Mixing economics, thermodynamics, and heterogeneity

... or METH, as some call it. And if you want some more drug innuendo, read on.

On Brad DeLong's blog, a commentator named "MJ" deftly applies insights from thermodynamics to the issue of heterogeneity of goods in economics:

What would statistical mechanics be without a quantitative model of heterogeneous vs. homogeneous distributions? Such a statistical mechanics would miss a few subtle but crucial concepts. Such as entropy.

Note how the negentropic development of increasingly heterogeneous capital allocations over the past decade was accomplished through entropy production: bundling good with bad, compromising tranches, etc... Goldman Sachs made a killing, basically, off of knowingly producing entropy. The entropy production, of course (2nd law), far exceeded the negentropy production of their wealth aggregation- as reflected in the order of magnitude between financial industry's gains and the over all loss.

We're now learning Fannie and Freddie also engaged in entropy production, obscuring the distinction between scores over and under 660.

I can vouch for that as showing a good understanding of entropy, and it gives a good perspective for viewing economics:

1) An efficient economy produces as little net entropy as possible: the entropy it generates (destruction of heterogeneity) should be offset by the entropy it destroys in organizing inputs for their uniquely optimal roles.

2) A sign of inefficiency is when economic actors destroy distinctions (like in MJ's example of very different tranches and borrowers being made indistinguishable) without making a corresponding useful distinction or organization.

Definitely some issues worth fleshing out. I know I've seen papers that try to view economics from a thermodynamic perspective, but they invariably have me rolling my eyes.

Happy (premature) New Year's!

That is all.

Setting circular anti-IP cliches straight

In a recent discussion on intellectual property (IP) on the Mises blog, I saw Stephan Kinsella advancing (again) a circular argument against IP: that it claims rights in already-owned property. But he very dispute is about which ownership rights people have in property!

I know what you're thinkin: "meh, dog bites man ... what else is new," right? Well, what's interesting is that my standard foil, Peter Surda, actually agrees with me that this specific point is circular, even as he generally agrees with Kinsella in his opposition to IP. Here's what Kinsella said in response:

Peter, I don't think it's circular because our view of property rights is grounded in a Lockean homesteading view as applied to scarce resources. Under that view you can perform any action you want so long as you do not invade the borders of (i.e., change the physical integrity of) another's Lockeanly-owned scarce resource, without his consent. How is this circular?

What follows is my response on the blog, with some hyperlinks for context:

***

The circularity lies in your assumption about which rights you gain by doing how much homesteading, and it is in no way obvious how the rights must work the way you think they do.

Say I homestead a plot of land. How far above and below does that homesteading entitle me to? Yes, you can justify a specific amount, but that's the point: you have to justify why your rights extend to that boundary (abstract or otherwise), not just assume that your land ownership implies ownership of the airspace through which planes fly, and then argue that "airplanes necessarily violate the property rights in already-owned land" ... which, when you think about it, is pretty much what your IP case is.

But that's just the beginning: does homesteading the land entitle you to block (non-nuisance) concentrated sound waves from passing through your land (e.g. ultrasound)? And of course, back to the ol' chestnut: does the land ownership entitle you to block every single frequency of the EM spectrum passing through?

Now, there are many cases where you can assume that homesteading entitles you to certain rights. However, here, the very debate is about which rights you are morally entitled to by virtue of homesteading what. And in that case, it is in fact circular to assume a certain level of homesteading-based rights, since you're trying to prove what the homesteading-based rights are in the first place, which people dispute!

Note that since this is the central argument of Against Intellectual Property, its circularity isn't very encouraging when judging its merit as an argument against IP.

Silas Barta, information theorist by night

UPDATE 12/17/09: Steven Landsburg, after responding several times in the comments section here, posts a defense of his position on his blog, although without mentioning me or Bob Murphy. Hey, I can understand: if I were in his position, I'd hide the existence of me and Bob too!

***

Bob Murphy invokes my expertise on information theory to criticize (yet) another bizarre argument from Steven Landsburg, that the natural numbers are more complex than human life. Here's the mistaken part of Landsburg's reasoning:

...the most complex thing I’m aware of is the system of natural numbers (0,1,2,3, and all the rest of them) together with the laws of arithmetic ...

If you doubt the complexity of the natural numbers, take note that you can use just a small part of them to encode the entire human genome. That makes the natural numbers more complex than human life. Unless, of course, human beings contain an uncodable essence, like an immortal soul

Naturally, I don't necessarily agree with the broader theological points Bob makes in his reply, and such issues will remain even scarcer on this blog than on his. However, I will expand on point I made in discussion with Bob.

The error in Landsburg's line of reasoning is: the fact that you can use instances of X to build Y does not mean X is more complex than Y. Just the opposite, in fact: in order to describe Y, you must describe X as a substep. Like in the analogy I gave, you can use bricks and mortar to build a house, but that means it's the house that's more complex. To fully specify the house you must describe not only the bricks and mortar, but the form they take as a house -- how they're supposed to be put together.

As for arithmetic and natural numbers, it's their lack of complexity that makes them so useful. By appealing to it, you can make sense of a diverse array of phenomena. The more complex arithmetic were, the less helpful it would be in making sense of things.

Just to be clear, this doesn't mean it's easy to learn math (different people have different problems in different topics and levels), or that you can't do anything complex with math. The point is that no amount of complexity produced in using arithmetic could ever imply arithmetic's complexity, for the same reason that no matter how complex a house you make with one kind of brick, you can't make the brick more complex.

But of course, Landsburg's errors don't end there. He wants to go so far as to say that by merely encoding the genome in base 4, you've described human life. That's certainly the impression people get from discussions of DNA in the popular media and movies like Jurassic Park. Hey, all you need is a string of letters made up of A,G,C,T, and you've described someone completely!

To put it mildly: that's not how it works. First of all, you need to say what the letters actually mean. And then, even if you know that much, all you have are empty labels -- suggestively named LISP tokens. So you know that C is cytosine? Okay, but what's that? Now you need to describe where the carbons and nitrogens and oxygens go to make up cytosine. But wait -- what's this "nitrogen" thing, anyway? And so on.

Don't worry -- the process terminates: once you've described the generative model that puts all of these concepts together in a way that yields a description of human life as its output.

Needless to say, you're using more than a few integers by that point!

World's newest space agency: Reuters

I normally don't pay much attention to photo credits, but I had to do a double-take on this one. An article in the Telegraph has a satellite picture of the sun. Of course, to get that kind of picture, you have to get pretty close, exist in a high temperature environment, and have photography equipment capable of significantly attenuating the EM radiation thrown off from the sun

And who do they credit for the photo? NASA, right? No, we get:

Professor Henrik Svensmark argued that the recent warming period was caused by solar activity. Photo: REUTERS

Um, yeah dude. I think Reuters got that photo from someone else. With the budget cuts the media have had to make in the past few years, they can only afford near-earth satellites. Deeper-space probes are just out of the question.

ANYWAY, since I haven't posted on Climategate, or for that matter, anything in a while, here are my thoughts: It's absolutely disgraceful, the way the scientists in question have acted. Disclosure of your data does not mean that skeptics get to go on a multi-year scavenger hunt to find your raw data and then play guessing games about which sources you threw out and why.

The very fact that you have to make a post like this one in order to summon forth all the data is proof that you weren't being transparent enough.

There's also clear evidence that the scientists didn't seem to understand that you can't contort one data source to look like another and then call it two independent sources of data. Eric S. Raymond has done a tremendous job at exposing the tricks in the code, which explains exactly why the insular climate science doesn't want critics poring over their work

Oh, and just a hint: when you only allow people you approve of to review your work, that's not science.

PS: Recall that my outrage at many libertarians has been to their reactions *conditional* on AGW being real, and that outrage remains.

