Dilbert Rules

Read and learn

Where all are above average

The Business Standard has published a grotesquely shoddy study on the performance of Fund Managers in India. Really, you expect better from this paper.

Indian equity fund managers have managed to beat the benchmark indices hands down, despite the stock markets going through tumultuous times over the past decade and a half.

The first-ever ranking of fund managers, based on performance throughout their career, reveals that 90 per cent of the fund managers had a 50 per cent rate of outperformance versus the benchmark Nifty index. In other words, of the 32 equity fund managers ranked, 29 bettered the Nifty at least half the time.

This may be meaningful because

“Apart from their skills, a key reason for the large-scale outperformance is that mutual funds are a tiny fraction of the whole market in our country, while in the US, mutual funds are the market itself, limiting the scope of fund managers bettering the market,” added Kumar.

Translation: these dudes have been thriving on the mistakes of the retail investors who swarm our markets while, in the US, one Fund Manager can outperform only at the expense of another.

And

While every one of the leading fund managers seemed to have a unique style of investing, a common thread was a bias towards growth. “Since most companies in India have still not attained their full potential, focusing on growth can bring in rich rewards,” said Subramanian of Franklin Templeton.

Meaning: we take more risks, which pay off in a rising market, but can sink us if the market turns against us.

However, the number one reason for this performance has not been explicitly presented: Sample selection bias.

The study ranked only equity managers with a minimum five-year track record and debt managers with at least two years of experience. The detailed methodology and results have been covered in the magazine, along with the profile of the five leading managers in the two categories.

Simply put, what do the authors want me to take away from such a study? That it is possible to beat the market over the long term, that its particularly easy to do this in India, and so I should hand my money over to these Fund Manegers. Now, they may be right, but this study inspires no confidence.

What they should have done is to look at all the Fund Managers who were in business 5 years ago, and then seen how they performed over these years. That would have given us a feel for how easy it is for these particular professionals to outperform, given the large number of amateurs mucking about in the marketplace.

The way they have conducted this study, all the Fund Managers who went out of business in these past 5 years have not been counted- hence the conclusion that "90% of the Fund Managers has a 50% rate of outperformance versus the benchmark Nifty at least half the time."

This article has a nice section on how the Fund Mangement industry manages to make itself look good.

There are a number of ways that active fund managers have been able to promote the illusion that as a group they are adding investment value. The investment management industry has many tricks to make it appear as if everyone is doing better than average.

For a start they can load the dice by opening to the public a lot of historically profitable funds. Fund managers introduce creation bias into the equation by starting a lot of aggressive new funds. The way this trick works is they give seed capital to a number of promising young portfolio managers every year. These managers then invest and trade aggressively for the next year or two, establishing a track record. The fund managers that didn't do well get the flick, their money gets plowed into the more successful fund and then the investment company opens the new fund to the public and puts enormous marketing hype behind it. In this way managers can ensure that all new funds (that the public hear about) have excellent track records.

There are studies that have found that brand new funds often underperform their own track records, and as a group seem to do worse than more established funds, this is probably why. Note that these new funds don't do any better than average following their launch, but they do get to brag about impressive past performance.

The second trick is to bury the evidence if one of their public funds ever falls behind. Survivorship bias is introduced when fund managers close or merge their less successful funds with more successful ones. By continually weeding out the weaker funds, a fund manager can present a prospectus showing the entire range of investment options being market beaters. Similarly, when a fund is culled it is usually deleted from most databases, so history is rewritten by the winners. Professor Burton Malkiel, author of the excellent book A Random Walk Down Wall Street studied this phenomenon and estimates survivorship bias could add as much as 1.5%pa to the performance of the median fund manager. Investors do not benefit from survivorship bias, real world investors do lose money on funds that are deleted. All that improves is the historical average performance of fund databases.

