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April 2009



If I Were Netflix I'd Be A Little Worried

April 09, 2009 – Comments (29) | RELATED TICKERS: NFLX

My teenage trends consultant has told me something interesting. She wants to drop our Netflix subscription. Why?  [more]



The Origin Of Wealth by Eric Beinhocker

April 06, 2009 – Comments (1)

This is an important book. It synthesizes economics with evolutionary theory and thermodynamics to come up with something that looks a lot more like the real world than traditional economics. I don't know about you, but when I was taking econ in college it really reminded me of the intro physics class where you took so many simplfying assumptions that you ended up with unreality. (Let's assume the strings are massless, the pulley frictionless, the masses are all point masses and the viscosity of the fluid is zero. Oh yeah and there is no turbulence.) This is why I found an awful lot of econ to be unsatisfying because most of the assumptions were false.

It was always obvious that in the real world economic behavior was messy, done with partial information, imperfect rationality and that the economy was in nothing like equilibrium. In his run over classical economic theory Beinhocker makes the point that the equilibrium assumption was put in to make the math work out. (Just like the derivative risk models used the normal distribution to make the math nice and then got the real world wrong because the actual distribution had fatter tails.) There isn't any actual justification for the equilibrium assumption, but without it the models didn't close so they kept it.

The core of the book is his discussion on how evolution in three areas, Physical Technology, Social Techology and Business Plans, have been the drivers behind the enormous explosion in wealth since 1750. One measurement that is a wierdly good one is the growth in SKUs that has happened since the hunter/gatherer days. The hunter/gatherers had less than a thousand SKUs. We are probably at about 10,000,000,000 SKUs. This growth in avaiable things is driven by evolution in all three areas and shows no signs of stopping any time soon. Indeed business plan evolution seems to be the most easily mutated of three areas, so expect the rate of change to increase not decrease. (One thing that falls out of his discussion on business plan selection and replication was it explained why management fads spread like wildfire, no matter how silly they are.)

One big upshot of the discussion is that only a small handful of companies will earn superior returns over any great length of time. A larger (but still very small percentage) will go through cycles of robust growth interspersed with bad periods. It is during the bad periods that they tinker up new business plans that lead to the next cycle of growth. Most companies are like annuals that grow rapidly, reach a maximum size, linger for a while and then stop being separate companies. (By either being bought or going out of business.)

Readers will have a much easier time if they have a little bit of exposure to a few different areas. The first one is computation. If you are comfortable writing a loop where the current iteration depends on the previous iteration and the next iteration will depend on this iteration, then you will have a much easier time with one of the central discussions. Likewise some exposure to evolution and just a touch of thermodynamics will make the first third of the book go down more smoothly. Once you've gotten through the informal discussion of genetic algorithms the rest of the book flows easily. If you have no exposure to these topics you need a better education. (Just kidding, he walks you through all of them, you just need to think about it more.)

My one big quibble with the book is near the end. He's talking about how complexity economics trancends Left/Right distinctions. But in his synthesis on what society should look like, he slips in some decidely progessive points without any attempt at justification. This bothered me. A quick google search turned up that he has contributed over $17,000 to various Democratic party candidates and institutions. So what I think he is trying to do here is to frame the debate the way he likes. This is a little dishonest, but I liked the rest of the book so much that I am willing to overlook it.

The only book that I can remotely compare this to is "Godel, Escher, Bach" by Douglas Hofstadter. While remarkably unlike they both cover an amazing amount of ground to come up with some new and interesting connections between things that seem to be unrelated.  [more]



Gold Standard? That's For Wusses. Real Men Use Plutonium

April 01, 2009 – Comments (4)

Given the currrent shenanigans going on with our currency, a return to a metallic standard has been mentioned by many commentators. Gold is the obvious choice, but it is relatively rare and there just isn't enough of it in the world to form a usable currency. Likewise gold and silver have been proposed, but bi-metallic standards always sink of the reef of arbitrage. It just can't be made to work.  [more]

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