Sarcasm, applied properly

In case you've been living in a cave for the past few weeks -- or rely on the mainstream media for your news -- you've probably heard about climate scientist Joe Romm's expose of the shoddy work on global warming in the new book SuperFreakonomics by Levitt and Dubner. (Excellent compilation of the discussion in the blogosphere and some mainstream publications.)

Long story short, it's like the kerfuffle a while back between me and Bob Murphy about his own, um, imprecise commentary on global warming, except that the mistakes by Levitt and Dubner were much bigger, they got called on their shoddiness by a lot more people, and they continued to dig themselves much deeper that Bob ever tried to. To top it off, they deliberately misrepresented one of their experts (Ken Caldeira added the quote you see to his web page in contradiction of a position attributed to him in the book after he found out what was in it.)

(Note: this isn't about "rah rah let's cut carbon emissions" vs. "those durn whiny hippies". Regardless of your opinion on the issue, Levitt and Dubner's handling was extremely shoddy, and exactly the kind of thing that neither side should want, even and especially if you agree with their policy positions.)

With that in mind, take a look at this post on the Freakonomics blog, where Levitt complains that he's unfairly portrayed, in his university's alumni magazine, as someone not tackling the "big questions" and who's ruining economics.

Yep, this is one of those times when only Silas-grade sarcasm will do. Here's what I posted:

Well, it's a good thing you've moved on from sumo-wrestling into important issues like global warming, where you've carefully researched the issue, accurately represented expert opinion, and presented an even-handed, informative discussion of the issue that helps sustain the University of Chicago's excellent reputation.

Needless to say, the comment didn't make it through moderation.

By the way, it's my birthday today! Wish me a happy 28th if you haven't already!

Paul Krugman actually allows criticism on his blog!

I had heard bad things about Keynesian economist Paul Krugman not allowing comments on his blog that are too critical, but that turned out not to be an issue. In a recent post he argues that the gold standard is obviously flawed because economic recovery during the Great Depression was highly correlated with going off the gold standard. Nevertheless, my usual criticism of this point got approved for others to see. It's this comment, which I'll repost here:

****

I’ve known about this correlation for a while, but I think it’s misleading, regardless of the merits of a gold standard.

Think about it this way: at the time, people expected their money to be convertible at a specific rate into gold. “Going off the gold standard” is therefore a roundabout way of saying “robbing people of their wealth”, because it amounts to expropriation of their gold holdings.

So this correlation (between going off the gold standard and recovery) reduces to the observation that “when times are bad, taking rich people’s stuff and redistributing it can making things look a lot better in the short term” … which isn’t so impressive when you look at it that way.

The real question is, *discounting* for the usual effects of looting the rich, did it make the economy better off than it would have been without such capricious, revolution-like activity?

Setting Callahan Straight -- on reductionism and the history of science

In a recent post on his blog, Gene Callahan tried to defend the "mysterious vital force" hypothesis from the clueless reductionists, saying that hey, it was a good idea at the time, and might even show some promise today.

After I explained that the "vital force" of the 18th century used to "explain" life (in the way that the "train force" explains the motion of trains) was not scientific in the way that gravitational force was, the exchange started to get lengthy. So, he did was all pursuers of the Truth do: he closed comments.

And this isn't the first time for Callahan to use argumentum ad closum: in a previous exchange where "TokyoTom" was the critic, he did the same thing, and TokyoTom recounts the pre-cutoff (and pre-coverup!) exchange on his blog.

So, since I can't post on Callahan's blog for that discussion, I decided to post my response to his latest comment here. So, take a gander at the discussion thus far, and read my response below. Let's hope it's just a "blog malfunction" this time, too!

********

Now, of course, this is not an explanation, just like Newton's force laws do not "explain anything," as the Cartesians ceaselessly pointed out.

And the Cartesians were dead wrong to argue this. Generating a model that correctly predicts the paths of celestial bodies (and bodies in vacuums, and falling bodies on earch with a high mass/drag ratio, etc.) is an explanation. The alternative -- your alternative -- results in such absurdities as "Okay, okay, sure, you were able to accurately predict celestial motions, material strengths, rocket propulsion capabilities, air properties, blah blah blah ... but you don't truly understand what it means to fly to the moon and return safely. Yeah, you have a 'model' that accurately predicts all that stuff, but you didn't truly [*suggestive emphasis*] explain it."

What else could you want from an explanation? The satisfaction of Gene Callahan's personal aesthetic standards? Or your presuppositions about things that have to be there?

Descartes and other mechanists developed models showing how gravity and magnetism could be reduced to the motion of particles alone -- Descartes, for instance, posited a flow of little screw shaped particles drawing iron to magnets.

And that would be a *different* explanation. It may be a better or worse explanation. But "reducing to particle motions" is not a requirement for an explanation, especially if it's wrong or unnecessarily long. Newton's model remains an explanation in that it constrains our expectations.

At the time, vitalism was a sound scientific hypothesis, and the vitalists expected to find good force laws just like for gravity, etc.

And they had no basis for such an expectation, even before an experiment, since "the vital force" is an "explanation" for everything, and therefore nothing. No matter what experiment they performed, it would be consistent with a "vital force". That was how they actually used the term.

me:"Your claim was stronger because you are saying that now, even given all the scientific knowledge we have, there still remains hope for the vital force "hypothesis"..."

you:All sorts of scientific hypotheses get revived after being "soundly rousted" earlier.

Right, but about the issue we were discussing: My claim, the one you're responding to here, is that the position you do endorse ("Vitalism may turn out to be a fruitful hypothesis") is a stronger claim than the one you excused earlier vitalists for believing (that it's reasonable given the limited evidence so far).

Yes, theories do get revived after being discarded. But as for the point that I was actually discussing there, it's irrelevant; the fact remains that you are making a stronger claim.

Now, with that said, scientists are indeed looking for causal phenomena and more general laws they may not have noticed before. But they keep a *broad* outlook. There are many, many shorter hypotheses to rule out before positing an additional, ontologically-fundamental "vital force" -- if in fact the "hypothesis" claims anything at all.

Oh, and what do you think about the complete overthrow of reductionism in quantum mechanics, where the behaviour of "atomic" particles turns out to be not atomic at all, but dependent instantaneously on the state of all other particles they have interacted with throughout their entire history, so that ultimately their state depends on the state of the entire universe?

Now you're just showing more ignorance of science on top of ignorance of reductionism. It was the philosophers, not physicists, who fell into the trap of thinking of particles, rather than an amplitude distribution over configurations, as being ontologically fundamental entities, and so were seduced to believe, "hah, I can say that you can never prove two electrons are identical, because that's an issue of epistemology, which I'm an expert in, rather than physics", which is wrong.

Reductionism of the kind I (and Drescher and Pearl and Jaynes and Hofstadter) endorse was never predicated on the existence of "atomic particles". Rather, it identifies where such hidden assumptions come in.

What modern quantum physics shows is that the wave equation is deterministic, and each point need only look at its immediate neighbors to iterate to the next state. See the excellent work of Gary Drescher in Good and Real: Demystifying Paradoxes from Physics to Ethics, or, for an online source, Eliezer Yudkowsky's quantum physics sequence.

My new kitty!

Last weekend, I adopted a little black male kitten that a friend of mine had found and was taking care of. He (the kitten, I mean) will be joining my other cat, Cordie, whom you may remember from her younger days. Cordie's a lot bigger now, though, and is playing mommy for her new friend.

Here are some pictures of the most adorable kitty ever! (Click to enlarge.)

What a Bayesian causal network on Newcomb's problem might look like

Explanation of Newcomb's problem.

ADDED: Oh, and here's the long discussion that led me to draw the network above. Click the picture to enlarge.

What "interference" with radio signals really means, and its implications for property rights

A common confusion often arises: people talk of the "interference" with radio tower transmissions, without understanding what physical process the term refers to. This misunderstanding makes it hard to see the logic in my analogy between intellectual property and rights to radio frequencies.

