The Filter^

The gathering storm

Public reactions to two recent news items trouble me greatly. A few years ago, people like myself wanted to buy a house but felt that prices were somewhat inflated and it'd be better judgment to rent rather than overstretch. Also, many people foresaw that trouble in the Middle East would have an impact on global markets, and bought shares in energy companies. Today we've learnt that both examples of successful entrepreneurial decision-making have been vindicated:

• UK house price fall 'at a record'
• Anger over £1bn Centrica profits

Obviously in the meantime many other judgments have proven incorrect, so I'm not trying to argue this from any particular side of the fence. The important point to realise is that when I put my savings into a low risk savings account, and when others put theirs into energy stocks, they were spending their own money. The incentives for thinking long and hard about what to do stemmed from the risk of losing some of that money should we get it wrong.

But note some of the reactions - which, I feel, receive broad public support:

• Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics), said that the focus should now be on kick-starting the mortgage market.
• After Centrica's results, a group of council leaders said energy suppliers should be subjected to a £500m annual charge to beat fuel poverty and cut carbon emissions.

Both of these points redistribute resources, penalising good judgment and subsidising poor judgment. The basis of a market economy is that people have the freedom to bet on ideas, and be responsible for the consequences of their action. Whereas in most walks of life we view mistakes as character building and a necessary part of development, the credit crunch is begetting the view that losses should be shared. Is anyone else concerned by the irony that current conditions are the consequence of not holding mortgage companies to account for risky lending? You don't reduce risk by redistributing resources. You reduce it by creating the incentives for sensible judgment.

Some Quick Suomi Sibelius Thoughts

I’ll admit it; music has perhaps fuelled my Finnish passion more than any other factor – geography, design, sociology and populace (as important as those factors are). That’s a combination of the country’s contemporary attitude towards the varied art of music, and the big daddy himself: Jean Sibelius.

There’s no point, here anyway, attempting any sort of analysis of why Sibelius’s music sounds like Finland; it just does. Just as Britten’s Peter Grimes makes most sense on the beach at Aldeburgh, so Sibelius’s Fourth Symphony sits enlighteningly upon the Finnish winter snow; his Fifth soaring above the shimmering summer lake.

I remember having the second symphony dissected before my eyes at rehearsal hall near London Bridge in February 2005, where the great Finn Paavo Berglund was taking the London Philharmonic through the Second Symphony. Berglund is an archetypal Finn from his facial bone structure to his economic use of words; ‘play it more like your father would have done’, he called out to one of the clarinettists. That was my first real Sibelius experience proper, and the second symphony is a good starting point for anyone whose a Sibelius newcomer (as is the Guy Rickards Phaidon biography which I read whislt in Finland earlier this month). But for something really remarkable, try the cigar-like, compact Seventh Symphony, or the ‘sketched rather than painted’ fourth - perhaps a startling but chilling evocation of the Finnish winter.

The Finns love Sibelius, and I find myself loving them for their love of him. Last Monday I was taken through a Finnish forest for an exploration, in the spirit of the national epic The Kalevala, of ‘what the Finns are made of’. After hunting, blacksmithing and sauna-ing, the young Helena Kinnunen led me into a pitch-dark log cabin and played Sibelius’s ‘Finlandia’ through the hi-fi. I wanted to probe her, an everyday late-teen or twenty-something Finn, on why a 20th century composer formed the final part of the ‘Kalevala Spirit’ tour. ‘Every Finn feels the same when they hear that music’, she said to me, ‘it represents who we are’.

BP Profits

This morning on 5 Live Richard Bacon reported that BP have announced Q2 profits of £4bn. I thought I detected a slight revulsion in his voice, but put it down to paranoia of BBC business reporting. But then he missed his next link, and apologised by saying that he was still getting his head around BP's profits, and that his tone had "said it all". Said what? What's going on? Can anyone explain to me why BP's profits are news?

Back to the pool of life

The Filter^ was born and bred in the city of Liverpool, and the common theme between our 6 editors is a deep affection for somewhere we've all called home. Indeed the roots of this blog lie in student days of 1999-2002, 4 of us sharing a house, all of us forging our paths in our respective domains of learning. We had hoped to bring a special focus to The Filter^ over the summer to celebrate Liverpool's status as European Capital of Culture, but that might not be feasible. However this weekend Andrew, Thomas, James and Anthony will be reunited for a weekend of reunion and rediscovery. We will be sampling as much culture as we can manage, and attempt to blog about it afterwards. Prepare for experimental blogging.

Predictably Irrational?

I've missed much of the press about Dan Ariely's new book, "Predictably Irrational" (e.g. his debates with Tim Harford) and therefore can't comment too much. I don't doubt his academic credentials, and am not hostile to behavourial research, but I am an Austrian and thus fundamentally object to any notion that human beings are "irrational". If he takes pains to define his terms I apologise, but that would warrant a different title, "Predictably Biased", perhaps.

