Author Archives: Diane Coyle

Risk-related rambling

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Not a new extreme sport, but some thoughts prompted by John Naughton’s column today on the vulnerability of important economic networks, such as just-in-time manufacturing or supermarket supply chains. It seems to me there’s an important gap between businesses making rational individual decisions about what they outsource and where, and how this aggregates up. For one manufacturer to outsource a vital component because there are lots of potential suppliers may be entirely sensible, but what if all the potential suppliers are clustered in one place, as is so often the case in global manufacturing chains? I doubt this question has made it to many businesses’ risk matrices. There’s an issue about diversity here – just as the border between the wisdom of crowds and the madness of crowds turns out to be all the individual members of the crowd having distinct ideas, not influenced by each other. For a supply chain that’s both efficient and resilient, you’d want the individual downstream components not to be linked to each other.

Network mathematics are tricky – I just looked in Barabasi’s 2002 [amazon_link id=”0738206679″ target=”_blank” ]Linked: The New Science of Networks[/amazon_link], my reference on the subject, and can’t find anything there on this issue. I’ve read [amazon_link id=”0099444968″ target=”_blank” ]Six Degrees[/amazon_link] by Duncan Watts and [amazon_link id=”0007303602″ target=”_blank” ]Connected[/amazon_link] by Nicholas Christakis and can’t remember if the discussion of vulnerability and resilience in those touched on this diversity question. But somebody must have looked at it.

[amazon_image id=”0738206679″ link=”true” target=”_blank” size=”medium” ]Linked: The New Science of Networks[/amazon_image]

Information underload

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In his classic book [amazon_link id=”014016734X” target=”_blank” ]Darwin’s Dangerous Idea[/amazon_link], Daniel Dennett said: “A scholar is just a library’s way of making another library.” I’ve always loved that inversion of conventional thinking about causality, and sometimes even muse that as friendly bacteria in the gut are to humans, we humans are becoming to computers or the internet.

[amazon_image id=”014016734X” link=”true” target=”_blank” size=”medium” ]Darwin’s Dangerous Idea: Evolution and the Meanings of Life (Penguin Science)[/amazon_image]

The line from Dennett is quoted in James Gleick’s [amazon_link id=”0007225741″ target=”_blank” ]The Information[/amazon_link]. It’s been a very enjoyable read, covering some of my favourite territory in a well-written way. This includes the long-run effects of the  telegraph, Charles Babbage and Ada Lovelace, Alan Turing’s codebreaking work, Norbert Wiener and cybernetics, Claude Shannon’s information theory. The book had some angles that were new and quirky – for example, I like the point that lots of newspapers named themselves The Telegraph, following on from The Bugle, but none chose The Telephone. I liked it that Turing and Shannon had met in 1943, one devising codes and the other breaking them, but because of wartime secrecy had been unable to discuss their work. There’s a good section on Godel’s incompleteness theorem and why this relates to computation, although drawing quite a lot on Douglas Hofstadter’s [amazon_link id=”0140289208″ target=”_blank” ]Godel, Escher, Bach[/amazon_link] and [amazon_link id=”0465045669″ target=”_blank” ]Metamagical Themas[/amazon_link].

Overall, though, there was little that’s new here (at least if you share my obsessions and have read so many other books on this territory, from Tom Standage’s [amazon_link id=”0753807033″ target=”_blank” ]The Victorian Internet[/amazon_link] to George Dyson’s [amazon_link id=”014101590X” target=”_blank” ]Turing’s Cathedral[/amazon_link]), and I could not find really find a line of argument. There’s a general theme that everything is about information, right down to genetic code and the meaning of life; that information is the fundamental idea that should shape how we think about the physical universe and all of life, rather than energy. Maybe. There’s a long section on entropy that tries to underpin this thought. But I think that just as our forbears saw everything via mechanical metaphors, information is the framing metaphor of our times.

So, an enjoyable, meandering read, ideal for a flight. But not, for me, living up to the praise heaped on it by other reviews such as this in The Guardian or this (rather more tempered) one in The New York Times. And of course it won the Royal Society Winton Prize, a major achievement. So maybe it’s just me. I wouldn’t discourage anybody from trying it.

