this: "Potential offenders catch the idea of offending from each other. And just like a disease that starts with only a few people and becomes an epidemic, once it reaches a tipping point the amount of criminal behaviour explodes". The American and British
responses are far more encouraging to them. Why give them the satisfaction of letting them think we consider them a huge issue? They are not.

I think this article in the Financial Times is also in favor of a more low-key approach to the "War on Terror". I also think Chris Dillow makes good sense here.

May I bring to your attention my paper

A wonderful article in the New Yorker, by Sylvia Nasar and David Gruber, on the Poincare hypothesis, and the battle for priority. A person like Perelman is almost certain to feel lost in this maze.

Perelman, by casually posting a proof on the Internet of one of the most famous problems in mathematics, was not just flouting academic convention but taking a considerable risk. If the proof was flawed, he would be publicly humiliated, and there would be no way to prevent another mathematician from fixing any errors and claiming victory. But Perelman said he was not particularly concerned. “My reasoning was: if I made an error and someone used my work to construct a correct proof I would be pleased,” he said. “I never set out to be the sole solver of the Poincaré.”

And Chinese mathematics comes across as some sort of weird cult.

Paying the price

Biology can tell some of the most compelling stories of Economics at work. This post by Carl Zimmer is a great example of the problem of Public goods. The question here is why some of these critters "willingly" sacrifice themselves so that others may breed.

The theory of altruism pioneered by Haldane and Hamilton can explain such behavior when the parties are closely related, but not when they are totally unrelated. Any gene that leads to such behavior would quickly die out. "The evolution of virtue" by Matt Ridley had a great discussion of such issues.

Bow down

Seems tall guys are smarter, and generally cooler.
Thought that was obvious- guess the shorties need everything spelt out. :-)

The man that hath no music in himself

This seems like a book for me.

Monty Hall is back

John Kay describes a problem that involves a probability distribution that is not well-behaved.

This problem is real. Anyone who has changed jobs, bought a house or planned a merger has encountered a version of the two-box game; keep what you know, or go for an uncertain alternative. But familiar problems are not necessarily easy to model.

Of course, this is better known as the two envelopes problem, and there are other paradoxes in probability theory.

Two on India

The Economist recently published two articles on India- one in this issue, and the other in Economics Focus from the previous issue.

The second is subscription only, and is about the World Bank's India Development Policy Review.

Look at the detail, however, and you may despair at the depth and complexity of the problems India faces. For all its achievements, poverty remains entrenched. Some 260m people survive on less than one dollar a day. Nearly half of the country's children below the age of six are undernourished. More than half of its women are illiterate. Half its homes have no electricity, and in one state, Chhattisgarh, 82% are not even connected by road. Nor is there a huge pot of money to throw at these shortages. The government's average budget deficit, from 2000 to 2004, was exceeded only by that of Turkey. Even when it does spend money, the pipeline between government coffers and the intended beneficiaries is corroded by corruption, and cash seeps out.

Thus, the report argues that the "rampant" optimism about India is not justified by fundamental changes, that the performance of the public sector is going from bad to worse, and that the gap between the best of India and the worst keeps growing.

India, for example, has a government committed to providing all its people with health care. But there are only five countries in the world where a lower proportion of spending on health comes from the government—just 21% (compared with, for example, 45% in America). So even the poor are paying for private health care. A survey has also found that health care absorbs a bigger share (27%) of low-level “retail” bribery than any other government function...Another found that between 1999 and 2003 the percentage of children fully immunised against childhood diseases had fallen from 52% to 45%.

Inequality keeps getting worse, partly because the worst-performing states are falling further behind the best.

Although India has, compared with other countries, a relatively equal distribution of income, it is a deeply unequal society, partly because of its legacy of social stratification and exclusion. The caste system is proving resilient, and there is evidence that, in some respects, the prejudice against girl children is worsening. In rich areas, sex-selective abortion is leading to highly skewed sex ratios at birth. Nor is the bias any less among the poor. A girl born in the early 1990s was 40% more likely than a boy to die between her first and fifth birthdays

Thus, it argues that the problems of the country boil down to two big, inter-related issues: "to make the public sector better at delivering basic services; and to sustain growth at high levels and extend its fruits to more people". Alas, no indication of how it can be done.