In a recent debate on intellectual property, I finally decided to set the record straight, and what follows in this post borrows heavily from what I said in the debate.

First, how does radio communication actually work? I'll admit that I don't know the answer all the way down to the nuts-and-bolts level. But I can explain it from the perspective of information theory.

Radio communication works, to the extent that it works, because a listener can perform a measurement, and thereby learn something about the source, i.e. the message transmitted. (This "something" they learn is called the "mutual information" between the two points, and is equivalent to so-called "Bayesian evidence".)

And when it comes to your radio, what is that actual measurement? Setting a dial on it that changes a circuit's properties so that it resonates when the surrounding area is filled with electromagnetic (EM) waves around a certain frequency. And when it resonates, an electrical signal in the radio follows a certain pattern that's correlated to the signal the radio tower is sending. Your radio then converts the circuit's electrical signal into sound that is meaningful to you.

All of this functioning relies on an assumption: that by performing the measurement, you do in fact learn something about the source. That assumption is violated when more than one tower transmits with enough intensity at the frequency you perform a measurement on. In this case, no measurement result tells you anything about either source: the transmitted waves overlap each other, coming across a gibberish on your radio. (In the lingo, there's no "mutual information" between you and either source.)

So whenever you talk about "interference" with radio communication, what you really mean is "violation of an assumption some parties were using to communicate which, when violated, makes them unable to communicate."

To understand the significance of using the term "interference" in this way, let's look at a more practical, intuitive example with the same dynamic, but unrelated to the EM spectrum.

An Illustrative Example

Let's say that I live in a small village where I have a few friends. I want an easy way to communicate to them that I expect a rainstorm today. So, I work out an "encoding scheme" with them in advance: if they hear me hit my gong before 8 am, I predict rain. If they don't hear me hit my gong, I don't predict rain. So, instead of having to tell them all individually, I can just hit the gong. They'll hear it, and they'll get a message from me. By "measuring" the sound they hear before 8 am, they learn the "signal" I'm sending.

So far, so good.

But there's a little snag: my friends will hear a gong sound as long as anyone hits a gong not just me! So, our communication scheme only works as long as we can rely on no one else hitting a gong before 8 am. If we can't rely on that, I can't send them the message, at least not as reliably. Because when they hear a gong, sure, it could be me, but it could also be anyone else with a gong. Hearing the gong sound is no longer a reliable sign that I think it will rain.

So there you see it: our communication system can be defeated by "interference" from other people, either because they're trying to set up their own similar system, or because they just like being mean. But this "interference" simply means: violating an assumption that we, rightly or wrongly, thought we could rely on.

And how does this relate to radio communication? Simple: the existence of the gong sound before 8 am is just like a radio signal within a given frequency range: it can provide information to others, but only if others don't try to use the same means to communicate.

Conclusion

So do you think people should be able to "homestead" such "communication assumptions" like that? Should I be able to assert rights as "the only one who can hit a gong in this area before 8 am"? (Or, to be less greedy, the right to hit a gong in this area in a certain five-minute window, with a certain rhythm.) Your answer to that question tells you a lot about how you should look at other issues.

For example, how about asserting rights as "the only one who can broadcast radio waves in this area within a particular frequency band"? How about asserting rights as "the only one who can distribute books containing Harry Potter stories"?

Hey! That last one kinda sounds like intellectual property rights...

Update on Billy Mays

Turns out he died of heart disease. (HT: Megan McArdle)

In honor of Billy Mays's characteristic style, and because I don't know the appropriate waiting time for stuff like this, I feel like I have to write the following:

***

Genial pitchman appears

"Are you suffering from clogged arteries?"

[footage of attractive middle-aged actor clutching chest and wincing]

"Does your doctor tell you to cut back on the foods you love?"

[footage of stereotypical doctor grimly advising attractive patient, who appears to be saddened]

"Well, now you can plow STRAIGHT THROUGH that build-up with Arta-cleanse! Using its patented formula, you can clear out those harmful deposits that put you at risk for heart disease!"

[computer simulation of large artery with ugly-looking blockage that is being magically washed away with pretty fluid]

"Powered by nature's very best ingredients, Arta-cleanse gives you INSTANT results you can SEE! Just watch!"

[Pitchman goes over to attractive middle-aged woman sitting down, injects syringe into upper inner right right arm]

"Watch as Arta-cleanse works its way through the system to BLOW AWAY all the nasty build-up that drags down your mood and strength!"

[camera zooms in on woman's arm, as discoloration propagates through arm where vein is located]

"In just MINUTES you have a cleaner, meaner, healthier circulation, or your money back!"

[camera cuts away to woman jogging, then to her blood pressure being checked, with a good reading showing up on a conspicuous monitor]

"But wait! Order in the next ten minutes and we'll throw in this free tourniquet that will make the injection even easer! And that's not all. Call within the next FIVE minutes and we'll DOUBLE your order for FREE! All this for just $29.99."

"HERE's how to order!" [points at camera]

***

You BETTER pay me royalties if you make that video! >:-(

Billy Mays, RIP

The famous pitchman Billy Mays has passed away at his home in Tampa. Famous for promoting OxyClean, Orange Glo, and the Hercules Hook, among other things, he became well known in the "as seen on TV" world.

I won't deny it, I loved that guy. His genial manner, his voice, his hand motions... and I've been using OxyClean to get out stains for a while. Er, well, the generic brand now, but still.

If you need a refresher, here's a characteristic video:



ADDENDUM: Here is a comic I made about Billy Mays and posted on a forum around two years ago. All in jest, of course.



Note the characteristic hand gestures ;-)

Fun with graphics and the environment!

Well, the Environmental Defense Fund has a cute graphic out (HT: Free Advice) promoting "green jobs":



The basic idea, as you probably figured out from the graphic, is that mandating pollution caps will give people something to do, thus reducing unemployment. They don't put it that way, of course, but that's the idea, and it's a rehash of the Broken Windows Fallacy.

This justification for pollution restrictions misses the point, of course. Assigning well-defined, sustainable pollution rights is a good idea, for the same reason that assigning rights to any scarce resource is a good idea: because of justice and efficiency, not because it would add another task for people to do.

In light of all of that, I decided to pull a SomethingAwful and put different words into the graphic, in an attempt to criticize my nemesis Bob Murphy's (of the Free Advice site linked above) sudden love of Coasean extortion payments when it comes to pollution. Enjoy!

220

Now, find what question from a previous post that's an answer to.

Spot the common professional economists' error

From James Hamilton:

When academic economists talk about inflation, we often think in terms of a single-good economy in which the concept refers unambiguously to an increase in the dollar price of that good.

If you can't wait for me to give you the answer, just go to the link and find my link. Well, I don't give it there either.

Anyway, all I can say is, if you make this kind of error at the beginning, don't expect me to put a lot of faith in your analysis...

Government loan to Chrysler now a gift

So it turns out that all that money the government "loaned" to bankrupt Chrysler doesn't have to be paid back, making it a gift, a handout, a chunk of free money. (Incidentally, this is one of my complaints about the whole vocabulary of discussing the crisis. Companies whine about how they need "liquidity" or "credit" or "short-term working capital". No. They need free money. More on that some other time.)

It just gets worse with every passing day. First, it was, "Don't worry guys, we're just giving loans to troubled companies, they'll pay them back, it's not like we're favoring anyone here!"

And now they throw all that to the wind, making it a $7 billion gift to failing Chrysler to cover up its complete inability to meet its obligations, and draw in people who had nothing to do with the management of Chrysler. (A friend and I dubbed it the "bridge loan to nowhere".)

Gee, when do *I* get my $7 billion loan that I don't have to pay back. I'll make sure to pay taxes on it! (Anyone think Chrysler's going to do the same for their "lobbying income"?)

