I’ve occasionally heard claims about Africa being poor because it was exploited by Europeans and Americans, and I’ve dismissed those claims because they were clearly based on superstitions.
Recently I’ve come across some scholarly writings on the effects of interactions between these cultures.
A paper on Colonial legacies and economic growth confirms my suspicions that areas which were colonized for longer times have higher economic growth.
As I mentioned recently, the book The Bottom Billion shows a connection between poverty and sale of natural resources, but explains several mechanisms by which the revenues could make bad governments more likely, independent of whether the buyers of those resources exploit the sellers. This suggests it’s not easy to resolve claims that such exploitation caused harm.
The most interesting study is The Long-Term Effects of Africa’s Slave Trade (via Freakonomics and Andrew Sullivan), which demonstrates that slave trade between Africa and other continents between 1400 and 1900 is significantly correlated with poverty now. The paper presents a good argument that the causal connection was mainly increased violent conflict due to rewards for enslaving people from neighboring villages (as opposed to prior forms of slavery which resulted from conquest by ethnic groups from somewhat farther regions). This caused social and ethnic fragmentation and corruption. I have doubts about whether the details of the paper’s causal model are correct, but they appear to be approximately correct.
Economics
Book review: The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It by Paul Collier
This very eloquent and mostly thoughtful book about the world’s poorest countries will offend ideologues of all stripes. Collier’s four different explanations for poverty traps (war, presence of natural resources, bad neighbors blocking trade routes, and corruption) clearly place him as a fox rather than a hedgehog without being complex enough that they can rationalize any result (although they can probably rationalize more results than an ideal set of explanations would). He blames both villains in poor countries and thoughtless voters in wealthy countries.
Collier sees that globalization has benefited most nations, but provides plausible mechanisms by which globalization can harm some (e.g. through enabling capital flight).
Collier mostly thinks like a good economist, but his prior work for the World Bank biases him to be overly optimistic about improving such institutions. He recognizes the incentives that cause bureaucrats to be too risk averse, but then makes a cryptic claim that the British government understands the problem and is spending money to fix it. He vaguely implies that this is a venture capital-like fund, but fails to say whether they replicated the key venture capital feature of providing unusually large rewards to employees who produce unusually good results. His silence on this subject leads me to suspect that he’s asking us to blindly trust institutions that have a long track record of avoiding results-oriented incentives.
He also shows misplaced faith in authority when he tries to calculate the value to the world of rescuing a failed state by using George Bush’s calculation that the benefits of installing a good government in Iraq exceeded the expected $100 billion cost. That might be a good argument if Bush had been spending his own money to help Iraq, but his willingness to spend other peoples’ money doesn’t say much.
Collier says it is “surely irresponsible” to leave Somalia with no government. Yet most evidence I’ve seen says Somalia improved by most standard criteria such as life expectancy when it had no government. I don’t know how reliable that evidence is, but Collier’s apparent assumption that we don’t need to look at the evidence makes his opinion suspect.
The book’s biggest shortcoming is the absence of anything resembling footnotes. Collier implies this is too make the book more readable, but he could have put a section of notes at the end referencing individual pages without altering the main text in any way. Instead he only gives a fairly large list of papers he’s written. But I can’t tell without tracking down and reading a large fraction of them which of them if any support his controversial claims (e.g. that giving money to the poorest countries helps them a bit but that doubling it would reach a limit beyond which further money would be wasted).
But his advice is good enough that its value doesn’t depend much on those controversial claims being right. Following his advice to condition aid on results (e.g. sending money to countries when they stop wars, cutting it off if they have a coup or resume war) would provide incentives that would make aid beneficial.
I had previously suspected that large countries have tended to escape poverty more easily in the past few decades because “aid” organizations had enough money to prop up small corrupt governments but not enough to affect a government such as India’s. Collier presents a good alternative theory: being a large country pretty much guarantees access to the sea, and by increasing the number of neighbors, increases the chance of having a neighbor which is open to trade.
Another good tidbit is this point on Fair Trade: farmers “get charity as long as they stay producing the crops that have locked them into poverty.”
Book review: Business Fairy Tales by Cecil W. Jackson.
This book provides a better analysis of financial accounting problems than you can find in the news media. But it’s not thoughtful enough for me to recommend it. The author sounds like an academic who has little experience as an investor.
The book provides little perspective on which mistakes did the most harm. I can’t tell whether the author sees any difference in seriousness of Enron’s inconsistent reports to the SEC about when it adopted mark-to-market accounting and the absence of market prices to guide its so-called mark-to-market accounting (it seems obvious to me that the former is trivial and the latter is outrageous, but I wouldn’t have learned that from reading this book).
