Evolutionary market competition

One of the best models of competitive markets in an economy is an evolutionary one that embeds the ideas that cooperation and competition operating at different levels. The basic ingredients of the evolutionary approach are:

• Variation - A process that varies inheritable traits at any reproducible unit (organism, tribe/colony, cell).
• Selection - A process whereby the environmental conditions determine the reproductive success of a reproducible unit.
• The result is a process of adaptation.
• A firm (or any organisation) can be considered a reproducible unit.
• The market and society as the environment which determines success and reproduction
• Relative success matters for reproduction (firm growth and continued existence) rather than an absolute success.
• Success depends on the local environment at each point time - there is no timeless correct way to do things, and there are environmental niches (sometimes temporary).
• The success of markets in delivering efficient output is, therefore, the result of within-firm cooperation, and between-firm competition.
• Without market level selection pressure, firms can become internally competitive, losing efficiency.

These ideas might make more sense with an example.

The core approach 
Imagine that within a firm every interaction amongst employees can be either cooperative, which results in improved production efficiency, or competitive, which helps one of the individual employees (conditional on the other being cooperative), but reduces the overall efficiency of the firm.

It might be as simple as employees wasting resources blaming others for failures rather than working together to get an efficient outcome, or it could be as competitive and nasty as sabotaging the work of others in the firm to make yourself look good, which might be good for the individual, but bad for the company.

Perhaps the example of Amazon can help get your mind around this idea:

At Amazon, workers are encouraged to tear apart one another’s ideas in meetings, toil long and late (emails arrive past midnight, followed by text messages asking why they were not answered), and held to standards that the company boasts are “unreasonably high.”
The internal phone directory instructs colleagues on how to send secret feedback to one another’s bosses. Employees say it is frequently used to sabotage others. (Source)

The table below shows the stylised conflict between individual choices to cooperation or compete within a firm. For two people (A and B) who randomly meet within a firm, they can both cooperate and earn an individual payoff of 10 each (top left cell with A, B individual payoffs listed), giving the firm an overall payoff of 20. Or, one person can ‘defect’ while the other cooperates, giving that person a payoff of 15, but only a payoff of 0 for the cooperator, and an overall firm payoff of 15, which is lower than if people were cooperating. And the bottom right cell shows the payoffs if both people are competitive (the defect from cooperation), giving each a lower payoff of 5, and the firm a payoff of 10 (the sum of both people’s payoff).

Clearly, the best thing within a firm is for all interactions to be cooperative to get the highest total firm payoff, but there remains an incentive for each individual within the firm to occasionally defect and get a higher personal payoff.

Now, let’s think about market competition operating at a firm level. With more competition, would we expect the evolution of market to result in the success of more competitive individuals?

The diagram below shows a serious of three selection stages over rows from time one to time three. Each small table is an environmental or market niche, and each colour represents a single firm. So in the top row there are four firms (blue, green, yellow and orange).

Each small table shows in column N the number of cooperators or defectors within the firm. So in the top row blue table, there are 20 cooperators and no defectors in the firm. The next column, P, shows the average payoff to each person from random interactions amongst other firm staff. In the top row of the blue table the average personal payoff is 10 because all 20 staff are cooperators and every interaction with another cooperator in the firm gives a payoff of 10. The total firm (or group) payoff is in column G and is 200 in this instance (20 people getting a payoff of 10 each).

The next firm in the top row in green has within it 15 cooperating staff, and 5 defectors. The average personal payoff for the cooperators in that firm is 7.5 because they have a 1 in 4 chance of dealing with a defector, and a 3 in 4 chance of dealing with another cooperator. The defectors have a higher personal payoff of 12.5 for the same reason.

Moving across the top row, the yellow firm has 10 cooperators and 10 defectors. This firm is a nasty place to be, and half the time the firm is busy with staff blaming each other and not producing efficiently. The payoff (or total efficiency) for the firm is much lower, at a total of 150.

The last orange firm is mostly defectors, perhaps an extreme version of our Amazon example. The total payoff for this firm is just 125.

Outside these tables on the right side is a column N, which is the sum total of the number of people who are cooperators or defectors in each time period. In time one there are 50 cooperators amongst the firms (20 in blue, 15 in green, 10 in yellow, and 5 in orange), and 30 defectors.

Moving from time one to time two, or going down a row, is a selection stage in the competitive evolutionary game of market competition amongst firms. That is, only the most efficient firms survive, and the least efficient die off from lack of customers from their poor value products made inefficiently. In fact, in this example, the most efficient firm expands to take up the market niche left by the firm that dies off.

So when we move to the second row in time two, the least efficient orange firm has died off, and the most efficient blue firm has expanded to satisfy that market niche.

But notice this. When we add up the total cooperators and defectors working in all the firms in the market at time two, there are now 65 cooperators (15 extra), and 15 defectors (15 less), compared to time one. That is, competition at the firm level has led to the selection of the most internally cooperate firms to survive, not the most internally competitive. Going down one more row shows the new relatively least efficient yellow firm also dies off. Thus, what works at one point in time does not work at all points in time, and success in this game is only relative to others in the market environment.

The economic lesson from this simple example is that competition is good when it provides a selection mechanism that favours cooperative and efficient groups (or firms) that enable total production to expand. Variations that improve efficiency and cooperation within firms will, over time, be selected for by consumer choices in the market.