A version of this is cross-posted as a comment at Naked Capitalsim.

On the "Felony Stupdity" in the NYC Flyby

Apparently, I'm not the only one stunned by the "felony stupidity"in the decision yesterday to fly an Air Force One standby with fighter jet escorts at low altitute through New York City. To begin with, to fly over the city that actually endured a terrorist attack from low-flying jumbo jets, a few weeks' worth of warning are certainly called for.

And for what? Apparently, because their file photos of ... aircraft, I guess? ... were out of date. Yes, the indignity of having insufficiently new pictures of your aircraft flying near the Statue of Liberty!

I would estimate this whole venture cost the government $500,000 (a coworker with more experience in this kind of thing puts it at $2 million), when you take into account wages of those participating, fuel and security costs, coordination with other agencies, etc. Then you take into account the costs imposed on bystanders (panic, evacuations), which I'll conservatively estimate bring the total cost to $10 million.

With that in mind, do you know what's really outrageous? They could have accomplished the same thing at a sliver of the cost. Here's what they should have done:

1) Set aside $100 instead of $500,000. Plus maybe a few days of wages for government workers.
2) Go to SomethingAwful.com and start a contest for whoever can photoshop the aircraft they want onto the background they want, promising an award of $100 (tax free!) to the winner. Allow them to use the existing stock photographs of the Statue of Liberty area and aircraft (obviously excluding classified photos).
3) Spend a few days sorting through the hundreds of high-quality entries that are indistinguishable from what you'd get through a photo of the real thing.
4) Spend a few more hours removing the "clever" captions SA users added to their entries, like "Your government at work!" and "9/11 looked something like this".
5) Tell President Obama that you just saved the taxpayers $500,000 minus a rounding error, so he can start up another debate in the blogosphere.

Another interesting thermodynamics result

Here's another interesting insight on thermodynamics and information theory to add to my previous: I realized why "joules per kelvin" is a measure of entropy. Not exciting? Wait, you'll see.

In the previous post on this topic, I mentioned all the parallels between entropy in information theory and entropy in thermodynamics. Also, some properties can be calculated by their information-theoretic definition or their thermodynamic definition, such as the thermodynamic availability, which can be calculated as the Kullback-Leibler divergence, a measure from information theory. But what's interesting is that this value can be expressed in terms of bits, or in terms of Joules per Kelvin, which has units of energy over temperature, with a simple constant multiplier for conversion.

Huh?

You see, there's the hard part: why on earth would bits -- which measure how much memory your computer has -- possibly refer to the same property as "Joules per Kelvin", the way that inches and meters refer to the same property?

And that's where we get to the interesting part. First of all, what is temperature? It's not how much internal energy something has, but rather, it's internal energy per degree of freedom. In this context, a "degree of freedom" is a distinct way that something can be modified at the molecular level. A single-atom molecule may be viewed as having three degrees of freedom, since it can translate in three dimensions. Once the molecule has shape, however, it can rotate in addition to translating. So, two different substances at the same temperature can have different internal energy, because one of them may be stuffing that energy into more degrees of freedom.

So where does that get us with Joules per Kelvin and energy per unit temperature? Well, watch what happens when you expand out temperature in the entropy expression:

energy
------------------------
energy/degree-of-freedom

= energy * degree-of-freedom/energy

= degree-of-freedom (!)

So there you have it! Once you expand it out, energy per unit temperature is simply a roundabout way of saying "degrees of freedom".

Now you may ask, "Nice, but that still doesn't explain what that has to do with bits." But then, what is a bit but a binary degree of freedom? When you have memory of n bits, then there are n values that you can independently set to one of two possible values, making it likewise a measure of degrees of freedom. (Note that this capability allows you to store 2^n possible states.) And informational entropy, in turn -- also expressed in bits -- is the logarithm of the number of possible states a system can be in, making it proportional to the degrees of freedom as well.

The two lessons to take away are that:

1) The number of degrees of freedom a system has depends on the arbitrary choice of what you count as a degree of freedom, just like the number of "units of length" something is.

2) Whichever consistent method you use of counting degrees of freedom, the number of degrees of freedom is proportional to the logarithm of the number of possible states.

Mystery solved! (No, I don't know if this discussion is given in any textbook treatment of the issue.)

Oh, and: Happy Saint Patty's Day!

Well, I took the plunge and installed Ubuntu (again)

Three years ago, I tried to install Ubuntu. Let's just say it went so badly that I'm not even going to give the details for fear that someone I chewed out at the time will notice the similarity between my case and "that jerk on the Ubuntu help site three years ago" and target me for reprisals.

Needless to say, it actually worked this time, since I was smart enough to install it on a completely different computer as a hedge against failure (instead of merely trying to isolate it to a partition on a secondary hard drive) and because the development crew has gotten its act together.

And I have to confess, I enjoy it for the most part. There's still a lot to get used to, and a lot of settings to configure, but I was amazed how easy it was to get wifi working, to install Firefox plugins (note how I don't snidely call it "liarsux" anymore?) and how many Free (yes, "they" want you to capitalize it), useful programs come bundled, and yet the system has no bloat ... everything is fast. Unlike on Windows, there isn't a huge list of processes of questionable purpose running that you can't shut down.

I've also gone back to using Vimperator which I had blogged about before, which means that yes, I made this post without ever using the mouse. But of course, like with most user interface design, the half-genius Herr Stubenschrott had to ruin his own code's functionality. Previously, you would hit the 'f' key and a bunch of key commands would pop up over the links like "ds". Then, hitting "ds" would activate the link. But now, they're all numerical, like "24", which makes it much less convenient.

Stubenschrott, in his defense, now permits you to call up a link by typing the first few letters of it, which I had suggested allowing before ... but it kind of defeats the purpose when the key commands blot out the first two letters! And the entire link becomes highlighted and impossible to read! Fortunately, someone wrote a script that converts it back to the old way.

All in all, a seamless, enjoyable transition so far. Now, to move over the old hard drives, files, and email...

The IP debate heats up again!

Well, did you miss my posting, guys? I know one fellow who did. STS welcomes "Andras", a commenter on the Mises blog, who has single-handedly revived my older, ultra-arrogant post that presented the serious problems with libertarian anti-IP (intellectual property) theorizing. Apparently, the default setting on Blogspot is that posts don't expire, so they can always get more comments, and I saw Andras's comment there because I kept coming back to it to link that post. Note that in addition to the initial post, I summarize in a later comment, my three biggest problems with opposition to IP in the context of libertarianism. Take a gander!

Andras understandably dislikes the pro-IP groupthink (though he doesn't use that term specifically) on the Mises blog. But, there's reason to be happy. I've noticed a sharp change in the general form of IP discussions there. They used to be a few people against hordes of fanatical IP haters. But now, there is significantly more balance, and far more people are making reasoned refutations of the standard (but wrong) anti-IP arguments. Here's a short list from the past month:

Why People Don't Believe In Paying For Music. Hint: Its All About Deflation.
A Book That Changes Everything
Hayek on Patents and Copyrights
Hayek, IP, and Knowledge
Authors: Beware of Copyright
The Universals of IP Theorizing
Matsushita and the Patent
Does Innovation Require Property in Ideas?
Dangers of Copyright Exhibit
Dissecting Boldrin and Levine: An Alternate View of Intellectual Property

Two things to keep in mind: a) these aren't all the IP posts in the past month, and b) I'm linking these not to endorse the argument at the top, but to show the more numerous and well-reasoned criticisms the Mises blog gets now.

Have a very merry DDR Christmas!

Last year, I made a video of myself doing the Christmas- and Winter-themed dances from the video game series Dance Dance Revolution (DDR), and put it on my YouTube page. But back then, I didn't have a rockin' blog to link it from!