Third trick is to throw a lot of hype behind high performing funds. There is little evidence that winning funds are able to sustain their high performance over the long term, so this can only be seen as a cynical marketing exercise, cashing in on last year's luck. Naturally funds that don't perform well don't advertise much, so all you see are ads showing high performance. (Rajeev: rather as your colleagues at work would are more likely to tell you about the winning stocks that they purchased, not the losers they have on their portfolio)

The fourth trick is as scurrilous as the rest, even a very poor fund that has underperformed over the longer term can have a good year or two, so as long as these funds only talk about recent past performance they can avoid the prickly question of longer term past results.

Similarly, funds can always brag about past glories, proudly displaying the fund manager of the year ribbon they won 3 years ago on every advertisement, and brag about a high long term performance even if the last few years have been dreadful.

The Poet-Scholar

The Harvard Business Review has a surprisingly enjoyable interview with James G. March, "professor emeritus in management, sociology, political science, and education at Stanford University". From the introduction

In these pages, three years ago, consultants Laurence Prusak and Thomas H. Davenport reported the findings of a survey of prominent management writers who
identified their own gurus. Although his is an unfamiliar name to most readers of this periodical, James G. March appeared on more lists than any other person except Peter Drucker.

and

March is perhaps best known for his pioneering contributions to organization and management theory. He has coauthored two classic books: Organizations (with Herbert A. Simon) and A Behavioral Theory of the Firm (with Richard M. Cyert). Together with Cyert and Simon, March developed a theory of the firm that incorporates aspects of sociology, psychology, and economics to provide an alternative to neoclassical theories. The underlying idea is that although managers make decisions that are intendedly rational, the rationality is “bounded” by human and organizational limitations. As a result, human behavior is not always what might be predicted when rationality is assumed.

One of the themes of his work appears to be the importance of the irrational- of behavior that does not seek to justify itself. It is unusual for the subject of an interview to insist on his irrelevance

If there is relevance to my ideas, then it is for the people who contemplate the ideas to see, not for the person who produces them. For me, a feature of scholarship that is generally more significant than relevance is the beauty of the ideas. I care that ideas have some form of elegance or grace or surprise—all the things that beauty gives you.

and

No organization works if the toilets don’t work, but I don’t believe that finding solutions to business problems is my job. If a manager asks an academic consultant what to do and that consultant answers, then the consultant should be fired. No academic has the experience to know the context of a managerial problem well enough to give specific advice about a specific situation. What an academic consultant can do is say some things that, in combination with the manager’s knowledge of the context, may lead to a better solution.

and

The scholar tries to figure out, What’s going on here? What are the underlying processes making the system go where it’s going? What is happening, or what might happen? Scholars talk about ideas that describe the basic mechanisms shaping managerial history—bounded rationality, diffusion of legitimate forms, loose coupling, liability of newness, competency traps, absorptive capacity, and the like. In contrast, experiential knowledge focuses on a particular context at a particular time and on the events of personal experience. It may or may not generalize to broader things and longer time periods; it may or may not flow into a powerful theory; but it
provides a lot of understanding of a particular situation. A scholar’s knowledge cannot address a concrete, highly specific context, except crudely. Fundamental academic knowledge becomes more useful in new or changing environments, when managers are faced with the unexpected or the unknown. It provides alternative frames for looking at problems rather than solutions to them.

His ideas on friendship and love reflect the influence of Kierkegaard's idea of a "leap of faith"

We justify actions by their consequences. But providing consequential justification is only a part of being human. It is an old issue, one with which Kant and Kierkegaard, among many others, struggled. I once taught a course on friendship that reinforced this idea for me. By the end of the course, a conspicuous difference had emerged between some of the students and me.

They saw friendship as an exchange relationship: My friend is my friend because he or she is useful to me in one way or another. By contrast, I saw friendship as an arbitrary relationship: If you’re my friend, then there are various obligations that I have toward you, which have nothing to do with your behavior. We also talked about trust in that class. The students would say, “Well, how can you trust people unless they are trustworthy?” So I asked them why they called that trust. It sounded to me like a calculated exchange. For trust to be anything truly meaningful, you have to trust somebody who isn’t trustworthy. Otherwise, it’s just a standard rational transaction.