The article in the new issue is about the Maoists in India. Not suprisingly, the epicenter is in the very parts, including Chattisgarh, which are falling further behind the rest of the country. These, though, are no defenders of the poor

Several hundred had mounted a co-ordinated attack on a police station, a paramilitary base and a relief camp for displaced people. They killed more than 30 of the camp's residents, mostly by hacking them to death with axes. The scholarly Mr Ueike did boast that his army relied on “low-tech weapons”.

This was the latest battle in a year-long civil war in Dantewada district, in which more than 350 people have been killed, and nearly 50,000 moved into camps such as the one at Errabore.

And the problem is big:

In nearly 1,600 violent incidents involving Naxalites last year, 669 people died. There have been spectacular attacks across a big area: a train hold-up last month involving 250 armed fighters, a jailbreak freeing 350 prisoners, a near-miss assassination attempt in 2004 against a leading politician. “Naxalism” now affects some 170 of India's 602 districts—a “red corridor” down a swathe of central India from the border with Nepal in the north to Karnataka in the south and covering more than a quarter of India's land mass.

As always, the reason for their success is that the "Indian State is almost invisible"

In one there is a hand-pump installed by the local government, but the well is dry. There are no roads, waterpipes, electricity or telephone lines. In another village a teacher does come, but, in the absence of a school, holds classes outdoors. Policemen, health workers and officials are never seen. The vacuum is filled by Naxalite committees, running village affairs and providing logistic support to the fighters camping in the forest.

And, predictably, the local people are caught between the Maoists and Salwa Judum

This is a dirty little war in which truth was long ago a casualty. Salwa Judum itself is also responsible for displacing people—a “scorched village” policy intended to starve the Maoists of local support. This recognises that the Naxalites' real strength lies not in their guerrillas in the jungle, with their peaked caps and “country-made” rifles, but in their civilian networks in the villages themselves....Even Mr Gill, who has seen more brutality than most, thinks the Maoists stand out in this respect: “Their ideology is that the manner of killing should frighten more than the killing itself.”

Salwa Judum, too, is accused of intimidation, extortion, rape and murder. Its thugs have been manning roadblocks, supposedly to hunt for Maoists, but also to demand money. Some SPOs—like some Naxalites—may be local hoodlums, who have signed up for the money on offer, and the shiny new bicycles and motorbikes still wrapped in plastic at the Dornapal police station. Some families refusing to join Salwa Judum on its “combing” operations—rampages of arson, thuggery and pillage—have been “fined” or beaten. A report on Salwa Judum produced in April by a number of civil-liberties groups concluded that its formation had “escalated violence on all sides...Salwa Judum and the paramilitary operate with complete impunity. The rule of law has completely broken down.”

However, the Maoists are not merely cruel

He (Ajai Sahni of the Institute of Conflict Management, a Delhi think-tank) also says that the Naxalites have been among the most principled of terrorist groups in selecting their targets. Their attacks are not random; though, because they so often use crude landmines, they may kill the wrong people. Their leaders are thinking far into the future, taking a 20- to 25-year view of their struggle. “Liberated” areas, such as their part of Dantewada, would be expanded until they pose a threat even to India's cities.

Nepal's Maoists, with whom the Indian party has “fraternal” links, are a model of how such a strategy can work. Having managed to exclude the state from virtually all the countryside, and waged war for a decade, the Maoists in Nepal are now negotiating, from a position of some strength, their share in government—a decision their Indian comrades quietly deplore, despite a pretence of solidarity.

Just as I am sure that the current wave of Terrorism will die out, I have no doubt that this threat too will pass, but at a very high price indeed. The Naxal threat is strongest in teh poorest parts of India, deterring investment and hence increasing the gap with the rest of the country, and the resulting frustration then feeds the Naxal movement. Some good could come out of this if it makes the Indian State more serious about delivering basic services to these poor people. The Indian State is immensely strong and resilient, but Indians are just flesh and blood.