Since Christmas is going to hit soon, here's the video, the most viewed on my page:

A non-conspiratorial explanation of oil's price history

As you're probably aware, oil this year surged to $147 a barrel and then fell to, as of today, about $40 -- over a 2/3 drop in less than six months. And its peak was over a 100% increase from the previous year. With a lot of the decline shortly before the election, this roller-coaster ride has prompted quite a lot of conspiracy theories.

Well, recently on another (private) forum, I summarized the significant reasons why oil acted like that, without reference to any conspiracy. I'll repeat it here:

1) China was buying a lot of oil and stockpiling it. Unlike the general "growth in emerging markets", this actually came as a surprise to a lot of speculators, which is why it was such a fast rise instead of a gradual one since 2000. China was doing this in order to burn less coal and make the air cleaner for the Olympics. Now that that's over, a significant source of demand is gone.

2) Because of the credit crunch, speculators were significantly less able to borrow and bid up the price of oil. Once it hit, they had to significantly unwind their positions.

(Now, I'm all for the right of people to make speculative purchases; however, what we had there was *far* from a free market. For one thing, the government's bailing out of banks that had hedge funds doing the speculating, eliminated the strong negative downside to hype-based, stupid speculation. Also, a lot of the *naked* shorts and longs were very corrupt where if one party lost money, the brokerage would act like it can't find the original contract and try to reverse the sale. Things like this artificially amplified the price premium due to hype [as opposed to rational estimations of future developments] and crowded out wiser investors.)

3) The global economic downturn significantly revised investors' estimates of future oil demand.

4) The president's, and then congress's, termination of the ban on offshore drilling also significantly changed expectations about future oil availability. These helped prod oil down.

Setting externalities straight: the elephant in the room

A recent comment on Megan McArdle's blog gave me a chance to explain (again) what I think is wrong with "glibertarian" (glib libertarian) solutions to the problem of externalities.

Basically, I think that when people complain about negative externalities, what they are really complaining about is a negative externality that they also find morally objectionable, but for well-grounded, intuitive, practical reasons. To suggest that the victim of such shenanigans should have to pay off the wrongdoer, thus misses the point. That is exactly the reasoning I elaborate on in the comments section of that post.

So, to the discussion. Jim Glass said:

... *if* transaction costs were zero *then* "externality problems" like pollution would be bargained away in the market, but these problems aren't bargained away in the market, *thus* transaction costs are large -- and should get a lot more attention from economists and other social planners than they do.

So I responded:

Jim_Glass: actually, as I said above, I think the problem people intuitively have with this Coasean reasoning is that it's not true, even in the pure case of no transaction costs.

Think about it this way: what if while you were sleeping I came close to your window -- though still outside your property, and revved my motorcycle loud enough to keep you from sleeping. And let's say that, because of some technicality, there's no law or property right you can invoke to make me stop.

Would you seriously try to pay me to go away, thinking, "hey, problem solved!" Hopefully, you're not that stupid. Because then you just created the incentive for people to extort more money out of you. Yet economists would pat themselves on the back and say, "See? Because of property rights, this so-called 'problem' has an efficient solution."

But it's a load of crap.

Now, as an economist, you might admit that, okay, sure, you suffered a bit -- you lost some of your consumer surplus. But that "doesn't matter" because it's "just" a transfer payment. You lost, and I gained. Only when there are are *no* gainers do we see an "inefficiency" and therefore a problem. Here, there is no problem.

Hell yes there is! A system in which people can extort money this way is a system in which people just don't make as big investments in property [which results in less wealth for everyone], knowing that that will just make them a better target for extortion. It's a systematic weakening of property rights.

So no, Jim_Glass, the appropriate solution is not to "get transaction costs to approach zero, and let bargaining take over." The appropriate solution is to require those who try this extortion to pay up for it!

Deliberately annoying people should *not* be a path to wealth. People see this intuitively. And for the exact same reason, the victims of global warming should *not* be the ones that have to buy out the polluters, even if the transaction costs would be zero.

The thing is, in these internet debates, people who object to e.g. pollution, are doing so in a way perfectly consistent with the basis I laid out -- yet rarely do the participants get around to identifying these underlying assumptions! Instead, they just throw the same non-responsive points at each other, and ultimately miss identifying the optimal solutions -- both in the moral and economic senses. I seem to be the only being in the world capable of actually seeing what the dispute is ultimately about.

So, again I have to ask: is the world insane, or just me?

Now I'm even famouser*!

Bob Murphy mentions me in a Buffalo News opinion piece. And promotes me to "financial commentator"!

For those of you who got here after wondering, "Huh? Who's Silas Barta?": welcome to my blog! Since you're probably not aware, Bob and I have had some pretty vicious disputes over the issues, so it's quite honorable of him to mention me. He said he felt he owed it to me because I originally suggested the point to him.

Don't worry though, I'll be back criticizing him in no time at all! Like, what's with the sudden reversal of his position on not making conditional endorsements of government intervention "because it might confuse the readers"? More on that later.

*Not actually a valid conjugation in proper English

Inflationary product debasement turns tragic

Previously, I had highlighted the problems in inflation measures that don't take into account when a product is debased in order to hide its true cost. Well, another case of that has come up in the news: the FDA melamine regulations permitting trace amounts of the stuff in baby formula. From the beginning:

This weekend, I saw a news story on TV where a doctor was explaining that, while melamine is most likely safe in these trace amounts, it "has no business being in baby formula" because there's no benefit to the baby, there's a risk of harm, and you just don't need it to make formula.

My immediate reaction was: Okay, if it's so bad, there must be some reason producers would want to include it. After all, businesses don't e.g. pollute just for fun; they do it because that improves product quality and/or cost -- er, at least it appears that way to the most highly-visible parties.

As the story continued, the doctor answered my question by saying that it's included in order to fool the tests used to determine protein content. I don't remember the channel, but I found a San Francisco Gate story substantiating that claim:

Melamine contamination became major news when it was discovered that China was adding it to milk to disguise test results that measure protein levels. Since the chemical was found in infant formula in September, it has sickened some 50,000 Chinese infants and killed 4.

So there's our answer! They use melamine instead of the good stuff in order to pass some protein measurement test. And they only use melamine because it's cheaper, or else what's the point? But, that test has a "blind spot" that will give a "pass" rating to baby formula that only achieved that rating by compromising the "design constraints" of baby formula! So it fits into my template of "compensate for inflation by debasing the product instead of raising the price".

Now, it certainly doesn't take a bout of inflation to make people try to get "something for nothing". But it's a very plausible suspect for why it wasn't tried before.

Of course this is not to take away from the culpability of those who conjure up such unethical policies. And, to some extent, you have to understand the position they're in: when consumers reward those who can keep the visible price low, while ignoring the other costs thereby incurred ... well, don't be surprised when they're all too willing to oblige :-/

A Big-Three-Bailout argument that just might work...

When they couldn't convince anyone they had a clue what they were doing, the Big Three resorted to doom-and-gloom about all the spillover damage onto poor, innocent workers that would ensue if they failed. But even that isn't working. Maybe it's too abstract? Not enough emotional appeal?

Don't worry, Silas X to the rescue! In this video, I show them how to really win over the hearts and minds of our elected representatives!

My plan to destroy the universe won't work

And I'll bet you're relieved!

Maybe a little background is in order.

A question of interest to philosophers and theoretical physicists is whether or not the universe is just a simulation running on some computer, one level up. (See e.g. Nick Bostrom's Simulation Argument.) Of course, many ridicule this idea as being non-falsifiable and thus non-scientific.

Not so fast! I said. Of course it's falsifiable. Here's how: if the universe is a simulation, then its programmers probably try to economize on computational resources (computing cycles, memory, disc space, time, etc). And to do that, they will make the program reveal to "us" (the conscious entities) the minimum required to make everything appear "believable". That in turn, means that as long as we "wouldn't know the difference" if some physical process developed in a way contradicting the rest of our observations, the simulator won't bother to churn through the calculations needed to make the process match up with known universal laws. In other words: "If we're not looking, why bother making sure something's there?"

