Sunday, 31 August 2014

The Axis is back



More BS amateur geopolitical thinking from yours truly.

In 2002, David Frum came up with one of the more boneheaded rhetorical blunders in American speechwriting history when he coined the term "Axis of Evil" to describe a motley collection of totally unrelated rogue states. Evil it was in varying degrees, but it was no Axis. The states were not allies, and two of them were actually bitter enemies. Nor did they pose any threat to the United States.

But while we were messing around in Iraq, babysitting Sunnis and Shiites, burning our international prestige with a blowtorch, and spending trillions, something very ominous was happening. The actual Axis - something very like the coalition we faced in World War 2 - was reconstituting itself, like some sort of demonic fantasy-novel creature that gets defeated and dispersed but never really dies.

Of course, I'm talking about Russia and China, which have occasionally been dubbed the "Axis of Authoritarianism", though Frum's boneheadedness has probably soured people on "Axis" nicknames for a while. But nevertheless, I think the analogy is apt.

What happened in World War 2 was basically this: Two small, powerful states (Germany and Japan) tried to conquer the large Asian land empires next to them (Russia and China) while those giga-empires were in a moment of weakness. Eventually the little guys would have lost, but the U.S. hastened that loss by intervening on behalf of the big countries. The U.S. conquered the Axis countries and reconstituted them as economically strong but military weak mostly-isolationist states, setting them up as buffers against the two now-very-pissed-off empires. The big empires, Russia and China, opted for a system (communism) that was economically non-viable in the long term but in the short term gave them organizational capacity that allowed them to repel external military threats (obviously this happened earlier in Russia). The system they adopted put them in ideological conflict with America, the country that had just saved their butts, and America won the ensuing ideological struggle when communism turned out to be a long-term loser. This outcome was hastened by a bitter split between Russia and China, which showed that shared ideology is never a guarantee of durable geopolitical friendship.

OK, that brings us to 2000. Post-Cold War, Russia and China have both adopted systems that look a little bit like the systems of the countries that whooped up on them in World War 2. Putin's Russia is a nationalist country that places a lot of emphasis on race, and scapegoats minorities like gays, while not really having an economic ideology - a little like Nazi Germany, but far less insane, and much more dependent on natural resource exports. China is now a bureaucratic directed-capitalist state with a strong independent confident military, a feeling of national resentment over past mistreatment by powers near and far, and a feeling that its destiny is to dominate East Asia - a little like Imperial Japan, though less beset by domestic terrorism.

Meanwhile, the strategies being used by Russia and China are a little similar to those used by the actual Axis. Russia is gobbling up co-ethnic neighboring states, much as Hitler gobbled Austria and the Sudetenland. China is bullying the neighbors (though not grabbing territory outright quite yet, as Japan did). And the two have formed a friendship of convenience rather than a strong cooperative alliance, much like Germany and Japan did in the Axis. The similarity is probably because Europe and East Asia each lends itself to a certain geopolitical power-building approach.

Ideologically, neither Russia nor China is interested in foisting a universalist ideology on the world - but neither were Nazi Germany or Imperial Japan. Hitler didn't want everyone to agree that Germans were racially superior, he just wanted people to bow to him and do what he said (or die, or both). Same with Japan. It wasn't until the Cold War that competing trans-national global ideology really came into play (though it had been in play in some other conflicts in history.) The new Axis is generally more authoritarian than its opponents, generally respects human rights less, generally favors less stable borders (despite Chinese B.S. rhetoric about national sovereignty), and is generally more militarily aggressive (Iraq notwithstanding). These characteristics are what make the Axis the Axis and the Allies the Allies. But that's not what the conflict is about.

What the conflict is about, is domination of Eurasia, the big continent. I don't know why countries want to dominate this landmass - it seems kind of dumb to me - but they do. This time instead of unusually tough periphery countries trying to conquer and replace the core, the big core countries have got their act together (more or less) and are ready to retake their "rightful" place as emperors of the big continent. Meanwhile the little countries on the periphery, in Europe, East Asia, and Southeast Asia, just want to be independent from the power of the core countries. The U.S., halfway around the world, tries to play balancer and stabilize everything. The "Axis" is just whoever is trying to dominate Eurasia this week, and the "Allies" are just the U.S. plus whoever in Eurasia would rather not be dominated. Until either A) everyone realizes that dominating the vast expanses of interior Asia is pointless, or B) those expanses become populated and economically self-sufficient and divided up into a bunch of stable countries, an Axis will periodically form, and be countered by some Allies.