Within-firm competition with external costs
Let us now think about larger firms that have multiple departments making multiple products with a variety of different customers. We can also think of large bureaucracies in general, including government departments. Perhaps the above example has led you to think that competition within company departments might be a good way to select for the best ones. Unfortunately, this approach has a huge incentive problem, as the relative success of one department might be due to passing off costs to, or sabotaging, another. Thus, within-firm competition that results in an evolutionary selection process is very risky, and it is well known that 'silos' in firms can results in conflict between what is best for each silo, and what is best for the firm.

Unfortunately on most occasions, silos encourage behaviours that are beneficial to the occupants of the silo, but are often not in the best interest of the overall business or its customers. It also plays into the hands of corporate politics, since silos help to keep things private. And we all know that in office politics information is power.
 A recent survey from the American Management Association showed that 83% of executives said that silos existed in their companies and that 97% think they have a negative effect. (Source)

I capture the idea of sabotage, or passing on external costs to other departments, in the table below. Here the company has two departments (each small table), and within each department there is a choice to cooperate on either project A, which provides that department with a payoff of 20, or project B, which provides a payoff to that department of 10. However, project A comes with an external cost to the other department of 15.

For each department it is better to cooperate on A, giving them 20 each, but also inflicting an external cost of 15 each. The overall company payoff is just 10 in this situation. However, if the departments each cooperate internally on B, the overall firm payoff is double, at 20, as there are no other externalised costs.

Thus, for large organisations, the emergence of silos that are blind to the situation of other parts of the company may end up with a choice of projects and investments that are not overall optimal and efficient. Companies that find ways to ensure they maintain this inter-departmental efficiency as they grow are those that the market will select for.

Notice that this problem is a much more serious one in governments where there is no government-level selection pressure. At best there is an occasional change of government in a democracy, but rarely does this provide strong incentives to change operational processes all that much.

Indeed, the incentive to sabotage other groups and inflict costs on them also arise with market competition in general, and as such, provides a strong basis for competition laws and intervention where negative externalities from the activities of certain firms exist.

Muir’s chickens
The lesson here about market competition acting as a selection mechanism to favour firms that have high within-group cooperation is radically displayed in the experiments of William Muir, who bred chickens and either selected for a) the most productive individual egg-laying chicken, or b) the most productive cage of egg-laying chickens (in each cage were 9 chickens).

The results drive home the message of group selection is a process that increases the number of cooperators and total efficiency.

The first method favored the nastiest hens who achieved their productivity by suppressing the productivity of other hens. After six generations, Muir had produced a nation of psychopaths, who plucked and murdered each other in their incessant attacks. No wonder egg productivity plummeted!
In the second approach, he selected the most productive groups and because they were already a group that worked well together, they included peaceful and cooperative hens. (Source)

Egg production by the cooperative cages increase 160% over just a few generations. More detail here.

How to stop corruption in town planning

I spoke this week at the Australian Public Sector Anti-Corruption Conference in Sydney about how to tackle corruption in councils and in town planning generally.

My main proposal is to not focus on political donations, disclosures, or electoral procedures, but instead to remove the economic payoffs available from being corrupt. In other words, remove the honeypot and you will get rid of the flies.

In town planning, the honeypot is the $11 billion worth of new property rights granted through the planning system to selected landowners across Australia each year.

If councils didn't have this power to make millionaires out of some landowners there would be no reason to lobby them in the first place. So why not simply charge the market price for new property rights made available through the planning scheme? No more honeypot. No more flies.

Below is the paper I discussed. What I didn't discuss in detail was a politically viable implementation. After all, some landholders have recently bought development sites and paid a price to the previous landholder that reflected their assumption that their planning application would be costless (or come with just a small administrative cost). That is, the previous landowner has already been paid for the new rights from the planning system that they were given for free.

To ensure that these recent purchasers do not pay twice for the same new property rights - once to the previous owner, then again to the council or state government - there can be a short phase-in period of a year or so where development applications made during that period operate under previous rules. This will bring forward a lot of development by landholders who have recently bought development sites since there is now a huge cost to delaying development and construction. Their chance to develop under previous rules is not taken away at all. The time frame is simply shortened.

So it is win-win all around. Charging for new property rights is economically efficient and captures pure economic rents. It removes the honeypot that political mates swarm around. And its introduction will increase housing supply by bringing forward development that would otherwise be delayed by private developers seeking to drip feed new developments into the market to maximise returns.

Get my full conference paper here.

Decent criticisms of economics? Here are 111 of them.

1 like = 1 criticism of mainstream economics

— Unnerving Economics (@UnlearningEcon) October 17, 2017

Courtesy of a lengthy Twitter thread following the above tweet by @UnlearningEconomics, here are 111 criticisms of economics. Most are spot on. My personal favourites are 42, 51, 58, 66, 80, 87, 92, and 106.