No deal

When you can't pay. Greg Mankiw links to an article by Cass Sunstein in the Washington Post, on why we are unlikely to see a deal on Global Warming. The folks responsible for the warming are not the ones who will suffer the consequences.

In recent years the United States has accounted for about 21 percent of the world's greenhouse gas emissions. China comes in second at about 15 percent. While many countries have stabilized their greenhouse gas levels, emissions from both nations, but especially China, are growing rapidly. Current projections suggest that by 2025 total emissions from the United States will increase by about one-third. By that year, China's emissions are expected roughly to double.... It follows that if an international agreement requires reductions, China and the United States will have to bear the brunt of the expense.

However,

the biggest losers from greenhouse gas pollution are likely to be India and Africa. Some of the most detailed, careful and influential projections have been made by Yale University's William Nordhaus and Joseph Boyer. Nordhaus and Boyer show that in terms of human health and agricultural loss, India and Africa are by far the most vulnerable regions on Earth. Because of an anticipated increase in malaria, Africa will probably be hit especially hard, and India is expected to suffer a large increase in premature deaths as well.

While the US will pobably not suffer seriously, and Chinese agriculture will actually gain.

The two nations now most responsible for the problem have comparatively little incentive to do anything about it.

Beauty bare

More than 2 years ago, Tyler Cowen reported that a "Russian loner", Grisha Perelman may have solved the Poincare Conjecture. Well, it seems the proof hangs together after all.

And Scientific American has an article on Alain Connes and his hopes that non-commutative geometry could explain the structure of space-time.

As an example, Connes refers to the way particle physics has grown: The concept of spacetime was derived from electrodynamics, but electrodynamics is only a small part of the Standard Model. New particles were added when required, and confirmation came when these predicted particles emerged in accelerators.

But the spacetime used in general relativity, also based on electrodynamics, was left unchanged. Connes proposed something quite different: "Instead of having new particles, we have a geometry that is more subtle, and the refinements of this geometry generate these new particles." In fact, he succeeded in creating a noncommutative space that contains all the abstract algebras (known as symmetry groups) that describe the properties of elementary particles in the Standard Model.

I don't understand any of the details of the latter, and only the most basic concepts of the first, but it feels nice that creatures of flesh and blood can actually think such thoughts.

Retailing and Software

The New Economist reports that IBM is planning to expand massively in India, and that this scares Indian firms who will now face competition for their employees.

Wage inflation is real but not a problem.

Some commentators have expressed concern that wage inflation in India is blunting the country's competitive edge in software services. These fears are overstated. It isn't particularly worrisome from India's perspective that the country's software engineers are now only a sixth as cheap as their U.S. counterparts. In 1998, that wage difference was about twice as large. The skills gap between its computer programmers and those from developed countries is shrinking even faster.

However, supply side constraints remain

That doesn't mean that such jobs are open to everyone. "Only those individuals have been able to gain entry into this industry whose parents are both quite highly educated,'' says Anirudh Krishna, a professor of public policy at Duke University in Durham, North Carolina.


Krishna's research on three Bangalore-based software companies shows that undereducated parents, unaware of the potential in the software industry, fail to prepare their children for the available opportunities. Parental ignorance constrains the size of the talent pool.

Ricardo is alive and well, as other sectors of the Economy struggle as talented people opt for careers in IT. The Bangalore Bug is

term that International Monetary Fund Chief Economist Raghuram Rajan uses for the challenge India will face as rising software wages make engineers so expensive that other sectors of the economy, especially labor-intensive manufacturing, can't afford them.

The New Economist also describes Reliance's plans to become the 3rd largest retailer in the world, after Wal-mart and Carrefour.

Truth Serum

Nice article from the March 2006 of Scientific American on the use of Experimental Economics at Hewlett-Packard.

Companies that rely on Salespeople's inputs to forecast sales face problems of Asymmetric information, similar to those that are confronted by Insurance companies. Salespeople are tempted to undercommit, which could result in the company being underprepared for actual sales. The solution, very similar to the one devised by insurance companies.

have each salesperson choose a personal balance of fixed and variable compensation. For example, the salesperson can choose a high commission percentage with no fixed salary or, at the other extreme, a modest fixed salary and no commission--or some combination in between. Each choice implicitly reveals how much the salesperson plans to sell, much as an insurance subscriber's choice of deductible and premium reveals how sick she is. Based on a truth-telling mechanism from game theory, this design works on paper.