He argues for the value of being foolish

That paper sometimes gets cited—by people who haven’t read it closely—as generic enthusiasm for silliness. Well, maybe it is, but the paper actually focused on a much narrower argument. It had to do with how you make interesting value systems. It seemed to me that one of the important things for any person interested in understanding or improving behavior was to know where preferences come from rather than simply to take them as given.

So, for example, I used to ask students to explain the factual anomaly that there are more interesting women than interesting men in the world. They were not allowed to question the fact. The key notion was a developmental one: When a woman is born, she’s usually a girl, and girls are told that because they are girls they can do things for no good reason. They can be unpredictable, inconsistent, illogical. But then a girl goes to school, and she’s told she is an educated person. Because she’s an educated person, a woman must do things consistently, analytically, and so on. So she goes through life doing things for no good reason and then figuring out the reasons, and in the process, she develops a very complicated value system—one that adapts very much to context. It’s such a value system that permitted a woman who was once sitting in a meeting I was chairing to look at the men and say, “As nearly as I can tell, your assumptions are correct. And as nearly as I can tell, your conclusions follow from the assumptions. But your conclusions are wrong.” And she was right. Men, though, are usually boys at birth. They are taught that, as boys, they are straightforward, consistent, and analytic. Then they go to school and are told that they’re straightforward, consistent, and analytic. So men go through life being straightforward, consistent, and analytic—with the goals of a two-year-old. And that’s why men are both less interesting and more predictable than women. They do not combine their analysis with foolishness.

and

Well, there are some obvious ways. Part of foolishness, or what looks like foolishness, is stealing ideas from a different domain. Someone in economics, for example, may borrow ideas from evolutionary biology, imagining that the ideas might be relevant to evolutionary economics. A scholar who does so will often get the ideas wrong; he may twist and strain them in applying them to his own discipline. But this kind of cross-disciplinary stealing can be very rich and productive.

It’s a tricky thing, because foolishness is usually that—foolishness. It can push you to be very creative, but uselessly creative. The chance that someone who knows no physics will be usefully creative in physics must be so close to zero as to be indistinguishable from it. Yet big jumps are likely to come in the form of foolishness that, against long odds, turns out to be valuable. So there’s a nice tension between how much foolishness is good for knowledge and how much knowledge is good for foolishness.

Another source of foolishness is coercion. That’s what parents often do. They say, “You’re going to take dance lessons.” And their kid says, “I don’t want to be a dancer.” And the parents say, “I don’t care whether you want to be a dancer. You’re going to take these lessons.” The use of authority is one of the more powerful ways to encourage foolishness. Play is another. Play is disinhibiting. When you play, you are allowed to do things you would not be allowed to do otherwise. However, if you’re not playing and you want to do those same things, you have to justify your behavior. Temporary foolishness gives you experience with a possible new you—but before you can make the change permanent, you have to provide reasons.

Of course, all these can be questioned and someone like Richard Dawkins would probably make mincemeat of ideas like the "leap of faith", and March recognizes the potentially tragic consequences of such foolishness

It’s all a question of balance. Soon after I wrote my paper on the technology of foolishness, I presented it at a conference in Holland. This was around 1971. One of my colleagues from Yugoslavia, now Croatia, came up and said, “That was a great talk, but please, when you come to Yugoslavia, don’t give that talk. We have enough foolishness.” And I think he may have been right.

I suspect Hume saw the relationship between the passions and reason better than anyone else. Whether we like it or not, passion governs us- nobody ever chose to refrain from suicide because of a cost-benefit analysis. We live on because we like
living, and can ask for no other justification.

The poem "As I walked out one evening" by W.H. Auden seems apt.

The Imperial Style Part Deux

The New York Times has an article on Shing-Tung Yau- the "Emperor of Math", who was recently involved in controversy with Grigory Perelman.