1. Too many unobservable parameters that change every time they are 'measured'
2. The functions are all smooth, when everything interesting that happens in a capitalist economy is not
3. Defends unrealistic assumptions on the basis that they can make good predictions. Almost never makes good predictions.
4. Embeds libertarianism, consumerism and capitalism into models without questioning them
5. Excessively 'thin' conception of the environment as amenable to cost-benefit analysis, no acknowledgement of how ecosystems work
6. Obscene levels of professional arrogance
7. Bizarre obsession with optimisation models. Guys, there's other kinds of maths
8. Use of the word 'proof' for things that are either trivial or don't technically count as 'proofs'
9. Textbooks/classes that teach model first, reality second (or never)
10. Bizarre obsession with linear regression. Guys, there's other kinds of statistics
11. Literally no case of an acknowledgement that a model/theory is flat out wrong and should be completely discarded
12. No real concept of the social. Putting 'identity' in a utility function doesn't count
13. Ridiculously hierarchical journal system that stifles creativity
14. Articles that are way too long, despite pretension that maths allows one to be concise
15. Virtually no conception of power, exploitation, conflict
16. Possibly worst of all, has undue levels of influence on policy despite its huge shortcomings
17. Huge problem with under-representation of women and POC
18. Research largely centred on the USA and other western countries, who need it least
19. At best, only pays much attention to pressing social issues *after* a catastrophe
20. Is the source of 'you just don't understand economics', repeated ad nauseum by academics and internet knuckle-draggers alike
21. Defines itself by a methodology instead of the object of study
22. Is taught as ‘economics’, so that students don’t even realise they are only learning one perspective
23. In practice, has generally favoured the powerful through its influence on policy
24. Is rife with aggregation problems, and pretends they don’t exist
25. Absorbs concepts used by critics/non-mainstream economics, watering them down to the point of being unrecognisable
26. Spends large amounts of time, pages, volumes, on issues which are basically trivial
27. Related: has little conception of its own history. Has been reinventing the wheel (but with maths!) for a long time
28. Insists on approaching history largely through the use of statistics, preferring even bad statistics to the qualitative
29. Makes its students more selfish (don’t @ me)
30. Uses maths to represent quantities which don’t have measurable, scientific units
31. A lot of statistical results are essentially obtained through p-hacking. (Though this isn’t specific to econ)
32. Little in the way of professional ethics or duty
33. Irritating habit of defining all criticisms as someone else’s problem. “That’s sociology!” Or “I’m not even a macroeconomist!”
34. Overuse of equilibrium & comparative statics, little conception of how things actually change
35. Crises are not exogenous shocks
36. Dear microeconomists. Why do I care what people do in laboratory gambles? Besides, Gigerenzer did it better.
37. Behavioural economics: making economic man more realistic by having him solve more complex utility functions
38. Also behavioural economics: ‘nudging’ people to be more ‘rational’, because economists clearly have that idea down
39. Game theory weirdly convinces it’s practitioners it’s applicable almost everywhere when it’s applicable almost nowhere
40. Preference satisfaction & efficiency/output are the focal points of almost every model. The normative implications are rarely laid bare
41. Calibration. Wtf
42. Large areas of undergraduate economics are the same as books from hundreds of years ago, with no empirical reason for why
43. The EMH is either the most trivial or most ridiculous theory I’ve ever seen, depending on who is arguing for it
44. On the whole, mainstream textbooks and economists STILL don’t get why banks work
45. Rational expectations is blatantly absurd to even the most casual observer
46. Models are invented too fast, and used before they are fully understood (my latest medium post is about this)
47. Prices simply do not play the coordinating role attributed to them by mainstream economists in many markets
48. Abuse of labels like ‘dynamic’ ‘imperfect information’ or ‘bounded rationality’, when the models do not truly reflect these ideas
49. With the way it’s taught, people who learn it often cannot think any other way. It is difficult to do even if you want to
50. The ‘law’ of demand and supply is quite clearly no such thing. Counterexamples are easy to find
51. The certainty with which comparative advantage is propagated as an argument for free trade is proportional to its utter inapplicability
52. No appreciation of the social economy. I bet most economists don’t even know what it is
53. In general, workplace dynamics are absent (except in terms of contract efficiency)
54. ‘Intuitive’, ‘plausible’. What the hell do these mean and why are they in every econ paper?
55. The spectrum auctions were  flawed, please stop going on about them
56. The ‘empirical revolution’ aka we’ve got clever statistical methods and look at them no not over there the shiny bit here
57. Randomised control trials, because we like experimenting on poor people-how else do we determine which experiments on poor people work?
58. Instrumental variables, because the best way to deal with unverifiable assumptions about endogeneity is to introduce another one
59. Regression discontinuity design, because that thing that’s obvious from looking at one graph needs an entire paper
60. Subjective well-being research has yet to tell us anything we didn’t already know
61. Utility as a concept has always been circular. Revealed preference doesn’t help, it just makes it more obvious
62. Functional forms are only chosen for tractability reasons, and every popular functional form has counterfactual implications
63. Excessive use of mathematical notation in explicit detail for god knows what reason. Makes it seem more scientific, I guess?
64. Similar love of graphs as apparently making ideas that are obviously wrong seem right. Laffer, Kuznets, environmental Kuznets, etc.
65. Convergence, as implied by the Solow model, is obviously wrong. 'Conditional convergence' just makes it unfalsifiable
66. Total Factor Productivity is an artefact of accounting, it doesn't measure productivity
67. Pareto optimality/efficiency are close to useless concepts, unverifiable and unobtainable in the real world
68. The market for lemons is so clearly wrong I'm not sure how it's so popular. The original referee rejections were right
69. Specific version of #27, but worth saying: I can't believe what the mainstream has done to Keynes. Sorry mate
70. Abuse of the term 'fallacy', which means an *objective* error in logic, to mean 'doesn't fit my little story about hotdogs'
71. Virtually ignores household work, care work, and anything else that isn't directly counted in GDP
72. Regional inequality buries GDP as a measure of national welfare. The UK is a case in point, the US isn't much better
73. Overly complicated statistical models hide assumptions and obscure more transparent relationships in descriptive data
74. The concept of 'marginal' anything is completely alien to most people, firms, governments, I don't know why it's used
75. The 'but there is a paper that does X' defence. 1. It will never be part of 99% of the mainstream 2. It's probably a crap attempt anyway
76. Kaldor-Hicks compensation is such a poorly thought out idea. People who've lost their jobs don't want 'transfers', they want jobs
77. 'Heterogeneity' in macroeconomics means 'people differ by one or two parameters', which is limited heterogeneity, to say the least
78. 'Models help us be logical and scientific'
79. EU was invented when mathematicians didn't know the difference between time averages & ensemble averages. Now they do, so get rid of it.
80. Markets don't clear, and they don't 'try' to clear. Businesses deliberately keep stocks to deal with uncertainty/change
81. Idea that maths is necessary for being logical has 2 issues (1) maths isn't always (Godel) & (2) words can obviously be logical
82. The basis of public choice theory - that political actors are selfish - has been convincingly falsified
83. Coase's theory of firms is either so vague as to be useless or wrong, otherwise all activity would be subsumed under a single firm
84. Where are the activist economists? Global slavery, meat-eating, the environment, are all both huge economic and huge moral issues
85. Has any economist ever been dismissed from the profession/respectability for doing terrible things? Scholes, Schleifer, etc.
86. Regulation policy is insufficiently systemic, overly focused on individual firms. Huge problem in the run-up to the crisis (see VAR)
87. There is generally little in the way of legal and institutional understanding when economists discuss policy
88. The overarching idea that 'competition is good' ignores the many cases where it is negative (such as arms races)
89. Unnecessary level of deference to existing models/literature, regardless of how wrong it is
90. Repetitive education. No I do not want to learn oligopoly theory 5 times
91. Lack of habitual use of case studies, survey methods, interviews, and other non-statistical research methods
92. Too much use of downloadable statistics without really knowing where they came from and their limitations
93. Time series, with the exception of finance, has data which verge on useless
94. The Lucas critique is a devastating critique of mainstream economics. Too bad it's somehow been interpreted as support for it.
95. Economists got Brexit wrong, and they barely even understand how. Hint: 'but our forecasts were right!' isn't the point
96. Econometrics "assumes independent, identically distributed populations when modelling unique & interdependent individuals" HT @BruceMcF
97. Excessive conviction in 'human capital' as a way to solve social problems and inequality
98. Any discipline which not only produces but *rewards* people like Robert Barro, Ed Prescott and Eugene Fama clearly has problems
99. It is common to see accounting identities interpreted as causal, probably due to economists mistaking them for equilibrium conditions
100. The causality paradigm in applied micro has completely overreached. Many social phenomena do not have 'causes'
101. 'Yes, we know this idea is wrong but we use it as a benchmark'
102. Inflation targeting (esp. CPI) played a huge role in blinding policymakers to the brewing financial crisis. No idea why it's still used
103. Monetarism is the single most ridiculous and most repeatedly falsified doctrine to have ever made it into policy. Still it lives on.
104. Becker-esque economic imperialism is so obviously counterfactual it's hard to believe it ever had a place in the discipline
105. Well-worn, but yes-it *is* sad/strange that economists invented their own 'Nobel'
106. The idea that the 'supply side' and 'demand side' are independent is wrong, and a source of (very) bad policy
107. Economists are largely responsible for Uber's surge pricing policy. 'nuff said
108. Major disciplinary institutions like the AEA were formed during in the red scare, hugely biasing them. These biases persist.
109. The Chicago School of anti-trust has taken over the discipline and competition authorities, doing irreparable damage
110. Ideas like 'government intervention' and 'externalities' only make sense if you assume the status quo is neutral. Which it isn't.
111. OK one more. Economic forecasts are really bad. Everyone knows it so why do we carry on making them??