[amazon_image id=”0007225741″ link=”true” target=”_blank” size=”medium” ]The Information: A History, A Theory, A Flood[/amazon_image]

Big data 2.0

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As I read a long Foreign Affairs article about Big Data and its ramifications this morning, it struck a real chord with a passage I’d just read in James Gleick’s interesting (although rambling) book [amazon_link id=”0007225741″ target=”_blank” ]The Information[/amazon_link].

[amazon_image id=”0007225741″ link=”true” target=”_blank” size=”medium” ]The Information: A History, A Theory, A Flood[/amazon_image]

He describes the use of the newfangled telegraph to send for the first time almost instantaneous news about the weather in different, distant parts of the country – fine in York, raining in Manchester. “The telegraph enabled people to think of the weather as a widespread and interconnected affair, rather than an assortment of local surprises.” Gleick quotes a commentator of 1848: “The telegraph may be made a vast national barometer.” (Tom Standage’s [amazon_link id=”0753807033″ target=”_blank” ]The Victorian Internet[/amazon_link] is a brilliant book about this particular communication medium.)

The possibility of weather reports led to the 1854 etablishment of the Meteorlogical Office by the Government, headed by Admiral FitzRoy, famously captain of [amazon_link id=”014043268X” target=”_blank” ]The Beagle[/amazon_link]. In 1860 he began issuing the first weather forecasts. The science of meteorology, and understanding of a global interconnected system, was built on the foundation of the local weather information conveyed by telegraph.

The new book, [amazon_link id=”1848547900″ target=”_blank” ]Big Data[/amazon_link], by Cukier and Mayer-Schoenberger appreciates the transformative scope of today’s Big Data 2.0 – in the article they write: “Big data is different: it marks a transformation in how society processes information. In time, big data might change our way of thinking about the world.” What the change will be is impossible to predict.

[amazon_image id=”1848547900″ link=”true” target=”_blank” size=”medium” ]Big Data: A Revolution That Will Transform How We Live, Work and Think[/amazon_image]

What is different, and what isn’t

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I’ve been a bit mystified by Excel-gate (see this good, balanced summary by Gavyn Davies). Bravo for Thomas Herndon, the graduate student who uncovered the error in the now-notorious paper by Carmen Reinhardt and Kenneth Rogoff; his job prospects will be rightly enhanced by this episode.

But the glee with which anti-Austerians pounced on this episode to ‘prove’ that austerity doesn’t work seems to involve an assumption that the original Reinhardt-Rogoff paper of 2010 ‘proved’ anything to the contrary in the first place. There are lots of papers about the impact of debt/GDP ratios on growth, and they demonstrate all kinds of different things – see for example this BIS paper by Cecchetti and others, or this IMF paper (pdf) from last year on the Caribbean economies, or this Fed paper published in December (pdf), or this much-cited 2010 paper by Koehler-Geib and others, or for that matter the new paper debunking Reinhardt and Rogoff’s 90% as it too finds the same correlation albeit with different numbers.

Well, you get the idea. Taking these together, we ‘know’ there might be a threshold for sovereign debt, but it varies over time and across countries, it’s a correlation whose causal direction and mechanism is unclear, and there isn’t enough data for any estimates to be robust (because history only runs once). All of which only goes to underline how little is known about the macroeconomy, not to mention how hard any macroeconomists and their camp followers find it to resist claiming certainty where there is none.

No doubt Reinhardt and Rogoff were tempted into over-claiming for their work by the politicisation of the debt threshold issue. But the underlying message of their big 2009 book, [amazon_link id=”0691152640″ target=”_blank” ]This Time is Different[/amazon_link], is unscathed: unlike the later paper, it makes it absolutely clear that debt ‘thresholds’ above which increasing borrowing is correlated with lower growth vary widely in different countries and at different times (no magic 90% here); and that the historical record indicates it generally takes a long time for growth to recover after banking crises involving debt overhangs.

[amazon_image id=”0691152640″ link=”true” target=”_blank” size=”medium” ]This Time Is Different: Eight Centuries of Financial Folly[/amazon_image]