I’m also disappointed that the book never takes the perspective of the villains to ask why they thought they could get away with bad accounting. Were they all confident that perpetually rising stock prices would ensure that investors would never complain? Could they have have thought they would make enough money before getting caught to profit even if they were punished? In some cases I can guess why the answer might have been yes to one of these, but in most cases I’m as puzzled as I was before reading the book.
The book suggests a number of signals that investors might look for to detect fraud. But none of them are valuable enough to change the way I read financial reports. A few, such as sales growth not meeting expectations or rising inventory / sales ratios, are valuable signs of an overrated company even though they rarely indicate accounting problems. Most of the signals the book recommends involve things like increases in receivables where there’s no obvious way to distinguish routine fluctuations from changes that indicate problems, so I suspect the number of false alarms would make these signals useless.
I suspect that avoiding the stock market during bubbles is a more practical and effective way of avoiding harm from accounting fraud than trying to follow this book’s advice. I’d guess that 10% of investors will learn to avoid bubbles if they try, but I doubt more than 1% will succeed at identifying fraud. If you do try to identify fraud, pay more attention to people such as Jim Chanos who have found ongoing frauds than to books such as this that only do post-mortem analysis.
The book claims that a benefit of Sarbanes-Oxley is that it restored investor confidence in corporate financial statements. This seems misguided. The stock market decline that prompted Sarbanes-Oxley was largely due to mistaken extrapolations of real trends in internet-related profits. Many investors prefer to exaggerate the role played by fraud because it distracts attention from the mistakes they made at the peak of the bubble. It’s unclear whether increased investor confidence is desirable. Accounting fraud is most common at peaks of bubbles because investor confidence makes it temporarily easier to avoid questions about suspicious accounting practices. Stock markets appear to function best with moderate amounts of suspicion among investors to help keep corporate reports honest.
Book review: How to Spend $50 Billion to Make the World a Better Place, edited by Bjorn Lomborg.
This book makes plausible and somewhat thought-provoking claims about how an altruist ought to spend money to provide the most benefit to the needy. It concludes that high priorities should include control of HIV, malaria, malnutrition, and trade barriers.
It appears to come close to being a good book. It addresses fairly good questions about important issues. Unfortunately, it has been simplified for readability to such an extent as to prevent it from accomplishing much. Its arguments aren’t sufficiently detailed or backed by references for me to evaluate them. So they were probably intended to be accepted as a result of the authors’ authority. But their credentials leave plenty of room for doubt about how much deference their authority deserves.
So I’m left unsatisfied, and highly uncertain whether I ought to read the more detailed version of this book (Global Crises, Global Solutions).
The Virgin Earth Challenge would be a great idea if we could count on it being awarded for a solution that resembles the headlines it’s been getting (e.g. $25M Bounty Offered for Global Warming Fix).
But the history of such prizes suggests that even for simple goals, describing the terms of a prize so that inventors can predict what will qualify for the award is nontrivial (e.g. see the longitude prize, where the winner appeared to have clearly met the conditions specified, yet wasn’t awarded the prize for 12 years because the solution didn’t meet the preconceptions of the board that judged it).
Anyone who looks past the media coverage and finds the terms of the challenge will see that the criteria are intended to be a good deal more complex than those of the longitude prize, that there’s plenty of ambiguity in them (although it’s possible they plan to make them clearer later), and that the panel of judges could be considered to be less impartial than the ideal one might hope for.
The criterion of “commercial viability” tends to suggest that a solution that required additional charitable donations to implement might be rejected even if there were donors who thought it worthy of funding, yet I doubt that’s consistent with the intent behind the prize. This ambiguity looks like simple carelessness.
The criterion of “harmful effects and/or other incidental consequences of the solution” represents a more disturbing ambiguity. Suppose I create nanobots which spread throughout the biosphere and sequester CO2 in a manner that offends some environmentalists’ feelings that the biosphere ought to be left in its natural state, but otherwise does no harm. How would these feelings be factored into the decision about whether to award the prize? Not to mention minor ambiguities such as whether making a coal worker’s job obsolete or reducing crop yields due to reduced atmospheric CO2 counts as a harmful effect.
I invite everyone who thinks Branson and Gore are serious about paying out the prize to contact them and ask that they clarify their criteria.
There has been a fair amount of research suggesting that beyond some low threshold, additional money does little to increase a person’s happiness.
Here’s a research report (see also here) indicating that the effect of money has sometimes been underestimated because researchers use income as a measure of money, when wealth has a higher correlation with happiness.