Corruption fighter joins contest for South Brisbane

Corruption fighter and Game of Mates author Dr Cameron Murray has thrown his hat into the ring to challenge Deputy Premier Jackie Trad for the hotly contested South Brisbane seat at the upcoming Queensland election.

University of Queensland economics lecturer and corruption fighter Dr Cameron Murray will be contesting the seat of South Brisbane as an Independent candidate.

After the release of his book earlier this year on political favouritism in Australia, entitled Game of Mates: How favours bleed the nation, Dr Murray decided it was time to take the next step and try and enter politics to clean it up.

“People are sick of professional politicians working in the interests of their mates rather than the hard-working public,” said Dr Murray. “Across the state, people have been telling me they want a fresh approach, free of corruption and big-party backroom deals, and that needs real people with experience from outside of politics to put their hand up and offer a sensible alternative.”

“I have been working for years now with community groups and anti-corruption campaigners, including Rob Pyne, the independent Cairns MP who has exposed corruption across Queensland councils. Being an independent elected member of parliament would allow me to continue this work and leverage that position to really help clean up Queensland politics.

“One issue I am passionate about is better planning. Communities across the State are being ignored while their cities, suburbs and towns are radically changed to benefit a small set of well-connected property developers. Drawing from lessons in Australia and abroad I will push for a range of effective policies, including selling new development rights to developers and enacting citizen juries to decide on local planning schemes. These will rescue ratepayers who are now subsidising overdevelopment, and provide true democratic input into these highly valuable decisions that are unfortunately being corrupted by political mates.

“I also believe that our current crop of politicians has forgotten about the basics. I would focus at every chance on maintaining the high quality of life we enjoy in Queensland. For that we need secure jobs in a diverse economy, not just relying on the booms and busts of mining and housing cycles. We need affordable housing for first home buyers and renters. And of course, we need a sustainable environment that preserves our rare natural gifts for future generations.

“I look forward to offering a sensible alternative in this election and bringing fresh economic thinking to Queensland politics,” said Dr Murray.