In 1979, Shing-Tung Yau, then a mathematician at the Institute for Advanced Study in Princeton, was visiting China and asked the authorities for permission to visit his birthplace, Shantou, a mountain town in Guangdong Province.

At first they refused, saying the town was not on the map. Finally, after more delays and excuses, Dr. Yau found himself being driven on a fresh dirt road through farm fields to his hometown, where the citizens slaughtered a cow to celebrate his homecoming. Only long after he left did Dr. Yau learn that the road had been built for his visit.

A fascinating tale.

The Imperial Style

The New Yorker has a fine review of "Academic charisma and the origins of the research university" by William Clark.

At a Berlin banquet in 1892, Mark Twain, himself a worldwide celebrity, stared in amazement as a crowd of a thousand young students “rose and shouted and stamped and clapped, and banged the beer-mugs” when the historian Theodor Mommsen entered the room

One of the more interesting topics is how Germany's universities took the lead in the 19th century. The driver was competition among a swarm of small states- somewhat like Singapore today.

The heart of Clark’s story, however, takes place not during the Middle Ages but from the Renaissance through the Enlightenment, and not in France but in the German lands of the Holy Roman Empire. This complex assembly of tiny territorial states and half-timbered towns had no capital to rival Paris, but the little clockwork polities transformed the university through the simple mechanism of competition. German officials understood that a university could make a profit by attaining international stature. Every well-off native who stayed home to study and every foreign noble who came from abroad with his tutor—as Shakespeare’s Hamlet left Denmark to study in Saxon Wittenberg—meant more income. And the way to attract customers was to modernize and rationalize what professors and students did.

This competition led to constant innovation.

Bureaucrats pressured universities to print catalogues of the courses they offered—the early modern ancestor of the bright brochures that spill from the crammed mailboxes of families with teen-age children. Gradually, the bureaucrats devised ways to insure that the academics were fulfilling their obligations. In Vienna, Clark notes, “a 1556 decree provided for paying two individuals to keep daily notes on lecturers and professors”; in Marburg, from 1564 on, the university beadle kept a list of skipped lectures and gave it, quarterly, to the rector, who imposed fines. Others demanded that professors fill in Professorenzetteln, slips of paper that gave a record of their teaching activities. Professorial responses to such bureaucratic intrusions seem to have varied as much then as they do now. Clark reproduces two Professorenzetteln from 1607 side by side. Michael Mästlin, an astronomer and mathematician who taught Kepler and was an early adopter of the Copernican view of the universe, gives an energetic full-page outline of his teaching. Meanwhile, Andreas Osiander, a theologian whose grandfather had been an important ally of Luther, writes one scornful sentence: “In explicating Luke I have reached chapter nine.”

And then

In an even more radical break with the past, professors began to be appointed on the basis of merit. In many universities, it had been routine for sons to succeed their fathers in chairs, and bright male students might hope to gain access to the privileged university caste by marrying a professor’s daughter. By the middle of the eighteenth century, however, reformers in Hanover and elsewhere tried to select and promote professors according to the quality of their published work, and an accepted hierarchy of positions emerged. The bureaucrats were upset when a gifted scholar like Immanuel Kant ignored this hierarchy and refused to leave the city of his choice to accept a desirable chair elsewhere. Around the turn of the nineteenth century, the pace of transformation reached a climax.

In these years, intellectuals inside and outside the university developed a new myth, one that Clark classes as Romantic. They argued that Wissenschaft—systematic, original research unencumbered by superstition or the authority of mere tradition—was the key to all academic achievement. If a university wanted to attract foreign students, it must appoint professors who could engage in such scholarship. At a great university like Göttingen or Berlin, students, too, would do original research, writing their own dissertations instead of paying the professors to do so, as their fathers probably had. Governments sought out famous professors and offered them high salaries and research funds, and stipends for their students. The fixation on Wissenschaft placed the long-standing competition among universities on an idealistic footing.