And that tells us how to test the Simulation Hypothesis: have everyone set up as much measurement equipment as they can, and therefore observe as much as they can. This will force the simulator do many more calculations than it would otherwise have to, since now it has to keep consistent with that many more observations. The programmers then have to devote an ever-increasing amount of resources to keep it running, which will eventually force them to "cut corners" in implementing the laws of physics, revealing violation of Standard Model physics, or ... um, make them pull the plug on our existence.

Hence, my "plan to destroy the universe".

Now, the good news: the plan wouldn't work, based on what we already know about how the universe would react to such a "hypermeasurement" scenario! And the reason is shocking: because we can't actually increase our total knowledge.

"What in the hay-ll? I did me some book-larnin' not but three yurs ago!"

Sorry, that was Cletus, our resident country bumpkin.

Well, I'll need to some more background now to justify that claim. First, I want to point you to a post on OvercomingBias.com that introduced me to a lot about what I'll discuss here: Engines of Cognition.

Now, consider the 2nd law of thermodynamics. There are many ways to express it, but a simpler way is: "The amount of disorder ('entropy') in the universe must always increase." Sure, you can increase the order any one specific place -- say, when you form crystals -- but it will always be counterbalanced by an increase in disorder somewhere else. The most common application of this law is in heat engines (such as the one in your car): when you burn fuel to turn your engine and thus your tires, you are extracting a kind of order: the useful mechanical "work" (as it is called in physics) of a spinning engine. However, to do so, you burn fuel and transfer heat to the environment, which, when tabulated, generates entropy/disorder exceeding that which you destroyed in extracting mechanical work from the system to drive.

Now, here's the kicker: there are deep parallels between the concept of entropy in thermodynamics, and the concept called "entropy" in information theory. In the latter, it refers (roughly) to the uncertainty one has about the content of a message before reading it. Any knowledge that some kinds of messages are more likely than others therefore reduces that "entropy". Similarly, entropy is at a maximum when all messages are equally likely.

And the truly mind-blowing part is that the connection between the two kinds of entropy is so deep that entropy in the information-theoretic sense affects entropy in the thermodynamic sense. (This is going somewhere, just be patient.) In short, if you are able to reduce your uncertainty (information-theoretic entropy) about the "message" contained in the molecules of a system, that knowledge can actually be exploited to reduce the thermodynamic entropy of the system and thereby extract useful work! (For reference, and early exploration of this idea is called the Maxwell's Demon thought experiment, and a hypothetical engine that extracts work this way is the Szilard engine.)

But this hypothetical capability of decreasing the entropy of a system does not actually contradict the 2nd Law, which, you'll remember, says that total entropy must increase. Rather, for reasons I won't go into, this acquisition of knowledge itself is limited by the 2nd Law. Just as the extraction of "organized" mechanical work from fuel requires the generation somewhere else, of at least as much counterbalancing disorganization, so too does the collection of information that could permit extraction of the same work without the fuel require a counterbalancing loss of information somewhere else, i.e. increased uncertainty.

This principle reveals a fundamental limit that your brain (in a deep sense, a "cognitive engine") faces: in order to learn something true about your environment (whether via the senses or inferences), you must sacrifice knowledge somewhere else. Fortunately, nothing requires you to care much about that lost knowledge, which takes the form of "lost certainty about aggregate statistical properties of thermodynamic variables".

Now, back to the main point: from the perspective of hypothetical beings running the universe's simulator, my idea to gather more measurements has no impact. Any time we make a measurement, we are gathering knowledge, which must therefore correspond to lost knowledge somewhere else. So, far from threatening the computer's ability to simulate our universe, all our measurements will (amazingly) decrease the computational resources the simulator requires.

Which neatly returns the Simulation Hypothesis to non-falsifiability, and assures us that even if people acted on my idea, we're still safe and sound. Alternatively, it reveals the universe's programmers to be really, really clever :-)

Yay! I'm famous now!

Because of my earlier criticism of Peter McCluskey's poorly-designed plan to learn the market's estimation of how the party of the next president will impact oil prices and interest rates, I actually got linked by someone I don't already know! (Someone who, by the way, didn't quite take me seriously the first time around.)

Peter McCluskey, for his part, now mourns the failure of his plan.

"Cynical comment left elsewhere" of the day

I've been pretty fed up with the combined favoritism and outright stupidity in the financial system these days. This has led me to guess that any exchange involving a promise from a large, old (and therefore probably protected at all costs by our Overlords in Washington) corporation is going to, less and less often, be treated as something they have to *sigh* actually honor. With Sears and K-Mart reinstituting layaway (in which you make installment payments and then, after the last, receive the product), I figured this would be just another promise you can't trust anymore.

Well, a former happy customer of layaway services, calling herself "Princess of Swords", didn't seem to notice this trend and so disputed my prediction in a discussion on a Megan McArdle post. (UPDATE: previous link was to the wrong site.) Here, I post my response, in which you'll start to understand the basis for my pessimism:

******

Princess_of_Swords: Thanks for taking the time to detail your experience with the intricacies and standard practices prevailing with respect to layaway at the time you availed yourself of it.

Now I'm going to explain to you how it works in the real world.

In the real world, an obligation no longer means anything.

-GM was obligated to pay pensions. They didn't even bother to internally classify them on the same level as a bond, until forced to by law.

-Insurance companies are obligated to pay when disaster strikes. They fight as hard as they can to avoid paying, even for plain vanilla cases.

-Individual consumers buy things on credit, deferring the first payment for a long while. They are routinely caught not having saved for that big first payment.

-Securities brokers engage in naked short-selling of stocks, which obligates them to produce actual ownership of that stock at a later date. Yet as we've seen recently, they've ended up flooding the market with fake stocks and then casually aver that they "can't locate your stocks" and offer to reverse your purchase as if it were no big deal.

-Gift card issuers are unilaterally stealing money from gift card owners on the grounds that "they need it" because they're in financial trouble, despite having obligated themselves to treat the gift cards as equivalent to cash.

-AIG got a massive bailout from the Fed, but, we were assured, they would be obligated to pay a hefty penalty interest rate and start immediately and orderly unwinding their enterprise. Well, the Fed went back and cut their payments in exchange for nothing, thus debasing the Fed's assets (and thus the dollar). And AIG has done virtually nothing to liquidate its assets.

You get the point. I just don't care how you think things used to work back then. We are in a new world, where only us responsible commoners have to keep our word.

And even *more* GM ROFLcopters!

This is too rich. Daniel Gross of Slate writes in defense of propping up the Big Three automakers. But since Slate recently started putting links in the middle of articles instead of at the end, we see that right in the MIDDLE, they post a link to Gross's previous article from '03 where he REJECTED the claim that the auto industry was doomed. Check out these gems:

"...the Big Three enjoy remarkably large market caps: $21.5 billion for GM [now under a tenth of that -- SB].... Throw in all the money that has been lent to the companies, and you have to come to the conclusion that either there's an awful lot of stupid money invested in the survival of the U.S. auto industry or the declinists are mere alarmists."

"...the Big Three are unlikely to seal their own near-term doom for the sake of short-term labor peace. It's safe to assume that the companies will gain the upper hand in negotiations ..."

Yeah, why would unions shoot themselves in the foot? And why would GM have anything but a long-term perspective?

"Ford, as Moneybox has described it, is a profitable bank lashed to an unprofitable carmaker."

Now, without the profitable part!

"...it's hard to go out of business when you have a great deal of brand equity, ready access to the capital markets, and the potential to print money when you have the right product mix at the right economic climate."

I really have to hand it to Slate: highlighting an author's unflattering earlier work is quite a selfless, helpful act!