A Bitcoin Bet

I have yet to hear reasoned arguments about why Bitcoin should be considered a currency. Nor have the perceived advantages over existing currencies and their settlement systems ever really been properly elucidated.

Somehow that does not stop people believing that Bitcoin is a currency. In many cases, people argue that it is even better than existing national currencies without even knowing about the security and settlement features of the current payment systems used across the world. Perhaps this is why the benefits of crypto-currencies are never made clear, and all you get is hand-waving about governments debasing their currency, being anonymous, or some such thing.

Bitcoin is a financial roulette wheel, spinning on ideology, and attracting suckers with every turn. It has none of the core features of a currency, which means it will never be used as one.

Professor Jason Potts, a founder of Crypto Economics, seems for some reason to think otherwise. On Facebook, I suggested to a mutual friend that I was willing to bet that Bitcoin will never be used as a currency, by which I mean as the unit in which goods and services are priced and as the medium for settling payments.

I said:

I have yet to hear why Bitcoin or any other cryptocurrency functions better than current monetary and payment systems, except nonsense anarchist handwaving about being 'distributed', and something about 'trust', which is no longer even the case with a small set of Chinese organisations essentially taking over Bitcoin mining, and the trust problem being totally misinterpreted...

Jason decided that a bet was interesting and would take me up on it if I decided terms. After a little back and forth the following terms were agreed to.

I [Cameron] will lose the bet if, as at 19 September 2022, Bitcoin (meaning Bitcoin or any other cryptocurrency not backed by a national banking institution) meets all of the following criteria. 

1. Bitcoin can be used to buy groceries in a physical store in my suburb where prices are posted in Bitcoin and not simply converted from AUD pricing periodically.

2. More than three listed companies in Australia pay salaries in Bitcoin (or have an option to), and advertise their salary rates in Bitcoin (i.e. you do not just get paid AUD converted at the going exchange rate each time).

3. At least one OECD country accepts Bitcoin for income tax payments and will calculate tax obligations in Bitcoin (not convert from the local currency to Bitcoin). 

4. Jason Potts is being paid in Bitcoin at a fixed Bitcoin price (not simply converting an AUD salary to Bitcoin). 

Loser pays the winner AUD 100 at an event the loser organises in their city that involves lively discussions, debates, and socialising.

I see a huge number of problems with Bitcoin and want to outline some of them here in the context of this bet. Some of the main ones are:

Money-ness
It is not clear what the advantage of a blockchain tracking all transactions is. My view is that this comes from a fundamental misunderstanding of money. Money is a not an object, or token. It is not a gold coin. It is a common accounting system.

This is why we price in the national currency. There is nothing stopping any company setting their prices in all manner of things — gold, iron, US dollars, or other units. But we don’t. Because we want to integrate into the common system of accounting that our suppliers and customers use, and one where it makes financial sense to can keep relatively stable and predictable pricing, in addition to easy payment.

Every online store that I have found that accepts Bitcoins does not price in Bitcoins. It prices in the national currency, and allows you to pay using Bitcoin. An Australian service that allows you to ‘get paid in Bitcoin’ prefers to be paid themselves in Aussie Dollars for that service.

Indeed, the fundamental misunderstanding of money is evident at some of these retailers. For example, when Mission Market announced they would start accepting Bitcoin, they noted the following:

Unlike credit cards, Bitcoin payments are not sent through a labyrinthine network of banks and processors, meaning that transactions can be completed faster and more cheaply than conventional electronic transactions. Bitcoin retains many of the useful features of cash while offering more security. And because Bitcoin has a finite supply and is not issued by a central bank such as the Federal Reserve, its purchasing power cannot be eroded through excessive money creation. [my emphasis]

Here again, we get the ‘money as object’ myth rearing its head. Payments are not ‘sent’. They are accounted for. The ‘finite supply’ again reinforces this idea.

Now, this same myth is true in much of economics. The quantity theory of money talks about the supply of money very much as a token. This is why the theory fails routinely. Properly considering the nature of money, the theory would not apply to some quantity stock measure, but would instead apply to the rate of expansion of current money accounts used for transactions of newly-produced real goods and services. But that is a fight for another day. 

The last main problem for Bitcoin in terms 'money-ness' is that if its value keeps rising no one will want to use it for transactions when an alternative currency that isn't rising in value is available. That's just Gresham's Law. And of course, if the value doesn't keep rising, it is not clear why anyone would want Bitcoin as a means of payment, and its value will likely converge to zero. 

Governments
Since money is a common accounting system, those who make the rules of money — government, central banks, and private banks — can exercise a great deal of power via this system. As we see now in China, those holding this power do not want it threatened. If a private crypto-currency did evolve into a more widely accepted alternative monetary system, it would be immediately crushed politically.

Trust
One of the arguments in favour of Bitcoin is that you don’t need to trust a banking system to settle a payment, nor identify yourself. Instead, you trust a different system. Surely in normal commercial arrangements, the very choice to use Bitcoin rather than established currencies would be a signal of a lack of trust on the part of a transaction partner.

Imagine you are a new retailer in a market and approach a wholesaler about purchasing a variety of goods. You ask to pay in Bitcoin. What would their response be? Would it increase their trust that you will pay your bills, or decrease it?

Perhaps this is why Bitcoin’s main commercial use has been in black markets.

And indeed, the main advantages of using Bitcoin — the anonymity of your transaction partner in digital payments — seem to be the very reasons that governments would want to crack down, particularly if it is widely used to avoid tax.