There’s probably more than one reason for this. Wealth produces a sense of security that isn’t achieved by having a high income but spending that income quickly. Also, it’s possible that people with high savings rates tend to be those who are easily satisfied with their status, whereas those who don’t save when they have high incomes are those who have a strong need to show off their incomes in order to compete for status (and since competition for status is in some ways a zero sum game, many of them will fail).
Book review: Information Markets: A New Way of Making Decisions, edited by Robert Hahn and Paul Tetlock
This book contains some good discussions of current issues in the design of prediction markets (aka idea futures).
Since it’s the result of a conference for experts, it is mainly directed toward experts. It shouldn’t be overly hard for laymen to understand, but it probably focuses on issues that are somewhat different from what most laymen would find interesting, so I’d probably recommend reading Surowiecki’s Wisdom of Crowds or some of Robin Hanson’s earlier papers on the subject first.
One surprising result reported here is that the Iowa Electronic Markets show no longshot bias, in contrast to similar markets on Tradesports/Intrade and to widespread types of sports betting. This looks like an important area for research, although that would probably require setting up many variations on those markets (varying things such as the user interface, commissions on trades, limits on how much money can be invested, etc.), which would be expensive and hindered by regulatory uncertainty.
Michael Abramowicz presents an interesting proposal to create incentives to counteract the likely tendency of markets such as prediction markets to discourage people from making public the knowledge that goes into making market prices efficient. I don’t have much of a guess about how well his solution will work. It needs some more thought about how vulnerable it is to manipulation of the intermediate prices used to reward traders who convince others to follow their reasoning (averaging prices over a week or two would be a simple start at deterring manipulation). But I think he understates the importance of the problems he’s trying to solve. He says “while they are endemic to all securities markets, they apparently cause little harm. They are likely to be much more severe, however, in markets with very few active participants.”. I suspect they are significant in most securities markets, and are underestimated because they are very hard to measure. As someone who trades stocks for a living, I’d say that the amount and quality of knowledge that is shared among traders is quite low compared to most professions, although it’s hard to say how much of this is due to desire to keep valuable information secret and how much is due to the difficulty of distinguishing valuable information from misleading information.
This book does an excellent job of reporting important evidence showing that group decisions can be wiser than those of any one individual. He makes some good attempts to describe what conditions cause groups to be wiser than individuals, but when he goes beyond reporting academic research, the quality of the book declines. He exaggerates enough to give critics excuses to reject the valuable parts of the book.
He lists four conditions that he claims determine whether groups are wiser than their individual members. I’m uncertain whether the conditions he lists are sufficient. I would have added something explicit about the need to minimize biases. It’s unclear whether that condition follows from his independence condition, partly because he’s a bit vague about whether he uses independence in the strong sense that statisticians do or whether he’s speaking more colloquially.
Sometimes he ignores those conditions and makes unconvincing blanket statements that larger groups will produce wiser decisions.
He makes exaggerated claims for the idea that crowds are wise due to information possessed by lots of average people rather than the influence of a few wise people. For instance, he disputes a Forsythe et al. paper which argues that a small number of “marginal traders” in a market to predict the 1988 presidential vote were responsible for the price accuracy. Surowiecki’s rejection of this argument depends on a claim that “two investors with the same amount of capital have the same influence on market prices”. But that looks false. For example, if the nonmarginal traders make all their trades on the first day and then blindly hold for a year, and the marginal traders trade with each other over that year in response to new information, prices on most days will be determined by the marginal traders.
It’s not designed to be an investment advice book, but if judged solely as a book on investment, I’d say it ranks in the top ten. It does a very good job of explaining both what’s right and what’s wrong with the random walk theory of the stock market.
He does a good job of ridiculing the “cult of the CEO” whereby most of a company’s value is attributed to its CEO (at least in the U.S.). I was surprised by his report that 95% of investors said they would buy stocks based on their opinion of the CEO. They certainly didn’t get that attitude from successful investors (who seem to do that only in rare cases where they are able to talk at length with the CEO). But his claim that “Corporate profit margins did not increase over the course of the 1990s, even as executive compensation was soaring” looks false, as well as being of questionable relevance to his points about executives being overvalued. And I wish he had also applied his argument to beliefs of the form “if we could just elect a good person to lead the nation”.
Chapter 6 does a good job of combining the best ideas from Wright’s book Nonzero and Fukuyama’s Trust (oddly, he doesn’t cite Trust).