(Cross posted at the ever-more-foot-in-mouth Megan McArdle's blog.)

ROFL = rolling on floor laughing
ROFLcopter = internet meme alluding to mechanization of this phenomenon

GM outdoes itself again

Finally, mainstream investors are wising up to the completely ridiculous assumptions you have to make to justify investing in General Motors. A Deutsche Bank analyst has finally set a target price of GM stock at $0. But here's what will really refuel your ROFLcopter:

GM bonds maturing in less than 3 years now yield SEVENTY-****ING-FIVE PERCENT!!!!!!

(Scroll down to "Last Sale" at the bottom. Thanks to rluser at Marginal revolution for pointing me to a free bond price site.)

The time it takes for investors to Set Things Straight is way too long.

Well, I guess I don't count as a libertarian anymore

Yesterday I was kicked off the private LibertarianForum Google Group and mailing list. The reason was that I had the audacity to remind other libertarians of the responsibility side of liberty (with respect to global warming), and for pointing out flaws in really stupid arguments against intellectual property (and, conversely, explaining how an IP-free system is vulnerable to Mises's economic calculation critique). The proverbial last straw was a discussion sparked by someone linking this TokyoTom post about Bob Murphy finally admitting, after being dragged kicking and screaming, to admit he misled readers in his op-ed, though of course he's not going to actually say it where any victims of his deception are going to see it.

The head of the list claimed that he was deluged with requests from people who were asking me to be removed, and who apparently lacked the guts and the brains to actually explain where my points were in error. I'm not going to name any names.[1]

Naturally, people are going to claim that, oh, it wasn't what I said, but my rudeness. This is ridiculous -- it's standard practice on the LibertarianForum list to use the exact same tone I did, as even my detractors readily admitted. A more plausible claim would be that the people there didn't like being uncomfortably reminded of the implications of their stated (though certainly not actual!) beliefs.

So why the title of this post then? I believe, after all, everything I did before. But look at it this way: time and time again, I see people nominally also "libertarian" reveal themselves to have been coming from completely different premises. I never imagined that I would see, for example, Bob Murphy take the attitude of, "Oh, did I destroy your land with my CO2 emissions? I got it! Here's the solution! Fix it your own damn self!" (Yeah, way to preach responsibility and universal adherence to basic morality there...)

There's only so many times I can see cases like that before the self-appellation "libertarian" obscures more than it clarifies.

So what to call myself now? One good option is Birchian, after Paul Birch (a former Anti-State Forum contributor), since I've been seeing my views more and more resemble his, especially in terms of focusing on whether the victims of one's actions have been adequately compensated.

Alternatively, I could -- gasp! -- call myself a mutualist as per the philosophy of Kevin Carson, my former nemesis. (As recently as July of this year he quipped that I couldn't grasp an argument even with velcro-covered mittens!) The reason for that term would again be because of my focus on the extent to which nominally "libertarian"-favored activities are in fact predicated on the state stepping in an exempting certain groups from having to actually bear its true cost.

Before inferring too much from this post, I ask that you heed this caution: There is a big difference between "Problem X is often overstated in an attempt to give politicians more power" and "Problem X doesn't exist." I certainly sympathize with those who have seen so many phony environmentalist rationalizations for statist measures that are thinly-veiled attempts to shut down markets, that they hear about Problem X and immediately view it as the former. But ask yourselves: has the tide turned to the point where it's more common to see anti-environmentalist arguments as thinly veiled attempts to shove onto other people, costs that the arguer should be bearing?

[1] Since a lot of you might be sketchy on terminology, a so-called "name" is a label used to refer to a specific instance of a proper noun. An example of a name might be Brad Edmonds or Max Chiz.

Yes I'm still around

And, inspired from a different context, I drew this comic about the current credit crisis corruption.

Rewriting history and science and history of science

Joe Biden tells us how it was in the good ol' days (via Megan McArdle via Jesse Walker and Stuart Buck):

"Part of what being a leader does is to instill confidence is to demonstrate what he or she knows what they are talking about and to communicating to people ... this is how we can fix this," Biden said. "When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed. He said, 'look, here's what happened.'"

Hey, don't laugh! In 80 years, VP candidates will claim that right after 9/11, Barack Obama heroically uplinked to NeuralNet and metacommunicated the full extent of the situation.

Well, I guess the crisis is over now

Warren Buffett is buying into Goldman Sachs, on very favorable terms -- 10% "perpetual preferred shares" plus the right to buy the stock cheaper than it currently is. This will signal that Goldman Sachs is sound, which will then provide a basis for trusting one party, which can then establish a basis for trusting their counterparties, until everyone can trust each other and the crisis can be averted -- for now -- long enough for me to dump the rest of my US shares on idiots -- without a massive government bailout. Hooray!

Alright, maybe a bit too optimistic.

Yeah, I know some of you are waiting for me to joke about how "Buffett has gold man-sacks" ... not gonna happen. This is a family blog. Hi Mom! :-)

Time to review the Put-Call Parity Theorem

With the SEC's recent move to ban short-selling of politically-important securities, it's time to review the beautiful Put-Call Parity Theorem to understand the futility of doing so. Here's my phrasing and elegant explanation of it:

B(t,$X) = S + P(t,$X) - C(t,$X)

B is the value of a bond maturing at time t for $X.
S is the value of some asset, it doesn't matter which.
P is the value of right to sell the above asset at time t for $X. (In financial terminology, a put option dated at t with a strike price of $X.)
C is the value of the right to buy the above asset at time for $X. (In financial terminology, a call option dated at t with a strike price of $X.)

In this sign convention, negative means the counterparty to the security, so for example, if the bond term were negative, it would refer to the value to the borrower on that loan, while the negative call option refers to the person having the obligation to sell at $X to the call owner.

So, the equation means that, for some time t and some money amount $X, a bond maturing at t for $X is equal in value to some asset, plus the right to sell the asset at time t for $X, plus the obligation to sell it at time t for $X.

Proof: the left-hand side of the equation is worth $X at time t. The right-hand side is also worth $X at time t because if S were worth less than $X, the holder of the put could sell it for $X, while if it were worth more, the holder of the call could buy it for less. Q.E.D.

Note that if you find a case where the two sides are not equal, you profit through arbitrage buy buying the cheaper side and selling the more expensive side. In a discussion a few years ago, Gene Callahan claimed this was how he made money. You also might be interested to know that this theorem -- though of course it wasn't referred to in such terms -- was historically used to circumvent financial regulations such as bans on usury, since through clever rearrangement of the equation you can recreate any financial security. Here is a neat paper on that history.

Anyway, the point to remember is, let's say I want to take a short position in a stock. That would be represented by "-S" in the above equation. But let's say you found out that was banned! No problem. Just rearrange the equation! With the function arguments suppressed:

-S = -B + P - C

So, borrow money, buy a put, and write (sell) a call. Problem solved! (Except for the cost of fending off the SEC guy giving you an intimidating stare, of course.)

Verb regularization sighted

You may have heard of the paper published about a year ago modeling when and why verbs regularize, that is, stop having irregular past tenses. (take->took is irregular, while jump->jumped is not) The basic idea is that the less frequently a verb is used, especially its past tense forms, the quicker speakers are to stop using the irregular form. Which makes sense, because those verbs are much easier for people to forget, and much easier for editors not to notice.

Well, in all the turmoil of this week's financial markets, what catches my attention the most? This:

Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers... [emphasis mine]

Now, maybe I've been living in a cave, but that's the first time I'd seen "grinded" instead of "ground" for the past tense in writing. Looks like that one's on the way out!

Oh, and I hope you got out of U.S. stocks and own some gold.

UPDATE: What a crock! They fundamentally revised the article at the link, removing even the sentence that I quoted. I didn't know I was linking to the Department of History Alteration or whatever Orwellian agency it is...