Technical limits
Around $180 billion worth of non-cash payments are settled each day in Australia. This excludes a great number of within-bank settlements between account holders, and all cash payments in the economy. Since cash payments are about 30% of all payments, and accounting for some within-bank settlements, the total daily payments could be closer to $300 billion.

I have no idea how Bitcoin or any other crypto-currency could handle that sort of settlement need in a timely manner. That’s over $200 million per minute. And yet, the Bitcoin system can only settle about 3 to 7 transactions per second. Mmmm…

Compare this to, say, VISA, the credit card payments company. They alone settle over 56,000 transactions per second during peak times.

Also, the cost of settling Bitcoin transactions is growing. To buy a coffee in Bitcoin today takes over 10 minutes and costs a few dollars for the transaction.

My view
If Bitcoin wants to be more “currency like” it will have to start centralising and becoming a lot more like existing currencies. It will have to change its structure to allow the balance sheets of the system to grow extremely rapidly as the market for them grows. In effect, it will have to become more like existing currencies. Which will then beg the question -- why change to a new private currency that works fundamentally the same as the existing one?

Finding Australia's "missing million"

I am responding here to Aidan Morrison's brilliant deep dive into the ABS population statistics entitled "The Missing Million: Is Australia's migration rate actually high?".

1. The ABS always strings together their data after series breaks. It is really bad in the economic data where the whole concept of what they are trying to measure can change (like the 1998 CPI revision). You could do a similar deep dive into every ABS dataset and finish with more questions than answers. 


2. Many people who use the data (including most of those people in your example) know there is a series break in 2006. But as you have shown, it doesn’t really make much of a difference in the end. The divergence with the raw arrivals/departures data that started in the early 2000s remains. The new 12/16 rule applies symmetrically to those who leave and arrive, and although the ABS notes that it increases the NOM estimate during their 2003-06 test period, this was kind of the point. They were classifying many arrivals as short-term (i.e. not in ERP) when they stayed more than 12 out of 16 months, but not consecutively. This applies to much of the international student cohort, of which there are now over 600,000, compared to 200,000 in 2001.  


3. My point is, the discrepancy you point out between your physically present population (PPP) and the estimated resident population (ERP) is not primarily because of this change in methodology in 2006. The difference is simply the number of residents currently abroad, short term, at any point in time, minus short term visitors (under the new definitions of short-term). The census also won’t catch the million residents who are abroad that night. 
And while short term departures are growing, the number abroad at any point in time will grow as well.

4. The new methodology means that the ERP is higher than the old methodology because it makes sense to count people who reside in Australia more than 12 out of 16 months as residents who need the type of long-term facilities that residents need. In my view, ERP is the more important concept economically than physical bodies on the ground on any day. It also matches more closely the way these things are measured internationally. 


5. So if the whole issue boils down to net short-term movements what is causing the change since 2001-02? From ABS 3401 we see that this is mostly from the rise in short-term resident departures for holidays!


Also, mostly these trips are for less than a couple of months. 



We can see that the increasingly popular destinations are NZ (big boost in 2003-04), Indonesia (likely Bali) and the US. Less so to China or India, as many might expect.


I would guess that retirees are a big portion of the post-2002 short term departures boom (a lot of baby boomers started retiring 10 years ago). There are plenty of anecdotes to back this up. And it’s now a hot button political issue that pensioners are getting the pension while on cruises and travelling abroad.

The data also shows that the number of people over 65 travelling abroad has tripled in the 10 years to 2015-16, with a relative decline in the share of short-term resident departures coming from people aged 30-60.

The other point to note is that both the baby boomers and their children (the baby-boomer echo) were, in the past ten years, at the stage of life where they are more likely to travel abroad.

We can see below that what data we have shows that people over age 60 have been a larger share of short-term departures recently, with people aged 30-60 being a declining share of the total.

6. Which brings us full circle. The 2006 methodology change meant that some inward immigration which was previously considered short-term, like international students, is now considered long term (i.e. residents), while there has been a rise in short-term departures from baby-boomers and their children holidaying in Bali!

Should we subtract retirees on holidays in Indonesia and on cruise ships from our resident population figures? I suspect not. Do their holidays mean that inbound residents residing more than 12 out of 16 months don't need to be considered in terms of housing and infrastructure needs? Probably not.

Overall, after a lot of thinking on this topic, I suspect that the ABS data, although imperfect, and although hiding a series break, is probably the ‘better’ metric to use in planning and economic analysis.

A random physicist takes on economics

Jason Smith, a random physicist, has a new book out where he takes aim at some of the core foundations of microeconomics. I encourage every economist out there to open their mind, read it, and genuinely consider the implications of this new approach.

Go get it now. It only costs a few bucks.

So what do I think? His approach is exactly what economics needs - a set of fresh eyes on the basics.[1]

The book is, fundamentally, an introduction to Smith's new view of what I would call ‘microeconomics as the emergent characteristic of random agents in constrained situations’. Or, more simply put, why you don’t need rational decision-makers for a useful economic theory that makes good predictions.

To get some sense of why this is important, economists are often criticised for getting the big picture stuff of macroeconomics wrong, like missing the financial crisis. But in reality, the economic micro-level stuff, about responding to relative prices, making choices based on incomes and preferences, is also a failure built on an elaborate, but highly questionable, theoretical structure.

Smith says that this theoretical structure is unnecessary. In fact, he says, people acting randomly within their budget will have the emergent property of behaving ‘as if’ they comply with the rational economic model. That is, humans are irrational at the individual level, but the fact that our choices are constrained by our incomes means that in aggregate, the average behaviour responds to external changes in a similar manner to that of the mythical rational person.