So that's kind of how I see things. The Axis is, for all intents and purposes, back. That doesn't mean we need to fight it in an apocalyptic war like last time. In fact, that would be a singularly bad idea. With nukes now involved, the cost is way too high. But we are probably in for a protracted struggle, unless the big core Eurasian countries suffer another falling-out or suffer some kind of surprising internal collapse.

Thursday, 28 August 2014

Thursday Roundup, 8/28/2014



Ride em, cowblogs!

Me on BV

1. Japan needs the hammer of private equity to smash the rotting edifice of corporate inefficiency

2. RBC models: The null hypothesis that there is no business cycle

3. Let's make sure not to discriminate against Chinese-Americans if we go to war with China

4. In which I cast doubt on a study about marriage

5. Economics is neither science nor literature, but a third intellectual culture

6. Different groups are treated differently under the law in America


From Around the Econ Blogosphere

1. Acemoglu and Robinson think that people want central governments to protect people from local bullies. Libertarians, take note. Speaking of libertarians, it turns out that many American "libertarians" don't hold very libertarian beliefs.

2. Cathy O'Neil on why the Fields Medal is st00pid. She is correct. And by "correct" I mean "I agree". Also see Frances Coppola on why we give too much respect to Nobelists relative to other scholars.

3. Surveys claim to have found that Americans are a lot more conformist, and less individualistic, than Europeans. Hive minds, indeed.

4. Kevin Grier unleashes a hellacious rhetorical slap at Market Monetarism. OUCH OUCH OUCH

5. Tim Harford: Are monopolies quietly taking over our economy? Unsettling.

6. A well-known econ blog commenter gives a list of reasons not to believe Shiller's CAPE-based warnings about an overpriced stock market.

7. Scott Sumner claims that the switch to true fiat money (post-Bretton Woods) was the mother of all black swans. But he's wrong: Nassim Taleb is the mother of all black swans. See, I just called Nassim Taleb a girl, ha ha ha.

8. John Cochrane says the Fed has mostly done the right thing since the financial crisis. John Taylor's head just exploded. But his hair, curiously, is intact.

9. Michael Strain of AEI argues that we need better infrastructure. If conservatives really jump on this bandwagon, then I say it's morning in America.

10. A great list of quotes by economists dissing economics. It's not clear if they're just talking about macro, though.

11. Is active management dying? Sometimes these days it feels like the whole finance industry is a non-pressurized balloon with a hole in the side, slowly losing air. If so, will that hold down the salaries of econ profs, for whom the finance industry is one of the main outside options? But this question would take us too far afield.

12. Dan McFadden might be my favorite economist. Watch him give a talk about decision-making. Then bow before his awesome awesome-itude.

13. Tyler Cowen says that the way economists measure "trends" and "cycles" has some major problems. Tyler Cowen is quite correct. And by "correct" I mean "the data seem to agree".

14. Tim Harford: 4% inflation target 4% inflation target 4% inflation target 4% inflation target 4% inflation target 4% inflation target 4% inflation target 4% inflation target 4% inflation target...oh dash it all, we'll never get a 4% inflation target.

15. All MMT people should watch Chris Sims talk about how he thinks money and inflation work. Also, all MMT people should dress in gold spandex and throw tomatoes at cars while playing "She Loves You" by the Beatles on kazoos and doing a little bow-legged jig.

16. Josh Brown talks about how the toughest part of being a financial adviser is helping people curb their behavioral biases. Even harder than drinking liquid magma while wrestling a python.

17. Mark Buchanan asks why economists are so obsessed with the Arrow-Debreu result. My answer: Because a cabal of gynecologists and realtors has been secretly promoting Arrow-Debreu since the end of World War 2.

18. Bob Murphy thinks Scott Sumner is using the EMH like a just-so story to "explain" anything he sees in financial markets. Bob Murphy, perhaps a bit uncharacteristically, makes a really good point.

19. Are red-light cameras a form of tax farming? I wouldn't have asked that question if I didn't think the answer was "yes"...