Arnold Kling asks for crisis joke, Silas delivers

In a great post on the current financial market issues, Arnold Kling says:

The guys who got it right on low-down-payment mortgage are the Freddie Mac folks that [ousted Freddie Mac CEO Richard] Syron ignored. (There has got to be a siren-Syron pun in their somewhere, but I'm missing it.)

Oh, that's easy: "In America, it's dangerous for you to ignore a siren. In Soviet Amerika, it's dangerous for Syron to ignore YOU."

I can't post it in his comments section for obvious reasons. If one of you would point him here, that would be rockin'.

How come I never caught this before?

"Power corrupts" -- LORD Acton.

Uh huh. Thanks for the tip. Perhaps His Lordship was trying to pull an Epimenides paradox on us?

Full quote: "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."

Wasn't Lord Acton so great?

I know, I know, British peerage system, he doesn't actually gain much power by being 22nd Earl of Halfingwaysshireford, blah blah blah ...

So I was right again. Now, let's fix inflation measures.

There's a story on CNN Money today about shrinking and degrading products in response to inflation. Unfortunately, it doesn't give more than passing mention to the real stickler in inflation, the "degrading" part, which is harder for measurers to notice.

Consumers are discovering more air in their bag of chips, fewer sheets of paper towels on the roll, thinner garbage bags and even smaller squares of toilet paper. (emphasis mine)

You don't say! I've been noticing this for a while, and haven't been convinced the BEA and BLS capture the impact. When you pay the same for a debased product, that is price inflation, and precisely what you need to measure. But like the fool who won't search for his keys outside of the light, the BEA and BLS don't do the lab testing necessary to incorporate critical quality-related aspects of products.

In my personal experience, I have noticed cereal boxes and paper cups as being flimsier and thus harder to hold -- about as big an inconvenience as you can tag onto such a simple, trivial product. Soda bottles also had confoundingly irritating changes: in addition to the 25% vending machine price increase, they shrunk the cap height beyond all reason so that it's nearly impossible to get a good enough grip to twist open with your hands. The fact that Coca-Cola even made this decision is a testimony to either a) the low quality of their engineering teams, or b) how desperately they needed to debase the product. Neither is encouraging. (To their credit, the caps have returned to "good enough", meaning they've hidden the price increase somewhere else.)

I should feel fortunate to live in a country where "difficulty in opening products" ranks highly enough to complain about. But that's also worrying: in a country with such enormous, overflowing wealth (which the US has, right?) shouldn't producers have kept such noticeable inconveniences out as a matter of course? Something's not right about that picture...

So, if you really want to measure inflation, you're going to have to track these very tricky quality changes. But there's an alternative: focus on measures were this quality debasement just isn't possible. As I'm sure I've argued here and on several boards by now, the ideal candidate is an insulin index which does the work of policing quality improvements for you. If you debase insulin, someone dies. The other benefits are:

-Steady, predictable demand
-Global market with many buyers
-Many inputs, so it's immune to any one specific input's volatility
-No transient intellectual property effects

Which probably accounts for why such information is so durn hard to find!

Second, in addition to capturing quality degradations, they need to fundamentally rework how luxury-type items are accounted for. Those typically "scale" with what other people have. Faster computers mean enabling nicer software, but they can also mean having to pay for hardware I don't need, as the older stuff isn't available, and my current one can't run the latest software that assumes I have a faster machine. And the value I can squeeze out of it doesn't increase one-to-one with the MegaHertz rating!

I absolutely accept that modern technologies have vastly expanded the entertainment and learning options available to me, but an inflation measure must at the same time account for when food and energy prices put the squeeze on me.

I'd be interested in transforming these ideas into an academic paper, except there are a few things ahead on that list...

Play-money arbitrage opportunity

Now this is weird: there's a play money contract on Intrade on whether Fannie Mae common stock will be under $1 per share on Jan 20, 2009. The market there is placing about a 14% chance of it happening.

But then when we look over at financial markets, we see puts on Fannie (the right to sell Fannie shares) trading at $1.60 for a stike price of $2.50 dated right near that. Do the math. To make a profit on the right to sell Fannie at $2.50 when you pay $1.60 for it, the shares must be under $1 at that time, so the financial markets are placing -- at least if my understanding of options is in order -- over a 100% chance on that same event.

If there were a real-money contract on this, it would be a nice arbitrage opportunity. I'll let you figure out what the trades would have to be.

As for me, I snagged 325 contracts, average price $1.21 (payoff is $10/contract if the event happens). All in play money, keep in mind.

UPDATE: Okay, my understanding of options isn't in order. But the point stands: the market places a "very high" chance of Fannie shares being under a dollar by innauguration day, while the play money prediction markets place a "pretty low" chance.

The Bob Murphy and Gene Callahan problem

If you've read their post about banning me, you may have by now a one-sided view of the dispute. I will explain here why I make so many posts on their blog that they find annoying. (some links missing and I apologize)

1) I have called out Bob on his deception of readers. As Bob admits here, his shameful op-ed was written to convince the public that carbon caps are necessarily stupid, a position he rejects. Now, when you are so misleading -- basically trivializing the suffering of hundreds of millions of people to justify why your gas should be cheaper -- yes, it will make you livid when someone points this out in front of others, and Bob's desire to ban me is a predictable manifestation this effect.

2) I regularly call out Gene on his selective invocation of rules of civility. Hey: having a civilzed discussion is great. But here's how Gene defines "civility":

Acceptable behavior:
-Lying about what someone believes (geo-engineering thread)
-Lying about the economics and morality of tradeable pollution caps (the op-ed above)
-Assuming the worst possible interpretation of any argument someone makes. (The discussion on the iMac and the "He must own the place" thread)
-Personal attacks, when Gene or Bob is making them. (apple thread and recent posts resulting in the ban consideration)

Non-acceptable behavior:
-Personal attacks, when Silas makes them.
-Asking for clarification (iMac thread)
-Suggesting that someone did in fact read a blog post just before submitting a full essay on it (in the case of Bryan Caplan's challenge)
-Mentioning that someone should have known something, given his job. (geo-engineering thread)
-Mentioning that someone know about the philosophy of others, given his job. (same)

Note here: Bob and Gene have repeatedly claimed that even when I do have a valid point, they dislike my posts because of the "tone". Well, I'll admit it: I do use a harsh tone, and I should. Their mistakes go well beyond the point where I can attribute it to mere stupidity or ignorance. They reflect a corrupted philosophy, one that says, "Whoa, you thought libertarians supported principled, private property rights? Hell no! We support cheap oil, first and foremost, even and especially if it permanently floods the residences of hundreds of millions of people. The right to slightly increased profits OBVIOUSLY supercedes the right not to have your homesteaded land permanently submerged."

When you have whored out your ideology, and so cheaply at that, a constant reminder from some, some ... nobody will put you into overdrive. It will cost you sleep. It will want you to shut up that voice in any way you can. Hence, the discussion of whether to ban me, which is where we are today.

I am appalled at the way libertarians have reacted to the global warming issue. While libertarians like Bob may have made valid cases why right now carbon caps can't be justified, in doing so, many of them have tipped their hands as to what philosophy they were really following the whole time -- and it's not pretty. If you were confused as to why I've been so harsh, you no longer are. And it is instances like these that give serious substantiation to the claims of those like Kevin Carson who say that many libertarians are more interested in shoving costs onto others than in seriously establishing principled private property rights.

In Bob's defense, he has written a paper on how a private law system would handle the current global warming evidence we've faced. I find it unacceptable (as I do Gene Callan's attempt to solve the economic calculation problem with protests), but we can save that for when it's publicly available. For now, I just want you to note Bob's prioritization: first, ridicule all attempts to define clear rights in the atmosphere. Then, much later, if ever, try to sort out what the libertarian position on atmospheric rights actually is. Oh, and support atmospheric socialism until a serious problem comes up.