To get a feeling for this, consider the graph below from one of Smith's favourite economics paper by Gary Becker, which made similar points. For those who haven't guessed what it shows, the X and Y axes are the amount of consumption of two goods, and the lines C-D and A-B are the budget constraints (i.e. how much of each good, or combination of goods, can be bought) at two different sets of relative prices. The line C-D has a lower price of good Y, and a higher price of good X, than the line A-B.

The point C is the centre of the triangle A-B-0. So if people consume randomly within that budget constraint at those prices, the average person will consume a combination of goods near point C. When the budget constraint changes to C-D, the new centre point is C'. This shift, from C to C', is very similar to the shift p to p', which is what would be expected under the standard theory utility maximisation.

Just taking the average of random choices within the budget constraint predicts the same patterns as utility maximisation, without requiring any knowledge of individual behaviour. When the price of good Y declines, people consume more of it, and vice-versa for good X, whether people act randomly or as utility maximisers.

Smith's (and Becker's) simpler approach reframes traditional micro-level topics as the emergent behaviour they are, and leaves the quirky patterns within individual choices to the realm of psychology. This approach makes perfect sense to me.

However, I highly doubt that this idea will be picked up in a hurry by the economics profession for a couple of main reasons. First, it gives away the big prize of economics-- utility and social welfare. If people just behave randomly at an individual level, it breaks the important link between individual choices, higher utility, and social welfare, which forms the backbone of economic thinking, and gives the profession the claim to power in political debates. No longer will economists be the only ones to proclaim that they know the secrets to a better (or higher utility/welfare) society. In fact, they will have to admit that they don’t.

Second, it removes the ability to blame bad choices by individuals as the cause of their economic destiny. If our theory of microeconomics is that people behave randomly within constraints, then to improve outcomes for certain groups of people, we need to change the nature of their constraints, not their decisions. These constraints could be income, wealth, social status and relationships, etc. Solutions to inequality, to homelessness, and other social problems are immediately redirected by this theory back to society at large, and the rules and systems we put in place to create constraints on individuals.

I highly recommend the read. When I finished the book, however, my mind was racing with more ways in which this approach could be applied in more ways across economic topics.

Finally, if you want to read more, you can read Smith's more detailed and technical attempt at piecing together this new approach here.

fn.[1] As a brief disclaimer, I have followed the author's terrific blog for quite a while. I make a point of keeping an eye on original thinkers in general, and he certainly is one, though I’ve never met Smith in person.

Economic bandits

Get the book via gameofmates.com 

A string of successful Game of Mates speaking events has happened recently -- in Kuranda, Sydney, Canberra, and Melbourne. I can't take all the credit. But, James, our bandit in the Game of Mates, can. He has been extremely active all across the land and people are starting to notice.

One issue that has repeatedly come up at these events is the rise of 'strategic representation' of the economic benefits of major projects in planning applications. For example, a land subdivision proposal might include plans for a new university campus, eco-tourism facilities, and more, in order to be able to claim the project will generate billions of dollars of economic benefits to the region. But the reality is often that these additional facilities are completely infeasible and will never happen. They are just included in the application to beef up the claimed merits of the project, for there is no obligation from the approval to follow through with the full extent of the proposal.

The same happens with applications for new mines. Miners often propose unrealistically high volumes of production to be able to exaggerate the scale and intensity of investment in the local area, along with inflated estimates of royalty revenues to State governments.

One solution to this problem is to make planning approvals an obligation, not an option. At present, miners are granted a right to mine up to a particular volume of minerals or energy resources, but with no obligation to do so. Instead, approvals could carry the obligation to deliver what was proposed within a reasonable timeframe or pay penalties and risk losing the option to ask for future approvals.

In the ACT, when land is sold to private developers for a particular purpose, like a residential apartment complex, they must deliver a development that complies within two years or face penalties, including the possibility of the land reverting back to public ownership.

In mining, to determine whether a proposal is exaggerated, rules that oblige application to pay their estimated royalties up front could be enacted, perhaps with a discount. If the project seems feasible, banks and other financiers would be willing to lend this amount to cover the royalties. If the project is unviable and exaggerated, no one will be will to be part of this financing effort.

The solutions are clear once we understand the core economic issues at play.

Bullshit economic assessments par for the course in Australia (more politely, it’s just “strategic assessment”) https://t.co/FuE2mlI5RI

— Cameron Murray (@DrCameronMurray) August 2, 2017

In other news, on 12th August I will be attending 'Love Your Bookshop Day' at Avid Reader in West End (Brisbane), so please come along to that event if you can.

Lastly, I will be a keynote speaker at The Australia Institute's Accountability and Law Conference in Canberra on 17th August. There is a group of very esteemed legal experts attending, as well as political representatives. All in all, it should be a very interesting event. The event website is here.

Long live food waste

One issue that occupies the minds of environmentalists from across the political spectrum is food waste. Around one-third of all food produced for human consumption is never eaten. To environmentalists, this is astonishing and terrible.

But, unfortunately, they are completely wrong. And I say that as a fervent environmentalist.

It is actually a world with zero food waste that is a terrible place to be. We absolutely do not want to be that world.

The reason is this.

Food waste is, in practice, a tremendously important global food insurance policy. In a world of zero food waste, if a natural disaster, such as a flood or drought, hits some of the most productive agricultural regions, both food production and food consumption will fall dramatically. There is no buffer. If production falls, food consumption falls by an equal amount.

If a flood, for example, wiped out a quarter of world food production one year, in a world with zero food waste the per person food intake must also fall on average by 25%. It would be an absolute humanitarian tragedy by any measure.