Between 1750 and 1825, the research enterprise established itself, along with institutions that now seem eternal and indispensable: the university library, with its acquisitions budget, large building, and elaborate catalogues; the laboratory; the academic department, with its fellowships and specialized training. So did a new form of teaching: the seminar, in which students learned by doing, presenting reports on their original research for the criticism of their teachers and colleagues. The new pedagogy prized novelty and discovery; it was stimulating, optimistic, and attractive to students around the world. Some ten thousand young Americans managed to study in Germany during the nineteenth century. There, they learned that research defined the university enterprise. And that is why we still make our graduate students write dissertations and our assistant professors write books. The multicultural, global faculty of the American university still inhabits the all-male, and virtually all-Christian, research universities of Mommsen’s day.

On the other hand, in England

He also uses the ancient universities of Oxford and Cambridge as a traditionalist foil to the innovations of Germany. Well into the nineteenth century, these were the only two universities in England, and dons—who were not allowed to marry—lived side by side with undergraduates, in an environment that had about it more of the monastery than of modernity. The tutorial method, too, had changed little, and colleges were concerned less with producing great scholars than with cultivating a serviceable crop of civil servants, barristers, and clergymen.

The review ends with a note of concern.

If Clark helps us to understand why the contemporary university seems such an odd, unstable compound of novelty and conservatism, he also leaves us with some cause for unease. Mommsen may have liked to see himself as a buccaneering capitalist, but his money came from the state. Today, by contrast, dwindling public support has forced university administrators to look for other sources of funding, and to assess professors and programs through the paradigm of the efficient market. Outside backers tend to direct their support toward disciplines that offer practical, salable results—the biological sciences, for instance, and the quantitative social sciences—and universities themselves have an incentive to channel money into work that will generate patents for them. The new regime may be a good way to get results, but it’s hard to imagine that this style of management would have found much room for a pair of eccentrics like James Watson and Francis Crick, or for the kind of long-range research that they did. As for the humanities, once the core of the enterprise—well, humanists these days bring in less grant money than Mommsen, and their salaries and working conditions reflect that all too clearly. The inefficient and paradoxical ways of doing things that, for all their peculiarity, have made American universities the envy of the world are changing rapidly. What ironic story will William Clark have to tell a generation from now?

He is probably right, but the example of people like Fred Kavli gives us reason for hope. The problem is not that the loss of State funding, but the ballooning costs of science- especially in areas like Particle Physics. The benefits of competition are not to be sneezed at, and when faced with a resource crunch, smart people can innovate, as is seen with recent work on Particle Accelerators.

Cell phones at sea

I first heard of this development in the Economist, but Greg Mankiw blogs that fishermen in my home state are taking their mobile phones to sea with them, and posts the abstract of a paper by Robert Jensen of the Kennedy School .

Visual proofs

From Mahalanobis

The Charms of the Bourgeoisie

The new Nobel Laureate has an article out in the Wall Street Journal, on his current interest- the "dynamism" of economies.

There are two economic systems in the West. Several nations--including the U.S., Canada and the U.K.--have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations. This is free enterprise, a k a capitalism.

The other system--in Western Continental Europe--though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks. Since World War II, a great deal of liberalization has taken place. But new corporatist institutions have sprung up: Co-determination (cogestion, or Mitbestimmung) has brought "worker councils" (Betriebsrat); and in Germany, a union representative sits on the investment committee of corporations. The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy.

He explains that those who created the European systems had wonderful faith in the intelligence and benevolence of centralized systems.

When building the massive structures of corporatism in interwar Italy, theoreticians explained that their new system would be more dynamic than capitalism--maybe not more fertile in little ideas, such as might come to petit-bourgeois entrepreneurs, but certainly in big ideas. Not having to fear fluid market conditions, an entrenched company could afford to develop radical innovation. And with industrial confederations and state mediation available, such companies could arrange to avoid costly duplication of their investments. The state and its instruments, the big banks, could intervene to settle conflicts about the economy's direction. Thus the corporatist economy was expected to usher in a new futurismo that was famously symbolized by Severini's paintings of fast trains. (What was important was that the train was rushing forward, not that it ran on time.)