He exaggerates reports that the stock market responded accurately to the Challenger explosion before any public reports indicated the cause. He claims “within a half hour of the shuttle blowing up, the stock market knew what company was responsible.” I don’t know where he gets the “half hour” time period. The paper he cites as the source says the market “pinpointed” Thiokol as the culprit “within an hour”, but it exaggerates a bit. If the percent decline in stock price is the best criterion, then the market provided strong evidence within an hour. If the dollar value of the loss of market capitalization is the best criterion, then the evidence was weak after one hour but strong within four hours.
He also claims “Savvy insiders alone did not cause that first-day drop in Thiokol’s price.”, but shows no sign that he could know whether this is true. He seems to base on the absence of reported selling by executives whom the law requires to report such selling, but he appears to overestimate how reliably that law is obeyed, and to ignore a large number of non-executive insiders (e.g. engineers). He does pass on a nice quote which better illustrates our understanding of these issues: “While markets appear to work in practice, we are not sure how they work in theory.”
Mike Linksvayer has a fairly good argument that raising X dollars by running ads on Wikipedia won’t create more conflict of interest than raising X dollars some other way.
But the amount of money an organization handles has important effects on its behavior that are somewhat independent of the source of the money, and the purpose of ads seems to be to drastically increase the money that they raise.
I can’t provide a single example that provides compelling evidence in isolation, but I think that looking at a broad range of organizations with $100 million revenues versus a broad range of organizations that are run by volunteers who only raise enough money to pay for hardware costs, I see signs of big differences in the attitudes of the people in charge.
Wealthy organizations tend to attract people who want (or corrupt people into wanting) job security or revenue maximization, whereas low-budget volunteer organizations tend to be run by people motivated by reputation. If reputational motivations have worked rather well for an organization (as I suspect the have for Wikipedia), we should be cautious about replacing those with financial incentives.
It’s possible that the Wikimedia Foundation could spend hundreds of millions of dollars wisely on charity, but the track record of large foundations does not suggest that should be the default expectation.
Book review: Envy: A Theory of Social Behavior by Helmut Schoeck
This book makes a moderate number of interesting claims about envy and its economic effects, interspersed with some long boring sections. The claims are mostly not backed up by strong arguments. It was written 40 years ago, and it shows – his understanding of psychology seems more Freudian than modern.
His most interesting claim is that many societies have more envy than ours, and that prevents them from escaping poverty. An extreme example are the Navaho, who reportedly have no concept of luck or of “personal achievement”, and believe that one person’s success can only come at another’s expense. This kind of attitude is pretty effective at discouraging people in such a society from adopting a better way of growing crops, etc.
Unfortunately, his evidence is clearly of the anecdotal kind that, even if I were to track down the few sources he cites for some of them and convinced myself they were reliable, his examples are too selective for me to believe that he knows whether envy and poverty are correlated. His hypothesis sounds potentially important, and I hope someone finds a way to rigorously analyze it.
He describes a few attempts to create non-envious societies, with kibbutzim being the clearest example. He gives adequate but unsurprising explanations of why they’ve had mixed success.
He claims “The victims claimed by a revolution or a civil war are incomparably more numerous among those who are more gifted and enterprising”, but shows no sign that he knows whether this is true. He might be right, but it’s easy to imagine that he’s been mislead by a bias toward reporting that kind of death more often than the death of a typical person.
He mentions that tax returns have been public in some jurisdictions. I wish he did a better job of examining the costs and benefits of this (one nice example he gives is that people sometimes overreport income in order to appear more credit-worthy than they are).
On page 82, he describes Nazis as having “an almost equally fanatical attachment to the principle of equality”. He seems there to be referring to when they were in power, but somewhere else he implies they moved away from this belief when they gained power. He was born in Austria in 1922, and studied in Munich from 1941 to 1945, which gives him a perspective that we don’t hear much these days. How much of the difference in perspectives is due to his flaws, and how much of it is due to our focus on the worst aspects of Nazism? There’s probably a hint of truth to his position, in that hatred of the Jews partly started with an egalitarian disapproval of their success.
I found a number of other strange claims. E.g. “The incest taboo alone makes possible the co-operative and stable family group.”; “Lee Harvey Oswald’s central motive was envy of those who were happy and successful”; “In 1920 President Woodrow Wilson predicted class warfare in America that would be sparked off by the envy of the many at the sight of the few in their motor cars.”.
He says “No society permits totally uninhibited promiscuity. In every culture there are definite rights of ownership in the sexual sphere, for no society could function unless it had foreseeable and predictable rules as regards selection of the sexual partner.” I’m not sure how close-minded that would have sounded in 1966, but there are cultures today which discredit it fairly well.
If you read this book, I suggest reading only these chapters: 1,3,5,8,13,17,21,22.
Update: Mike Linksvayer has a better review of the book.