However, in a world where one-third of the food produced is wasted, either on the farm, during distribution, or in processing and cooking, that flood would have the same effect on food production, but a much smaller impact on overall food consumption. Reducing waste at each point in the food production chain could regain most of that 25% of food that was lost to flood.

The below table show this basic comparison. Country A is the idealised zero food waste utopia, producing 100 units of food, and consuming it all, in the Before scenario. Country B is the current world, consuming only two-thirds of the food produced, and ‘wasting’ the rest. Notice that in the situation before the natural disaster, Country B produces far more food, and this production requires vast swathes of land to be brought into production, something with considerable environmental cost.

But look at both countries in the After scenario, where an unforeseen disaster wipes out a quarter of food production, it is Country B that comes out on top. Country B is able to consume more than Country A, perhaps as much as before, by using the food waste as a type of insurance, able to be drawn on when needed.

This is important. As a world we can’t use traditional insurance for such situations. Being paid out financially by an insurance policy is useless if there is no food to buy. You still starve.

This is also why most countries heavily subsidise and incentivise agricultural production. Letting markets alone decide what to produce each year will not create the genuine over-supply needed to act as a buffer against bad times.

Indeed, countries with the most food waste are generally the most economically efficient. Europe and North America waste almost 300kg of food per person per year. In sub-Saharan Africa and southern Asia, food waste is around half of that. Yet it is Europe and North America that are overall the most economically efficient in terms of converting resource inputs to outputs.

The above scenario also abstracts away from the many distributional issues at play in our food system as well. But reducing food waste overall won’t solve these either. If the problem is distribution, focus on distribution.

Indeed, if land degradation from agriculture is the underlying concern that makes reducing food waste an attractive idea, we should focus directly on the problem by making rules that control land uses to ensure better environmental outcomes. Indirect approaches should be a last resort.

Reducing food waste, like many pro-environment ideas, seems plausible and obvious on the surface but ignores crucial systemic issues.

First published at Renegade Inc.

Population debate now mainstream

After years of being an 'off-limits' topic, a debate has finally emerged in the mainstream media about an appropriate level of immigration to Australia.

As a background, immigration levels have been rising steadily since the late 1990s, with record inflows after the financial crisis of 2008, as the below ABS chart shows. The break in the data series is a change in the measurement, now applying a "12/16 month rule" of residency that captures immigrants who travel to their home country periodically, but reside in Australia for 12 out of the past 16 months. This brings the data in line with many other countries, like Canada.

The latest mainstream media attention has been at The Guardian, in an article by Tom Westlake, responding to ongoing discussions at MacroBusiness, which has led to some back and forth (here, here, and now here).

No doubt the media will prefer to avoid the main issue, instead attracting clicks with racist rants and name-calling, all the while presenting the debate as a choice between two extremes (open borders vs zero immigration). The debate is not about immigrants being bad people for coming to Australia. After all, they almost always jump the hoops and follow the rules our politicians made. The debate is about setting up an immigration system that delivers a lower overall rate while delivering better humanitarian and social outcomes.

Below is what I hope is a sensible contribution, which I originally posted at Medium in response to Tom Westlake.

~~~***~~~

I’m pretty sure the arguments boil down to you each having two different points of view, then both sides finding evidence to support it (which is totally normal, by the way). As you said:

I am not going to try to address the implied moral logic of van Onselen: that the criterion upon which we ought to judge immigration policy is the welfare of incumbent residents. As it happens, I think this is a deeply unethical social welfare function.

This is the crux. I know enough economics now to know that you can get just about any answer from technical assessments of marginal welfare effects. So let’s leave that to the side. Let’s stop pretending technical assessments will provide an answer or change minds.

I personally think this ideological different is strange, and am curious as to your ethical viewpoint. For example, if you think nations are a useful organisational institution, and democracy is a useful way to offer some checks on power structures in a nation, surely you imply support for judging national policy based on the welfare of residents, as that is the underlying rationale of the democratic nation-state.

If you don’t, then you open up some puzzles. For example, if you are instead a global welfare maximiser, start sending ships to collect the neediest people from Bangladesh, or the drought-affected regions of Somalia, South Sudan, Tanzania, Mozambique etc., and bring them over. It’s the easiest way to do it. Or just send them free food and equipment. Our policy settings, and most individual choices, are completely unlike the choices of a global welfare maximiser.

In any case, any policy position apart from complete open borders is a de facto population policy. The question is whether the benefits outweigh the costs (to whoever, based on your ethical view) at an immigration rate of 200,000+ per year, or whether the net benefits are higher with a rate less than 100,000 per year. Judging by the comments and my experience talking to people from all across the country, the common view is that the benefits are more apparent with lower rates.

If we take some counterfactuals for a moment, consider if this debate was happening in the early 2000s when the immigration rate was about half what it is now. I assume you would argue that higher is better. I have no idea what Leith would argue, since I don’t think he thought it was an issue back then.

Then immigration doubles. You, I assume, would still be happier with a higher rate. Leith now sees it as a problem.

Let’s double the rate again (to half a million a year). Would your position change? I suspect not. I suspect, again, that this argument is really about conflicting underlying moral and philosophical viewpoints.

Anyway, my feeling is many of the policy failures you discuss are also much easier to remedy with lower rates of immigration.

Lastly, if you genuinely want higher immigration you should be ignoring this debate and not fuelling the fire, since there is massive popular support for lowering immigration back to pre-2006 levels, and the more it is in the media, the more politicians will have to respond to this groundswell.