Friedrich Hayek and others showed that a pure capitalist system, by enabling experimentation and encouraging the participation of everyone, would maximize dynamism.

First, virtually everyone right down to the humblest employees has "know-how," some of what Michael Polanyi called "personal knowledge" and some merely private knowledge, and out of that an idea may come that few others would have. In its openness to the ideas of all or most participants, the capitalist economy tends to generate a plethora of new ideas.

Second, the pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation. And, importantly, the financier and the entrepreneur do not need the approval of the state or of social partners. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier's investors. So projects can be undertaken that would be too opaque and uncertain for the state or social partners to endorse. Lastly, the pluralism of knowledge and experience that managers and consumers bring to bear in deciding which innovations to try, and which to adopt, is crucial in giving a good chance to the most promising innovations launched. Where the Continental system convenes experts to set a product standard before any version is launched, capitalism gives market access to all versions.

He then argues that the great benefit of such dynamism accrues to the employees

The concept that people need problem-solving and intellectual development originates in Europe: There is the classical Aristotle, who writes of the "development of talents"; later the Renaissance figure Cellini, who jubilates in achievement; and Cervantes, who evokes vitality and challenge. In the 20th century, Alfred Marshall observed that the job is in the worker's thoughts for most of the day. And Gunnar Myrdal wrote in 1933 that the time will soon come when more satisfaction derives from the job than from consuming. The American application of this Aristotelian perspective is the thesis that most, if not all, of such self-realization in modern societies can come only from a career. Today we cannot go tilting at windmills, but we can take on the challenges of a career. If a challenging career is not the main hope for self-realization, what else could be? Even to be a good mother, it helps to have the experience of work outside the home.

And a comment that probably applies to India:

Why, then, if the "downside" is so exaggerated, is capitalism so reviled in Western Continental Europe? It may be that elements of capitalism are seen by some in Europe as morally wrong in the same way that birth control or nuclear power or sweatshops are seen by some as simply wrong in spite of the consequences of barring them. And it appears that the recent street protesters associate business with established wealth; in their minds, giving greater latitude to businesses would increase the privileges of old wealth. By an "entrepreneur" they appear to mean a rich owner of a bank or factory, while for Schumpeter and Knight it meant a newcomer, a parvenu who is an outsider. A tremendous confusion is created by associating "capitalism" with entrenched wealth and power. The textbook capitalism of Schumpeter and Hayek means opening up the economy to new industries, opening industries to start-up companies, and opening existing companies to new owners and new managers. It is inseparable from an adequate degree of competition. Monopolies like Microsoft are a deviation from the model.

He argues that even Rawls' conception of Justice appears risk-averse only because we have always insisted that work is only about money

Yet the tone here is wrong. As Kant also said, persons are not to be made instruments for the gain of others. Suppose the wage of the lowest- paid workers was foreseen to be reduced over the entire future by innovations conceived by entrepreneurs. Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream?

To respond, we have to go outside Rawls's classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization--no matter if they take paying jobs instead--and that counts whether or not they were born the "least advantaged." So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid workers--and higher, of course, if workers are not damaged by support for entrepreneurship. In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls's bottom scores.

Over at Asymmetrical Information, Jane Galt has a fine post on the relative importance of economic versus civil liberty. Her point would resonate with anyone who has shut his trap simply to avoid annoying his manager.

Working in technology in the 1990's, I had a fair number of friends and colleagues from the former Soviet Union. One of the things that surprised me was the way they described living under totalitarianism in the 1970's and 1980's. To them, the risk you took in joining the wrong group or saying the wrong thing was not, as it had been under Stalin, the risk of the KGB showing up one misty night to make you "disappear". It wasn't even going to the (horrible and often deadly) Soviet jails. The risk was that you would lose your job, or your apartment, or both. This was a very, very effective deterrant to any sort of dissidence.