On inequality

Via New Economist, an article by Pranab Bardhan in the Financial Times, on Inequality in India.
Its important to realize that these statistics are for all of India- a huge place. There is a lot of variation within the country.
However, it is broadly true that your well-being, and the social status that you enjoy, is largely determined by the family that you are born in into.
In the long run, this could cause India to go the way of Latin America. While the US followed a policy of homesteading (read this article by Hernando De Soto on the squatters who built America), land in Latin America was distributed by the government. Naturally, the wealthy and powerful grew even more wealthy and powerful. This could be one reason why wealth in Latin America has been tainted, and society has bene torn apart by the conflict between ultra-conservative reactionaries and redistributionist radicals.
This is related to one reason why I am against restictions on immigration into the large cities. In a country that fails to provide basic health-care and education to its rural poor, the alternative to internal migration is revolution.

Here comes the sun

and blue skies, after 3 days of gloom.

On the workings of the Indian Economy

Nitin Pai points out that India is still a difficult place to do business. (Worse than Iraq, though?!)

The New Economist links to a World Bank working paper by by Franklin Allen, Rajesh Chakrabarti, Sankar De, Jun Qian and Meijun Qianon on "Financing Firms in India. "

Our evidence, including results based on a survey of small- and medium-scale private firms, shows that alternative financing channels provide the most important source of funds. We also find that informal governance mechanisms, such as those based on reputation, trust and relationships, are more important than formal mechanisms (e.g., courts) in resolving disputes, overcoming corruption and supporting growth.

This is typical of extremely immature market economies.
Now, how do businesses survive the corruption?

Perhaps one of the most effective solutions for corruption for firms in this sector is the common goal of sharing high prospective profits. This common goal can align interests of the investors and government officials with entrepreneurs and managers to overcome numerous obstacles.

Another potential effective solution for corruption is competition among local governments/ bureaucrats from different regions within the same country. Entrepreneurs can move from region to region to find the most supportive government officials for their private firms, which in turn motivates officials to lend "helping hands" rather than "grabbing hands," or else there will be an outflow of profitable private businesses from the region. This remedy should be typically available in a big country with multiple regions like India.

This is an interesting variant of Mancur Olson's "grabbing hand" theory of Government. Because the businesses can choose the "bandit" (the regional governments) they are subject to, the Bandits' rapacity is constrained.

Poetry

Five books

What price peace?

David Warsh, author of Knowledge and the Wealth of Nations, and the best weekly commentator on Economics matters I know of, writes about the cost of the war in Iraq. There are potential lessons for us in India, in our war with terrorism. I have little to add where people brighter and more knowledgeable than I am have thought so long and so hard. However, Pakistan is clearly a failed state- and its failure is inflicting terrible suffering on its own people. Moreover, the place is a breeding ground for terrorist activity directed at India. It is tempting to think that our problems originate across the border, and that if we could only remake the place more to our own liking, using force if required, our problems would be solved. This piece should give us pause.

What is our greatest problem? There are 10,000 armed Maoists tormenting at least 170 of India’s 602 districts, and Diarrhoea is the second leading cause of death among children here. Economics suggest that we should spend our resources where the marginal returns are greatest. We spend 15% of our central government budget on defense, and 2% on health and education each. Containment looks like a better policy than ever.

