Sunday, May 18, 2008

Two Books on Progress: "Farewell to Alms" and "Birth of Plenty"

I recently read two more books on the question of progress that had very different approaches to the subject. The two were William Bernstein's The Birth of Plenty , and Gregory Clark's A Farewell to Alms. (Marginal Revolution had a long discussion on the latter book. It's worth reading if you have time.)

Clark's main argument is reasonably straightforward: Before the industrial revolution, the world's economies were all caught in a malthusian trap: any increase in productivity increased population and drove living standards down. The only (short-term) changes that improved living standards were things that reduced population: war, famine, disease. There was a gradual accretion of technological improvements over time, and something switched over in the 16th or 17th century in Europe (and later elsewhere) leading to a situation in which progress was substantial enough that societies left the malthusian trap, and people gradually became richer. The key according to Clark was that in the malthusian era in England, the wealthy were out-reproducing the poor, causing a general downward mobility, which spread the social mores (and possibly the genes) for more productive behavior more widely there. It's crucial to the argument that in England commerce was the road to wealth, so the values and behavior that were spreading were those that are the foundational for commercial and entrepreneurial success.

Bernstein's story isn't as deep; he's interested in intermediate causes rather than root causes. Bernstein argues that economic growth occurs only when four institutions are all present in a society: property rights, the scientific worldview, access to capital, and high-speed communication. He provides a very engaging account of the history of these institutions, and a plausible argument that they are associated with growth, but the evidence that they are both necessary and sufficient is lacking. As history, I found the book to be very well written. Bernstein depicts several episodes in history quite colorfully: the sprint from the invention of telegraphy in the 1830s to stock tickers in 1867 was wonderful. His evidence that the US victory over Japan in the Pacific was dominated by productivity differences is also convincing. The two nations had roughly equal fleets at the beginning of the war, and the early battles caused attrition to each that were due to the vagaries of fate and individual commanders. But four years later, the Japanese had built two new carriers to shore up their losses, and the US had built sixteen. In smaller ships, the US was outproducing the Japanese at a much higher rate. At that point, fate and individual talent stop mattering

Both authors are concerned with the now omnipresent question raised by Diamond in Guns, Germs and Steel: why in some places and not others; why did those particular countries come out on top, and what could the developing countries do to catch up? Bernstein says that development of the four institutions is all it takes. Of course, prescribing it is easier than implementing it, and the biggest step missing from his argument is evidence that it's possible for a country to decide to take this path and succeed. According to the evidence he marshals, it has only happened in the past when the institutional framework was nearly complete, and the missing ingredients fell into place by happenstance. This makes it sound like an experiment worth trying, if there were a country on the verge of having that set of institutions, and the political ability to make the changes. But it doesn't seem like a prescription that can (or ought to, at this point) be forced on all underdeveloped nations wholesale.

Clark's answer is more pessimistic (and less culturally neutral.) Some countries' citizens work more efficiently than others. Clark carefully rules out the obvious possible causes: differences in available capital or in training. He's left saying that the difference is in the workers themselves, though it "can be firmly established" that the differences "stem from the local social environment". Although Clark refuses to use the word himself, the conclusion he leads you to is that poor countries have lazy workers. It takes more workers to do the same amount of work, and no amount of training or social pressure seems to change that. Employers have tried a number of tactics, and the only approach that seems to work reliably is to expect it to take two or three people to carry out the tasks that would be done by one worker in a first-world country. Clark is unhappy with the conclusion, and doesn't proffer any explanations of root causes.

My conclusion? Progress was a complex event historically, and there are lots more details to learn. In the contemporary world, there are significant differences between those who continue to advance and those who don't, and we still haven't found a recipe for bridging the gap. We know that it's sometimes possible, but we don't know of any interventions that could even be said to be "likely" to work. There are changes that seem to lead to improvements (improving access to markets, increasing protections for property ownership, better telecommunications and transportation infrastructure) but they don't work reliably, and these aren't simple to achieve. They take time and significant effort, and can be derailed in a variety of unpredictable ways.

The only good news for those below the curve is that progress is usually much faster for those playing catch-up (once they start on the accelerating path).