When the State is the sole employer, where do you go if you anger it?

Obituary

Paul Halmos is dead.

Are women underpaid?

The New Economist blogs on "Were women's wages customary"- a paper by Joyce Burnett of Wabash College on the gap between the wages paid to men and women ("Throughout history and all over the world women have earned lower wages than men"). She asks whether this reflected custom or market forces.

The best way to resolve the question of who was right is to look for evidence that is not the expression of someone’s opinion, but is direct evidence from output. Evidence from production functions gives us such direct evidence. The available evidence from production functions uniformly indicates that women had lower marginal productivity than men.

Using census data to estimate the marginal products of men and women in the US in 1860, Craig and Field-Hendrey find that women were about 60 percent as productive as men in agriculture, and 40 to 50 percent as productive in manufacturing. Cox and Nye use data on nineteenth-century French manufacturing firms to estimate the marginal
product of male and female workers and find productivity ratios ranging from 0.37 to 0.63. When they test for wage discrimination, they find no evidence of wage discrimination.

Benjamin and Brandt use a 1936 household survey in China to estimate the contribution of men and women to family income in general and crop income specifically; they find that women contributed 62 percent as much as men to farm production.60 Women are also less productive than men in agriculture in developing countries today; Jacoby finds that women were 46 percent as productive as men in Peruvian agriculture in the 1980s. While the estimates of the productivity ratio vary depending on the industry and location, all of the estimates suggest that women were substantially less productive than men in manual labor.

Thus I conclude that women’s wages, at least in competitive sectors such as agriculture and textile manufacturing, were not customary in the sense that they were lower than women’s productivity.

In the comments, knzn asks whether this confuses cause and effect: maybe because custom set men's wages higher, they were employed in high-productivity jobs while women were relegated to low-productivity jobs. I don't think that would survive in a competitive market where arbitrage would result in low-wage women being employed in high-productivity jobs, so that their wages get bid up. Lafayette wonders whether the difference may have been because the women could not do heavy manual labor. If that is the case, we would see the gap close as mechanization reduces the need for muscle vs brain.

Here is a previous post on this topic.

Two comments:

1. I am pretty sure there is discrimination against women, as there has been against almost any group you can think of. The case of Joan Robinson is a good example. She helped found the theory of monopolistic competition, and won the Cambridge controversy ('As historian Mark Blaug put it, Samuelson made a "declaration of unconditional surrender"'), and yet never won the Nobel and did not become a full professor at Cambridge University until 1965, when she was 62 years old. ('Perhaps not coincidentally, this was the year her husband retired from Cambridge.')

2. The wages reflect poductivity in the market, which is fair. However, I expect this understates the total output of women, which includes unpaid labor at home.

Very Big

The world's third largest refinery complex is coming up at Jamnagar, India. The Guardian reports.

But Reliance says it gambled on a "paradigm shift" in the economics of the refinery business. The company, which began as a textile trader but moved into producing polyester, had noticed that India was importing millions of tonnes of refined hydrocarbons a year. Its managers projected prices creeping upwards largely due to three global oil trends.

First the oil being produced from the world's hydrocarbon reservoirs was increasingly "sour", or heavy, full of sulphur and other impurities that older refineries could not cope with.

Second was that no new capacity was being built around the world. Environmental concerns and the rising costs of infrastructure projects discouraged the oil majors from putting up refineries in Europe and America. No new oil refinery has been built in the US since the 1980s as environmental legislation has tightened.

Third was Reliance's belief that Asian economies would become dynamos of world growth - inevitably increasing demand for petro-products. It also saw that many European countries wanted cleaner petroleum, which required complex refining techniques. According to its strategists, commercial logic dictated that new, hi-tech refineries would be needed - and soon. Reliance, Mr Meswani says, decided to build big.

Thanks to the New Economist.

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.