It's probably fair to say that the economics of national security had its beginnings in an essay by William D. Nordhaus of Yale University that appeared in December 2002, first in a non-technical essay in The New York Review of Books, then as a publication of the American Academy of Arts and Sciences…

It might seem faint-hearted to take seriously beforehand the task of estimating war's potential cost, wrote Nordhaus, slyly anticipating his critics, "a sign of insufficient resolve at best and appeasement at worst," but in fact it was simply realistic. "...[M]ost people recognize that the costs in dollars, and especially in blood, are acceptable only as long as they are low. If the casualty estimates mount to the thousands, if oil prices skyrocket, if a war pushes the economy into recession or requires a large tax increase, and if the United States becomes a pariah in the world because of callous attacks on civilian populations, then decision-makers in the White House and the Congress might not post so expeditiously to battle."…

And after disentangling direct military spending from various follow-on costs -- occupation and peacekeeping, reconstruction and nation-building, humanitarian assistance, the impact on oil markets and macroeconomic impact, Nordhaus produced a pair of estimates of the war's likely cost over a the course of a decade, low and high --$99 billion after a short and favorably resolved battle, compared to $1,934 billion, or almost $2 trillion dollars, nearly 20 percent of GDP, in the event of a protracted war with an unfavorable outcome.

As it happened, a trio of University of Chicago economists also produced in 2003 an estimate of the costs of the war, which came to very different conclusions -- partly by taking the analysis a step further and asking, compared to what?...

Assuming that Saddam had the same kind of staying power as repressive regimes in North Korea and Cuba, the Chicago economists concluded that the invasion would be a bargain, for Americans and Iraqis alike. The cost of continuing to contain Saddam at the same level as the precious decade -- 30,000 troops, 30 ships and 200 aircraft and their crews -- would add up to $380 billion going forward. "This dwarfs any reasonable estimate of US war costs," they wrote -- even before the possibility of increased terrorism was over the next twenty years was added in.

What about the Iraqis? What about the cost of war to them? Since Saddam came to power in 1979, their economy had stagnated, the Chicagoans noted; income per person had fallen by as much as 75 percent. They toted up the loss of lives as well -- the war with Iran, the repression of the Shiites, the Kurds and the Marsh Arabs, something like half a million premature deaths over a quarter-century, and projected the record into the future (with a suitable discount rate of 2 percent, and a 3 percent probability of spontaneous regime-change) and concluded another 200,000 to 600,000 Iraqis could be expected to die under a policy of continued containment were Saddam and his henchmen to continue to rule for another 33 years.

In contrast, after a forcible regime change, the Iraqi economy begins growing again. The war itself costs no more than a half a year's GDP. Oil revenues swell, income per person grows enough to make up for the quarter-century decline. "At first, it may seem surprising that war can lead to a huge improvement in human welfare. But, in fact, this conclusion is hard to escape so long as regime change even partly undoes the collapse in living standards under Saddam" -- at least it does as long as the killing stops.

And what if doesn't? Last week the Chicagoans were back, with a revised and considerably expanded rewrite of their 2003 paper, presented by Davis to the NBER's Summer Institute. Gone were some of the slam-bang certainties of the earlier version ("...[T]he costs of containment dramatically outweigh the costs of war according to our analysis"). Added were a number of cost-of-capital subtleties in calculating the cost of various contingencies, and a broader view of the possibilities themselves. Unchanged was the insistence that any judgment of the cost and efficacy of the invasion of Iraq would have meaning only when compared to the cost of /not/ invading -- that is, to maintaining a policy of containment.

What was striking, however, was that somehow the Chicagoans' numbers had changed.

In his role as discussant, Yale's Nordhaus underscored the disparity. In 2003, he noted, on the eve of the war itself, the Chicagoans had rated the cost of containment as $630 billion, compared to a projected $125 billion cost of war -- a virtual no-brainer. In the 2006 version, with the advantage of "partial hindsight" creeping in despite their determination to write as though they were still looking forward from early 2003, their (backward-looking) forward-looking cost of containment had become $297 billion, against a best guess of the cost of the war of $414 billion -- a very dramatic swing.

The words with which Nordhaus closed his 2002 discussion of the economic consequences of a war with Iraq suggest just how imaginative a before-the-fact analysis must be in the future if it is to be persuasive:

"The cost of a war may turn out to be low, but the cost of a successful peace looks very steep. If American taxpayers decline to pay the bills for ensuring the long-term health of Iraq, America would leave behind mountains of rubble and mobs of angry people. As the world learned from the Carthaginian peace that settled World War I, the cost of a botched peace may be even higher than the price of a bloody war"