At the root of this issue is a simple semantic problem in whether we're talking about epistemic or instrumental rationality, and on this topic see these comments about the work of Bryan Caplan (especially those of Steve Miller, who probably understands Caplan better than anyone). But with Ariely it seems that the issue is more than mere semantics, as his focus on behaviouralism seems to deny (or at least severely downplay) the role of incentives. In a recent post he says:

How can it be that with all this energy, time, and money the medicine market remains so primitive in terms of its ability to learn about the optimal outcome?
...
Why do we believe that the stock market is rational but at the same time recognize that the medicine market is full of mistakes?

I've not been able to establish how thorough a methodological individualist Ariely's book is (and I happen to believe that MI is fundamentally incompatible with Rational Expectations) but his claim troubles me. Rather than directly challenge his view that both of these markets are "irrational", let's look at the possibility that people are right to believe that the medicine market is primitive, whilst the stock market is rational. Might it not be the case that alternative institutional mechanisms play some role in outcomes? Are there differences in how markets operate, that give rise to alternative incentives for learning? What model of human behaviour would help us explore them?

As I say, I'm not in a position to critique Ariely. But if he's straying into holism with an assumption of epistemic rationality... what's novel?

The notion of risk is becoming ever more important, and a sensible discussion should remember (at least) three things: (i) the distinction between risk and uncertainty; (ii) risk compensation; (iii) the social constructions of risk. A recent article in The Economist:

What Americans and Europeans alike are now attempting to do is squeeze out the last few drops of risk, with results that are often counter-productive, because risk is simply transferred from one place to another...
An experiment in Munich found that the drivers of taxicabs fitted with anti-lock braking systems were involved in no fewer accidents than those without. That is because the former used those superior brakes not to practise prudence but to drive more aggressively.

I've only just begun to fully appreciate the importance of behavioural premises at the moment. To someone that thinks people are irrational concerns about moral hazard is irrelevent. I only wish that those who advocate greater regulatory involvement in financial markets admitted that they believe people are too stupid to make adult decisions.

It's a trialogue

As Arnold Kling shows:

Chicago (Classical): "Markets work well. Use the market."

MIT (Keynesian): "Markets fail. Use government."

GMU (Austrian): "Markets fail. Use markets."

There's three points of view.

   

God bless 'the markets'

Chris Dillow bemoans three journalistic errors:

1. They take business statements at face value, rarely questioning vested interests. Any businessman claims his failures are due to economic conditions and his successes to personal skill. This is not challenged sufficiently.
2. They don’t take their cues from the market. M&S’s share price fell 19% this morning, even though the market generally is up. So the market is telling us there’s a company-specific problem here. This should have given Naughtie a clue.
3. They fail to see that the macroeconomy is more stable than any business. Many businesses thrive in recession and fail in booms. You can never infer anything about the macroeconomy from specific company performance. 

I read this as an example of how businesses can manipulate the media, which is undoubtedly true. But the real test of a business is how well it performs in the marketplace. By contrast, when it comes to politics journalists aren't merely (incompetent) commentators, they *are* the marketplace. When the BBC messes up an interview with Stuart Rose, rest assured he won't escape  punishment. But when it lets politicians off the hook they get away with it. Marks & Spencer have not been able to pretend that their woes are down to the macroeconomy rather than their own mistakes. Brown and Darling - it seems to me - have.

John Templeton (1912-2008)

I was sorry to hear that John Templeton, founder of the Templeton Foundation, has died. Here's the Economist obituary, here's the Telegraph. A sad loss, a great man.

Finding my Finn

The rumblings which sparked many little projects including this Filter series and my two recent trips to Finland can only be described as being like a distant, alluring smell. I sensed a strong aroma, and sniffed around the Scandinavian countries for a good few years, visiting Norway and Denmark, and exploring the cultures of Sweden and Finland from the safe distance of book, record and internet. Then, some 18 months ago, I began to detect the source of the whiff. I ventured to what I believed was its epicentre in January – as Finland Filtered began.

Then, last week, it was emphatically rubber-stamped. The smell was coming from Finland; from its lakes and forests, its cool cities, its inherited and contemporary cultural values, its wonderful and idiosyncratic populace, its culture of equality and independence, its sonic father-figure Jean Sibelius, its beautiful and utterly unique language, and even its flag-carrying airline. I had seen Finland in the dead of winter and in the heart of summer; in the city and in the country. Leaving on Wednesday felt like leaving my own homeland and returning to a strange island where priorities and customs made no sense. As I sat naked in a forest sauna with fifteen unknown companions the night before, beating one another with eucalyptus branches before running into a black lake at 1am, I felt as though I’d been handed a precious gift; one of physical freedom, of equality, of communion with the earth. I felt as if the inane small-talk of Great Britain was the foreign tongue, and the non-judgemental silence of the Finns my native dialogue.

More soon on Kuhmo Kamarmusikiin and Sibelius, Kuhmo and Finnish Karelia, discovering the Kalevala and the sauna parties…

Terry Leahy in the Indy

"we are successful because we give ordinary people power. We serve them. And they choose. Some people in society don't like that. They like to be the people who decide what's good for the masses."

That's Tesco CEO Terry Leahy in a fascinating interview with The Independent. Personally I don't like Tesco, but I wouldn't dream of denying their customers the freedom to choose.