Monday, May 12, 2008

Puzzle Contest June 14th

For several years, I've been entering the US Puzzle Championship annual contest. I've never placed very highly, but I enjoy the puzzles they provide. If you are into puzzles, I recommend it. I try to complete as many puzzles as I can in the 2.5 hours they provide, but you can take as long as you like. If you want to compete for time and submit your answers, you have to pre-register. Afterwards, they make the puzzles available. For instance, you can download several years' worth of past puzzle tests.

Saturday, May 03, 2008

CFTC Requests Input on Regulating Prediction Markets

The CFTC asked for comments on whether they should legalize and regulate prediction markets. I haven't joined the discussion yet, because I'm seriously torn about whether it would be a good idea. But I feel compelled to quibble with something Dave Pennock said: "It's not often that an industry in its infancy cries out for more government oversight."

It's actually quite common. The term in the economics literature that includes this is regulatory capture. When there's a regulatory body specific to a particular industry, it's very common for industry to be the major source of expertise in the area, and so for the regulators to be reasonably friendly with the businesses. The businesses can work for regulation that limits entry, and cuts down on competition that reduces profits, and they can work together to ensure that public relations problems are addressed in a cohesive way. But cutting down on competition often means fewer choices for consumers by way of tighter controls on what products are offered.

In our case, the thing I worry about is a narrow ruling that only "socially valuable" questions can be asked, and an expensive process for deciding what innovative questions can be posed. It seems likely that some interests will work to ensure that sports and entertainment questions be declared off-limits. The companies that have the strongest interest in fighting that faction are mostly persona non grata in the CFTC's eyes, since they currently operate outside the law (TradeSports) or outside the country (BetFair ).

The narrower the set of approved questions, or the more expensive the process of getting approval, the less chance that markets will be commercially successful. I think the experiments within companies have indicated (though not proven) that a mix of valuable and popular claims is necessary in order to attract continuing participation.

My biggest worry about fighting for CFTC regulation at this point is that they'll approve something narrow, and this won't produce enough successes to demonstrate that loosening the restrictions over time would be beneficial. The alternative is to continue to find ways to introduce markets under the radar and demonstrate their value to the academic audience, which could lead to a friendlier hearing in a more distant future after prediction markets have demonstrated social value and little risk of harm.

Of course the other likely outcome is that the novel experiments don't happen because of the threat of litigation or regulation. But that seems unlikely given the growth in internal markets within companies. I think there's more likelihood of long-term success without regulation than with it, and we're better off waiting until the chances that the regulations will provide a broad approval are significantly higher.

Friday, May 02, 2008

Zocalo News

I've been busy with a major home remodel recently, so I haven't had a chance to crow in public about some great news for Zocalo, my open source prediction market project. I have two consulting contracts now that are paying for ongoing improvements in the software. Together they are keeping me busy full-time.

I have been working on development of Zocalo since 2004, including a period of 18 months as a Research Fellow at CommerceNet. I've been busy with personal matters for much of the last 8 months (a major home remodel), so I wasn't able to put in as much time as I'd have liked recently, but I've been working on the code again full-time for about two months.

I'm pleased to be able to say that I have two consulting contracts at this point. I'm working with a group at Chapman University and another university I'm not allowed to mention in public announcements. The Chapman team is led by Dave Porter, who I worked with while he was at George Mason University. Most of the Experimentalists from the GMU Economics department have moved (or are in the process of moving) to Chapman in Orange County, California. Dave has been using Zocalo for economics experiments since 2005, while I was at CommerceNet. He has plans (and budget) to expand Zocalo to support a variety of experiments that he'd like to do. The software continues to be used at George Mason as well.

The other group is probably familiar to most of you, though my contract says I can't use their name for publicity without approval (which they didn't give). Suffice it to say, I'm happy to be working with this group; the professor in charge has been working on market-related software systems for almost 20 years.

These consulting contracts support my continued development of Zocalo, and both groups are fully supportive of the open source approach. Having these groups actively working with the software, requesting changes, and reviewing progress will contribute substantially to the usefulness and usability of the code. The fact that one group is working with the experiment configuration and the other with the prediction markets ensures that both will continue to be enhanced and get more robust as they are being used.

This announcement is being cross-posted to