20. Cardiff Garcia summarizes, and dares to gently critique, Autor's Jackson Hole paper.

Tuesday, 26 August 2014

I still don't understand the philosophy of Bayesian probability



Brad DeLong is having an extremely fascinating conversation with an E.E. Doc Smith deus ex machina character, an emulation of a Princeton professor, looser emulations of two famous dead probabilists, and a made-up Greek mediator himself about the philosophy of Bayesian probability (see also here). DeLong focuses on the question of whether probabilities should be "sharp" - i.e., whether we should always say "I believe the probability of the event is x%" (as Bayesians always do), or whether we should say something along the lines of "I believe the probability of the event is between x% and y%."

But I want to focus on a deeper question, which is: What is a probability in the first place? I mean, sure, it's a number between 0 and 1 that you assign to events in a probability space. But how should we use that mathematical concept to represent events in the real world? What observable things should we represent with those numbers, and how should we assign the numbers to the things?

The philosophy of Bayesian probability says that probabilities should be assigned to beliefs. But are beliefs observable? Only through actions. So one flavor (the dominant flavor?) of Bayesian probability theory says that you observe beliefs by watching people make bets. As DeLong writes:
Thomas Bayes: It is simple. [Nate Silver assigning a 60% probability to a GOP takeover of the Senate in 2014] means that Nate Silver stands ready to bet on [Republican] Senate control next January at odds of 2-3. 
Thrasymakhos: “Stands ready”? 
Thomas Bayes: Yes. He stands ready to make a (small) bet that the Majority Leader of the Senate will [not] be a Republican on January 5, 2015 if he gets at least 2-3 odds, and he stands ready to make a (small) bet that the Majority Leader of the Senate will not be a Republican on January 5, 2015 if he gets at least 3-2 odds.
DeLong is very careful to write "a (small) bet". If he wrote "a bet", we would have to introduce Nate Silver's risk aversion into our interpretation of the observed action, if the bet size were large. DeLong is assuming that a small bet will get rid of Silver's risk aversion.

However, there's a problem: DeLong's assumption, though characteristic of the decision theory used in most economic models, does not fit the evidence. People do seem to be risk-averse over small gambles. One (probably wrong) explanation for this is prospect theory. Loss aversion (one half of prospect theory) makes people care about losing, no matter how small the loss is. To back out beliefs from bets, you need a model of preferences. And that model might be right for one person at one time, but wrong for other people and/or other times!

But isn't that just a practical, technological problem? Why do we need real-world observation in order to define a philosophical notion? Well, we don't. We already defined a probability as a real number between 0 and 1 (which gets assigned to the latter slot in the tuples that are the elements of a probability measure). That's fine. But the Bayesian philosophical definition of probability, if it is to be more than "a number between 0 and 1," seems like it has to include a scientific component. The Bayesian notion of "probability as belief" explicitly posits a believer, and ascribes the probability to that real, observable entity (note: This is also why I think the "Weak Axiom of Revealed Preference" is not an axiom). If we can't observe the probability, then it doesn't exist - or, rather, it goes back to just being "a number between 0 and 1".

So can't we just posit a hypothetical purely rational person, and define beliefs as his bet odds? Well, it seems to me that this will probably lead to circular reasoning. "Rational" will probably be defined, in part, as "taking actions based on Bayesian beliefs." But the Bayesian beliefs, themselves, will be defined based on the actions taken by the person! This means that imagining this purely rational person gets us nowhere. Maybe there's a way around this, but I haven't thought of it.

Does all this mean that the definition of Bayesian probability is logically incoherent? No. It means that defining Bayesian probability without reference to preferences (or other decision-theoretical rules that stand in for preferences) is scientifically useless. In physics, a particle that interacts with no other particles - and is hence unobservable, even indirectly - might as well not exist. So by the same token, I claim that Bayesian probabilities might as well not exist independently of other elements of the decision theory in which they are included. You can't chop decision theory up into two parts; it's all or nothing.

I assume philosophers and decision-theory people thought of this long ago. In fact, I'm probably wrong; there's probably some key concept I'm missing here.

But does it matter? Well, yes. If I'm right, it means the argument over whether stock prices swing around because of badly-formed beliefs or because of hard-to-understand risk preferences is pretty useless; there's no fundamental divide between "behavioral" and "rational" theories of asset pricing.

It's also going to bear on the more complicated question Brad is thinking about. If you're talking to people who make decisions differently than you do, it might not be a good idea to report a number whose meaning is conditional on your own decision-making process (which your audience does not know). So that could be a reason not to report sharp probabilities to the public, even if you would make your own decisions in the standard Bayesian-with-canonical-risk-aversion way. But what you should do instead, I'm not sure.